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Section 1: 10-K (10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________________
FORM 10-K
_________________________________________________________________________________
(cid:58) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
(cid:134) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
_________________________________________________________________________________
Commission File Number
814-00832
Exact name of registrant as specified in its charter, addresses of principal executive offices, telephone numbers and states or
other jurisdictions of incorporation or organization
New Mountain Finance Corporation
787 Seventh Avenue, 48th Floor
New York, New York 10019
Telephone: (212) 720-0300
State of Incorporation: Delaware
_________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
I.R.S. Employer
Identification Number
27-2978010
Title of each class
Common stock, par value $0.01 per share
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
_________________________________________________________________________________
Title of each class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:58)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:58)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes (cid:58) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes (cid:134) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (cid:58)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer (cid:58)
Non-accelerated filer (cid:134)
(Do not check if a
smaller reporting company)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:58)
The aggregate market value of common stock held by non-affiliates of New Mountain Finance Corporation on June 30, 2016, based on the closing price on that
date of $12.90, on the New York Stock Exchange was $741.5 million. For the purposes of calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.
Description
Common stock, par value $0.01 per share
Shares as of February 28, 2017
69,717,814
Portions of the Registrant's Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year covered
by this Annual Report on this Form 10-K are incorporated by reference into Part III on this Form 10-K.
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
PAGE
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Table of Contents
Item 1. Business
PART I
New Mountain Finance Corporation ("NMFC", the "Company", "we", "us" or "our") is a Delaware corporation that was originally incorporated on June 29, 2010
and completed its initial public offering ("IPO") on May 19, 2011. We are a closed-end, non-diversified management investment company that has elected to be regulated
as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). As such, we are obligated to comply with certain
regulatory requirements. We have elected to be treated, and intend 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"). We are also registered as an investment adviser under the Investment
Advisers Act of 1940, as amended (the "Advisers Act").
Our wholly-owned subsidiary, New Mountain Finance Holdings, L.L.C. (“NMF Holdings” or the "Predecessor Operating Company"), is a Delaware limited
liability company whose assets are used to secure NMF Holdings’ credit facility. For additional information about our organizational structure prior to May 8, 2014, see
"—Historical Structure". NMF Ancora Holdings Inc. ("NMF Ancora"), NMF QID NGL Holdings, Inc. (“NMF QID”) and NMF YP Holdings Inc. ("NMF YP"), our
wholly-owned subsidiaries, are structured as Delaware entities that serve as tax blocker corporations which hold equity or equity-like investments in portfolio companies
organized as limited liability companies (or other forms of pass-through entities). We consolidate our tax blocker corporations for accounting purposes. The tax blocker
corporations are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of the portfolio companies. Additionally, our
wholly-owned subsidiary, New Mountain Finance Servicing, L.L.C. ("NMF Servicing") 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 our consolidated wholly-owned direct and indirect subsidiaries. SBIC LP received a
license from the United States ("U.S.") Small Business Administration (the "SBA") to operate as a small business investment company ("SBIC") under Section 301(c) of
the Small Business Investment Act of 1958, as amended (the "1958 Act").
New Mountain Finance Advisers BDC, L.L.C.
New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) is a wholly-owned subsidiary of New Mountain Capital, L.L.C. ("New Mountain
Capital", defined as New Mountain Capital Group, L.L.C. and its affiliates). New Mountain Capital is a firm with a track record of investing in the middle market and
with assets under management totaling more than $15.5 billion(1), which includes total assets held by us. New Mountain Capital focuses on investing in defensive growth
companies across its private equity, public equity and credit investment vehicles. The Investment Adviser manages our day-to-day operations and provides us with
investment advisory and management services. In particular, the Investment Adviser is responsible for identifying attractive investment opportunities, conducting research
and due diligence on prospective investments, structuring our investments and monitoring and servicing our investments. The Investment Adviser is managed by a five
member investment committee, which is responsible for approving purchases and sales of our investments above $10.0 million in aggregate by issuer. For additional
information on the investment committee, see "Investment Committee".
New Mountain Finance Administration, L.L.C.
New Mountain Finance Administration, L.L.C. (the "Administrator"), a wholly-owned subsidiary of New Mountain Capital, provides the administrative services
necessary to conduct our day-to-day operations. The Administrator also performs, or oversees the performance of, our financial records, our reports to stockholders and
reports filed with the U.S. Securities and Exchange Commission ("SEC"). The Administrator performs the calculation and publication of our net asset values, the payment
of our expenses and oversees the performance of various third-party service providers and the preparation and filing of our tax returns. The Administrator may also
provide, on our behalf, managerial assistance to our portfolio companies.
Competition
We compete for investments with a number of BDCs and investment funds (including private equity and hedge funds), as well as traditional financial services
companies such as commercial banks and other sources of financing. Many of these entities have greater financial and managerial resources than we do. We believe we
are able to be competitive with these entities primarily on the basis of the experience and contacts of our management team, our responsive and efficient investment
analysis and decision-making processes, the investment terms we offer, the model that we employ to perform our due diligence with the broader New Mountain Capital
team and our model of investing in companies and industries we know well.
_______________________________________________________________________________
(1)
Includes amounts committed, not all of which have been drawn down and invested, as of December 31, 2016, as well as amounts called and returned since
inception.
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We believe that some of our competitors may make investments with interest rates and returns that are comparable to or lower than the rates and returns that we
target. Therefore, we do not seek to compete solely on the interest rates and returns that we offer to potential portfolio companies. For additional information concerning
the competitive risks we face, see Item 1A.—Risk Factors.
Investment Objective and Portfolio
Our 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, our investments may also include equity interests such as preferred
stock, common stock, warrants or options received in connection with our debt investments or may include a direct investment in the equity of private companies.
We make investments through both primary originations and open-market secondary purchases. We primarily target loans to, and invest in, the U.S. middle
market businesses, a market segment we believe continues to be underserved by other lenders. We define middle market businesses as those businesses with annual
earnings before interest, taxes, depreciation, and amortization (“EBITDA”) between $20.0 million and $200.0 million. Our 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. Similar to us, SBIC LP’s
investment objective is to generate current income and capital appreciation under our investment criteria. However, SBIC LP’s investments must be in SBA eligible
companies. Our portfolio may be concentrated in a limited number of industries. As of December 31, 2016, our top five industry concentrations were business services,
software, consumer services, investment fund and education. Our targeted investments typically have maturities of between five and ten years and generally range in size
between $10.0 million and $100.0 million. This investment size may vary proportionately as the size of our capital base changes. At December 31, 2016, our portfolio
consisted of 78 portfolio companies and was invested 44.9% in first lien loans, 38.8% in second lien loans, 4.3% in subordinated debt and 12.0% in equity and other, as
measured at fair value versus 75 portfolio companies invested 44.3% in first lien loans, 41.8% in second lien loans, 5.8% in subordinated debt and 8.1% in equity and
other at December 31, 2015.
The fair value of our investments was approximately $1,558.8 million in 78 portfolio companies at December 31, 2016, approximately $1,512.2 million in 75
portfolio companies at December 31, 2015 and approximately $1,424.7 million in 71 portfolio companies at December 31, 2014.
The following table shows our portfolio and investment activity for the years ended December 31, 2016, December 31, 2015 and December 31, 2014:
(in millions)
New investments in 43, 36 and 43 portfolio companies, respectively
Debt repayments in existing portfolio companies
Sales of securities in 10, 15 and 14 portfolio companies, respectively
Change in unrealized appreciation on 71, 23 and 20 portfolio companies, respectively
Change in unrealized depreciation on 24, 70 and 60 portfolio companies, respectively
_______________________________________________________________________________
(1)
$
Years Ended December 31,
2016
2015
2014(1)
$
558.1
479.5
67.6
76.5
(36.4)
$
612.7
400.8
83.1
44.7
(79.9)
720.9
267.5
117.0
21.2
(63.9)
For the year ended December 31, 2014, amounts represent the investment activity of the Predecessor Operating Company through and including May 7, 2014
and our investment activity from May 8, 2014 through December 31, 2014.
At December 31, 2016 and December 31, 2015, our weighted average yield to maturity at cost ("Yield to Maturity at Cost") was approximately 11.1% and
10.7%, respectively. This Yield to Maturity at Cost calculation assumes that all investments, including secured collateralized agreements, not on non-accrual are
purchased at cost on the quarter end date and held until their respective maturities with no prepayments or losses and exited at par at maturity. 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 our portfolio or other factors.
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The following summarizes our ten largest portfolio company investments and the top ten industries in which we were invested as of December 31, 2016,
calculated as a percentage of total assets as of December 31, 2016:
Portfolio Company
NMFC Senior Loan Program II LLC
UniTek Global Services, Inc.
Tenawa Resource Holdings LLC
TIBCO Software Inc.
Navex Global, Inc.
Hill International, Inc.
AssuredPartners, Inc.
Kronos Incorporated
PetVet Care Centers LLC
Ascend Learning, LLC
Total
Industry Type
Business Services
Software
Consumer Services
Investment Fund
Education
Energy
Healthcare Services
Distribution & Logistics
Federal Services
Net Lease
Total
Investment Criteria
Percent of Total Assets
4.3%
3.4%
2.8%
2.7%
2.7%
2.5%
2.5%
2.2%
2.2%
2.1%
27.4%
Percent of Total Assets
27.9%
25.4%
6.4%
5.7%
5.7%
4.5%
4.3%
3.7%
3.6%
1.6%
88.8%
The Investment Adviser has identified the following investment criteria and guidelines for use in evaluating prospective portfolio companies. However, not all of
these criteria and guidelines were, or will be, met in connection with each of our investments.
•
•
•
•
•
•
Defensive growth industries. We seek to invest in industries that can succeed in both robust and weak economic environments but which are also
sufficiently large and growing to achieve high valuations providing enterprise value cushion for our targeted debt securities.
High barriers to competitive entry. We target industries and companies that have well defined industries and well established, understandable barriers to
competitive entry.
Recurring revenue. Where possible, we focus on companies that have a high degree of predictability in future revenue.
Flexible cost structure. We seek to invest in businesses that have limited fixed costs and therefore modest operating leverage.
Strong free cash flow and high return on assets. We focus on businesses with a demonstrated ability to produce meaningful free cash flow from operations.
We typically target companies that are not asset intensive and that have minimal capital expenditure and minimal working capital growth needs.
Sustainable business and niche market dominance. We seek to invest in businesses that exert niche market dominance in their industry and that have a
demonstrated history of sustaining market leadership over time.
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•
•
•
Established companies. We seek to invest in established companies with sound historical financial performance. We do not intend to invest in start-up
companies or companies with speculative business plans.
Private equity sponsorship. We generally seek to invest in companies in conjunction with private equity sponsors who we know and trust and who have
proven capabilities in building value.
Seasoned management team. We generally require that portfolio companies have a seasoned management team with strong corporate governance.
Oftentimes we have a historical relationship with or direct knowledge of key managers from previous investment experience.
Investment Selection and Process
The Investment Adviser believes it has developed a proven, consistent and replicable investment process to execute our investment strategy. The Investment
Adviser seeks to identify the most attractive investment sectors from the top down and then works to become the most advantaged investor in these sectors. The steps in
the Investment Adviser's process include:
•
•
•
Identifying attractive investment sectors top down;
Creating competitive advantages in the selected industry sectors; and
Targeting companies with leading market share and attractive business models in its chosen sectors.
Investment Committee
The Investment Adviser's investment committee (the "Investment Committee") currently consists of Steven B. Klinsky, Robert A. Hamwee, Adam B. Weinstein
and John R. Kline. The fifth and final member of the Investment Committee will consist of a New Mountain Capital Managing Director who will hold the position on the
Investment Committee on an annual rotating basis. Beginning in August 2016, Mathew J. Lori was appointed to the Investment Committee for a one year term. In
addition, our executive officers and certain investment professionals of the Investment Adviser are invited to all Investment Committee meetings. The Investment
Committee is responsible for approving purchases and sales of our investments above $10.0 million in aggregate by issuer. Purchases and dispositions below
$10.0 million may be approved by our chief executive officer. These approval thresholds are subject to change over time. We expect to benefit from the extensive and
varied relevant experience of the investment professionals serving on the Investment Committee, which includes expertise in private equity, primary and secondary
leveraged credit, private mezzanine finance and distressed debt.
The purpose of the Investment Committee is to evaluate and approve, as deemed appropriate, all investments by the Investment Adviser, subject to certain
thresholds. The Investment Committee's process is intended to bring the diverse experience and perspectives of the Investment Committee's members to the analysis and
consideration of every investment. The Investment Committee also serves to provide investment consistency and adherence to the Investment Adviser's investment
philosophies and policies. The Investment Committee also determines appropriate investment sizing and suggests ongoing monitoring requirements.
In addition to reviewing investments, the Investment Committee meetings serve as a forum to discuss credit views and outlooks. Potential transactions and
investment opportunities are also reviewed on a regular basis. Members of our investment team are encouraged to share information and views on credits with the
Investment Committee early in their analysis. This process improves the quality of the analysis and assists the deal team members to work more efficiently.
Investment Structure
We target debt investments that will yield meaningful current income and occasionally provide the opportunity for capital appreciation through equity securities.
Our debt investments are typically structured with the maximum seniority and collateral that we can reasonably obtain while seeking to achieve our total return target.
Debt Investments
The terms of our debt investments are tailored to the facts and circumstances of the transaction and prospective portfolio company and structured to protect its
rights and manage its risk while creating incentives for the portfolio company to achieve its business plan. A substantial source of return is the cash interest that we collect
on our debt investments.
•
First Lien Loans and Bonds. First lien loans and bonds generally have terms of four to seven years, provide for a variable or fixed interest rate, may
contain prepayment penalties and are secured by a first priority security interest in all existing and future assets of the borrower. These first lien loans and
bonds may include payment-in-kind ("PIK") interest, which represents contractual interest accrued and added to the principal that generally becomes due at
maturity.
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•
•
Second Lien Loans and Bonds. Second lien loans and bonds generally have terms of five to eight years, provide for a variable or fixed interest rate, may
contain prepayment penalties and are secured by a second priority security interest in all existing and future assets of the borrower. These second lien loans
and bonds may include PIK interest.
Unsecured Senior, Subordinated and "Mezzanine" Loans and Bonds. Any unsecured investments are generally expected to have terms of five to ten
years and provide for a fixed interest rate. Unsecured investments may include PIK interest and may have an equity component, such as warrants to purchase
common stock in the portfolio company.
In addition, from time to time we may also enter into revolving credit facilities, bridge financing commitments, delayed draw commitments or other
commitments which can result in providing future financing to a portfolio company.
Equity Investments
When we make a debt investment, we may be granted equity in the portfolio company in the same class of security as the sponsor receives upon funding. In
addition, we may from time to time make non-control, equity co-investments in conjunction with private equity sponsors. We generally seek to structure our equity
investments, such as direct equity co-investments, to provide us with minority rights provisions and event-driven put rights. We also seek to obtain limited registration
rights in connection with these investments, which may include “piggyback” registration rights.
Portfolio Company Monitoring
We monitor the performance and financial trends of our portfolio companies on at least a quarterly basis. We attempt to identify any developments within the
portfolio company, the industry or the macroeconomic environment that may alter any material element of our original investment strategy. We use several methods of
evaluating and monitoring the performance of our investments, including but not limited to the following:
•
•
•
•
review of monthly and/or quarterly financial statements and financial projections for portfolio companies provided by its management;
ongoing dialogue with and review of original diligence sources;
periodic contact with portfolio company management (and, if appropriate, the private equity sponsor) to discuss financial position, requirements and
accomplishments; and
assessment of business development success, including product development, profitability and the portfolio company's overall adherence to its business plan.
We use an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in the portfolio. We use 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 we will not recoup our original cost basis in the investment and may realize a substantial
loss upon exit.
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The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of December 31, 2016:
(in millions)
Investment Rating
Investment Rating 1
Investment Rating 2
Investment Rating 3
Investment Rating 4
Par Value(1)
Percent
Fair Value
Percent
As of December 31, 2016
$
$
136.7
1,278.0
20.5
72.7
1,507.9
9.1% $
84.7%
1.4%
4.8%
100.0% $
136.9
1,399.7
12.6
9.6
1,558.8
8.8%
89.8%
0.8%
0.6%
100.0%
_______________________________________________________________________________
(1)
Excludes shares and warrants.
Exit Strategies/Refinancing
We exit our investments typically through one of four scenarios: (i) the sale of the portfolio company itself resulting in repayment of all outstanding debt, (ii) the
recapitalization of the portfolio company in which our loan is replaced with debt or equity from a third party or parties (in some cases, we may choose to participate in the
newly issued loan(s)), (iii) the repayment of the initial or remaining principal amount of our loan then outstanding at maturity or (iv) the sale of the debt investment by us.
In some investments, there may be scheduled amortization of some portion of our loan which would result in a partial exit of our investment prior to the maturity of the
loan.
Valuation
At all times consistent with accounting principals generally accepted in the United States of America ("GAAP") and the 1940 Act, we conduct a valuation of
assets, which impacts our net asset value.
We value our assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, our board of directors is ultimately and solely
responsible for determining the fair value of our 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 our portfolio investments require a fair value determination. Security transactions are accounted for
on a trade date basis. Our 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 investment professionals of the Investment Adviser look at the number of quotes readily available and perform the
following:
i.
ii.
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;
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).
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(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 our 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 investment professionals of the Investment Adviser do not have a
readily available market quotation will be reviewed by an independent valuation firm engaged by our board of directors; and
d. When deemed appropriate by our 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 our investments may fluctuate from period to period and the fluctuations
could be material.
Operating and Regulatory Environment
As with other companies regulated by the 1940 Act, a BDC must adhere to certain regulatory requirements. The 1940 Act contains prohibitions and restrictions
relating to investments by a BDC in another investment company as well as transactions between BDCs and their affiliates, principal underwriters and affiliates of those
affiliates or underwriters. A BDC must be organized and have its principal place of business in the U.S., it must be operated for the purpose of investing in or lending to
primarily private companies and for qualifying investments it must make significant managerial assistance available to them. A BDC may use capital provided by public
stockholders and from other sources to make long-term, private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly
traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
We have a board of directors. A majority of our board of directors must be persons who are not interested persons, as that term is defined in the 1940 Act. As a
BDC, we are prohibited from indemnifying any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such person's office. Additionally, we are required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect the BDC.
As a BDC, we are required to meet a coverage ratio of the value of total assets to total senior securities, which include all of our borrowings, excluding SBA-
guaranteed debentures, and any preferred stock we may issue in the future, of at least 200.0% (i.e., the amount of debt may not exceed 50.0% of the value of our total
assets or we may borrow an amount equal to 100.0% of net assets). We monitor our compliance with this coverage ratio on a regular basis.
We may, to the extent permitted under the 1940 Act, issue additional equity or debt capital. We will generally not be able to issue and sell our common stock at a
price below net asset value per share without shareholder approval. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock,
at a price below the then-current net asset value of our common stock if our board of directors determines that such sale is in our best interests and the best interests of our
stockholders, and our stockholders approve such sale. In addition, we may generally issue new shares of our common stock at a price below net asset value in rights
offerings to existing stockholders, in payment of dividends and in certain other limited circumstances.
As a BDC, we will not generally be permitted to invest in any portfolio company in which the Investment Adviser or any of its affiliates currently have an
investment or to make any co-investments with the Investment Adviser or its affiliates without an exemptive order from the SEC. On September 12, 2016, we filed an
exemptive application with the SEC to permit us to co-invest with funds or entities managed by the Investment Adviser or its affiliates in certain negotiated transactions
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where co-investing would otherwise be prohibited under the 1940 Act. Any such order, if granted by the SEC, will be subject to certain terms and conditions.
Furthermore, there is no assurance when, or if, this application for exemptive relief will be granted by the SEC.
We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding
voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 67.0% or
more of such company's voting securities present at a meeting if more than 50.0% of the outstanding voting securities of such company are present or represented by
proxy, or (b) more than 50.0% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.
In addition, as a BDC, we are not permitted to issue stock in consideration for services.
Taxation as a Regulated Investment Company
We have elected to be treated, and intend to comply with the requirements to continue to qualify annually, as a RIC under Subchapter M of the Code. As a RIC,
we generally will not be subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our stockholders as
dividends. Rather, dividends distributed by us generally will be taxable to our stockholders, and any net operating losses, foreign tax credits and other tax attributes of
ours generally will not pass through to our stockholders, subject to special rules for certain items such as net capital gains and qualified dividend income recognized by us.
To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify as a RIC, we
must distribute to our stockholders, for each taxable year, at least 90.0% of our "investment company taxable income", which is generally our net ordinary income plus the
excess of realized net short-term capital gains over realized net long-term capital losses (the "Annual Distribution Requirement").
We will be subject to a 4.0% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least
equal to the sum of (1) 98.0% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in
that calendar year and (3) any income recognized, but not distributed and on which we did not pay corporate-level U.S. federal income tax, in preceding years (the "Excise
Tax Avoidance Requirement"). While we intend to make distributions to our stockholders in each taxable year that will be sufficient to avoid any U.S. federal excise tax
on our earnings, there can be no assurance that we will be successful in entirely avoiding this tax.
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
•
•
continue to qualify as a BDC under the 1940 Act at all times during each taxable year;
derive in each taxable year at least 90.0% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the
sale of stock or other securities or foreign currencies, net income from certain "qualified publicly traded partnerships", or other income derived with respect
to our business of investing in such stock or securities (the "90.0% Income Test"); and
•
diversify our holdings so that at the end of each quarter of the taxable year:
•
•
at least 50.0% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if
such other securities of any one issuer do not represent more than 5.0% of the value of our assets or more than 10.0% of the outstanding voting
securities of the issuer; and
no more than 25.0% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of: (1) one
issuer, (2) two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or
related trades, or (3) businesses or of certain "qualified publicly traded partnerships" (the "Diversification Tests").
A RIC is limited in its ability to deduct expenses in excess of its "investment company taxable income" (which is, generally, ordinary income plus the excess of
realized net short-term capital gains over realized net long-term capital losses). If our expenses in a given year exceed our investment company taxable income, we would
experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years and such net operating losses do
not pass through to its stockholders. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net
capital losses (that is, realized capital losses in excess of realized capital gains) to offset the RIC's investment company taxable income, but may carry forward such losses,
and use them to offset capital gains, indefinitely. Due to these limits on the deductibility of expenses and net capital losses, we may for tax purposes have aggregate
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taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we
actually earned during those years.
Failure to Qualify as a Regulated Investment Company
If we fail to satisfy the 90.0% Income Test or the Diversification Tests for any taxable year or quarter of such taxable year, we may nevertheless continue to
qualify as a RIC for such year if certain relief provisions of the Code apply (which may, among other things, require us to pay certain corporate-level U.S. federal income
taxes or to dispose of certain assets). If we fail to qualify for treatment as a RIC and such relief provisions do not apply to us, we will be subject to U.S. federal income tax
on all of our taxable income at regular corporate rates (and also will be subject to any applicable state and local taxes), regardless of whether we make any distributions to
our stockholders. Distributions would not be required. However, if distributions were made, any such distributions would be taxable to our stockholders as ordinary
dividend income and, subject to certain limitations under the Code, any such distributions may be eligible for the 20.0% maximum rate applicable to non-corporate
taxpayers to the extent of our current or accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the
dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the
stockholder's tax basis, and any remaining distributions would be treated as a capital gain.
Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that
requalify as a RIC no later than the second year following the non-qualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us
during the period in which we failed to qualify as a RIC that are recognized during the five-year period after our requalification as a RIC, unless we made a special
election to pay corporate-level U.S. federal income tax on such built-in gain at the time of our requalification as a RIC. We may decide to be taxed as a regular corporation
even if we would otherwise qualify as a RIC if we determine that treatment as a corporation for a particular year would be in our best interests.
SBA Regulation
On August 1, 2014, SBIC LP, our wholly-owned direct and indirect subsidiary, received a license from the SBA to operate as an SBIC under Section 301(c) of
the 1958 Act. SBIC LP has an investment strategy and philosophy substantially similar to ours and makes similar types of investments in accordance with SBA
regulations.
A license allows SBIC LP to incur leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment and certain approvals by the
SBA and customary procedures. SBA-guaranteed debentures carry long-term fixed rates that are generally lower than rates on comparable bank and other debt. Under the
regulations applicable to SBICs, a standard debenture licensed SBIC is eligible for two tiers of leverage capped at $150.0 million, where each tier is equivalent to the
SBIC's regulatory capital, which generally equates to the amount of equity capital in the SBIC. Debentures guaranteed by the SBA have a maturity of ten years, require
semi-annual payments of interest and do not require any principal payments prior to maturity. SBIC LP is subject to regulation and oversight by the SBA, including
requirements with respect to reporting financial information, such as the extent of capital impairment, if applicable, on a regular basis and annual examinations conducted
by the SBIC. The SBA, as a creditor, will have a superior claim to SBIC LP's assets over our stockholders in the event SBIC LP is liquidated or the SBA exercises its
remedies under the SBA-guaranteed debentures issued by SBIC LP upon an event of default.
On November 5, 2014, we received exemptive relief from the SEC to permit us to exclude the SBA-guaranteed debentures of SBIC LP from our 200.0% asset
coverage test under the 1940 Act. As such, our ratio of total consolidated assets to outstanding indebtedness may be less than 200.0%. This provides us with increased
investment flexibility but also increases our risks related to leverage.
SBICs are designed to stimulate the flow of private investor capital to eligible small businesses as defined by the SBA. Under SBA regulations, SBICs may make
loans to eligible small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Under present SBA
regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worth not exceeding $19.5 million and have
average annual net income after U.S. federal income taxes not exceeding $6.5 million (average net income to be computed without benefit of any carryover loss) for the
two most recent fiscal years. In addition, an SBIC must invest 25.0% of its investment capital to "smaller business", as defined by the SBA. The definition of a smaller
business generally includes businesses that have a tangible net worth not exceeding $6.0 million for the most recent fiscal year and have average annual net income after
U.S. federal income taxes not exceeding $2.0 million (average net income to be computed without benefit of any net carryover loss) for the two most recent fiscal years.
SBA regulations also provide alternative size standard criteria to determine eligibility for designation as an eligible small business or smaller concern, which criteria
depend on the primary industry in which the business is engaged and is based on such factors as the number of employees and gross revenue. However, once an SBIC has
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invested in an eligible small business, it may continue to make follow-on investments in the company, regardless of the size of the company at the time of the follow-on
investment.
The SBA prohibits an SBIC from providing funds to small businesses with certain characteristics, such as businesses with the majority of their employees located
outside the U.S., or from investing in project finance, real estate, farmland, financial intermediaries or "passive" (i.e. non-operating) businesses. Without prior SBA
approval, an SBIC may not invest an amount equal to more than approximately 30.0% of the SBIC's regulatory capital in any one company and its affiliates.
The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies (such as limiting the permissible interest rate on debt
securities held by an SBIC in a portfolio company). An SBIC may exercise control over a small business for a period of up to seven years from the date on which the
SBIC initially acquires its control position. This control period may be extended for an additional period of time with the SBA's prior written approval.
The SBA restricts the ability of an SBIC to lend money to any of its officers, directors and employees or to invest in associates thereof. The SBA also prohibits,
without prior SBA approval, a "change of control" of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10.0% or more
of a class of capital stock of a licensed SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the
management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise.
The SBA regulations require, among other things, an annual periodic examination of a licensed SBIC by an SBA examiner to determine the SBIC's compliance
with the relevant SBA regulations, and the performance of a financial audit by an independent auditor.
In December 2015, the 2016 omnibus spending bill approved by the U.S. Congress and signed into law by the President increased the amount of SBA-guaranteed
debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval.
Historical Structure
On May 19, 2011, we priced our 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, we sold an additional 2,172,000 shares of our 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 (as defined below). In connection with our 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. 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 May 8, 2014, NMF Holdings was externally managed by the Investment Adviser 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 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.
Until April 25, 2014, New Mountain Finance AIV Holdings Corporation ("AIV Holdings") was a Delaware corporation that was originally incorporated on
March 11, 2011. Guardian AIV, a Delaware limited partnership, was AIV Holdings' sole stockholder. AIV Holdings was a closed-end, non-diversified management
investment company that was regulated as a BDC under the 1940 Act. As such, AIV Holdings was obligated to comply with certain regulatory requirements. AIV
Holdings was treated, and complied with the requirements to qualify annually, as a RIC under the Code. AIV Holdings was dissolved on April 25, 2014.
Prior to May 8, 2014, NMFC and AIV Holdings were holding companies with no direct operations of their own, and their sole asset was their 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.
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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 our IPO, and through December 31, 2016, we raised approximately $533.1 million in net proceeds from additional offerings of common stock and issued
shares of common stock valued at approximately $288.4 million on behalf of AIV Holdings for exchanged units. We acquired from NMF Holdings units of NMF
Holdings equal to the number of shares of our common stock sold in additional offerings. With the completion of the final secondary offering on February 3, 2014, we
owned 100.0% of the units of NMF Holdings, which became our wholly-owned subsidiary.
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 determined that continuation as a BDC was not in the best interest of AIV Holdings and Guardian AIV. 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 the 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 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 joint annual meeting of the stockholders of NMFC and the sole unit holder of NMF Holdings 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 a 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.
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Effective May 8, 2014, NMF Holdings amended and restated its 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' 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 direct and indirect 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 GAAP. NMFC continues to remain a BDC regulated under the 1940 Act.
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 held at NMF Holdings will continue to be used to secure
NMF Holdings' credit facility.
Prior to December 18, 2014, New Mountain Finance SPV Funding, L.L.C. ("NMF SLF") was a Delaware limited liability company. NMF SLF was a wholly-
owned subsidiary of NMF Holdings and thus our wholly-owned indirect subsidiary. NMF SLF was bankruptcy-remote and non-recourse to us. As part of an amendment
to our existing credit facilities with Wells Fargo Bank, National Association, NMF SLF merged with and into NMF Holdings on December 18, 2014. See Item 8.—
Financial Statements and Supplementary Data—Note 7. Borrowings for additional information on our borrowings.
Investment Management Agreement
We are a closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. We are externally managed
by our Investment Adviser and pay our Investment Adviser a fee for its services. The following summarizes our arrangements with the Investment Adviser pursuant to an
investment advisory and management agreement (the "Investment Management Agreement").
Management Services
The Investment Adviser is registered as an Investment Adviser under the Advisers Act. The Investment Adviser serves pursuant to the Investment Management
Agreement in accordance with the 1940 Act. Subject to the overall supervision of our board of directors, the Investment Adviser manages our day-to-day operations and
provides us with investment advisory and management services. Under the terms of the Investment Management Agreement, the Investment Adviser:
•
•
•
•
•
•
•
determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
determines the securities and other assets that we will purchase, retain or sell;
identifies, evaluates and negotiates the structure of our investments that we make;
executes, monitors and services the investments that we make;
performs due diligence on prospective portfolio companies;
votes, exercises consents and exercises all other rights appertaining to such securities and other assets on our behalf; and
provides us with such other investment advisory, research and related services as we may, from time to time, reasonably require.
The Investment Adviser's services under the Investment Management Agreement are not exclusive, and the Investment Adviser (so long as its services to us are
not impaired) and/or other entities affiliated with New Mountain Capital are permitted to furnish similar services to other entities.
Management Fees
Pursuant to the Investment Management Agreement, we have agreed to pay the Investment Adviser a fee for investment advisory and management services
consisting of two components—a base management fee and an incentive fee. The cost of both the base management fee payable to the Investment Adviser and any
incentive fees paid in cash to the Investment Adviser are borne by us and, as a result, are indirectly borne by our common stockholders.
Base Management Fees
Pursuant to the Investment Management Agreement, the base management fee is calculated at an annual rate of 1.75% of our gross assets, which equals our total
assets on the Consolidated Statements of Assets and Liabilities, less (i) the borrowings under the senior loan fund's Loan and Security Agreement with Wells Fargo Bank,
National Association, dated
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October 27, 2010, as amended (the "SLF Credit Facility"), and (ii) cash and cash equivalents. The base management fee is payable quarterly in arrears, and is calculated
based on the average value of our gross assets, which equals our total assets, as determined in accordance with GAAP, less the 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. We have not invested, and currently do not invest, in derivatives. To the extent we invest in derivatives in
the future, we will use the actual value of the derivatives, as reported on our Consolidated Statements of Assets and Liabilities, for purposes of calculating our base
management fee.
Since our IPO, the base management fee calculation has deducted the borrowings under the SLF Credit Facility. The SLF Credit Facility had historically
consisted of primarily lower yielding assets at higher advance rates. As part of an amendment to our existing credit facilities with Wells Fargo Bank, National
Association, the SLF Credit Facility merged with the NMF Holdings' Loan and Security Agreement with Wells Fargo Bank, National Association, dated May 19, 2011, as
amended and restated (the "Predecessor Holdings Credit Facility"), and into the Second Amended and Restated Loan and Security Agreement with Wells Fargo Bank,
National Association (the "Holdings Credit Facility") on December 18, 2014. See Item 8.—Financial Statements and Supplementary Data—Note 7. Borrowings for
additional information on our credit facilities. Post credit facility merger and to be consistent with the methodology since our IPO, the Investment Adviser will continue to
waive management fees on the leverage associated with those assets that share the same underlying yield characteristics with investments leveraged under the legacy SLF
Credit Facility, which approximated $297.3 million as of December 31, 2016. The Investment Adviser cannot recoup management fees that the Investment Adviser has
previously waived. For the year ended December 31, 2016, total management fees waived was approximately $4.8 million.
Incentive Fees
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20.0% of our "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 we receive from portfolio companies) accrued during the calendar quarter, minus our
operating expenses for the quarter (including the base management fee, expenses payable under the 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 stock (of which there is
none as of December 31, 2016), 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 we have 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, our 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 or mature in the future. We track the transferred (or fair market) value of each of our
investments as of the time of the IPO and, for purposes of the incentive fee calculation, adjust Pre-Incentive Fee Net Investment Income to reflect the amortization of
purchase or original issue discount on our investments as if each investment was purchased at the date of our IPO, or stepped up to fair market value. This is defined as
"Pre-Incentive Fee Adjusted Net Investment Income". We also use the transferred (or fair market) value of each of our 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 our 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 our 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 our Pre-Incentive Fee Adjusted Net Investment Income does not
exceed the hurdle rate of 2.0% (the "preferred return" or "hurdle").
100.0% of our 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 our Pre-
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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 our Pre-Incentive Fee Adjusted Net Investment Income as if
a hurdle rate did not apply when our Pre-Incentive Fee Adjusted Net Investment Income exceeds 2.5% in any calendar quarter.
•
20.0% of the amount of our 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 our 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, we accrue 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.
Example 1: Income Related Portion of Incentive Fee for Each Calendar Quarter*:
Alternative 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate(1) = 2.00%
Management fee(2) = 0.44%
Other expenses (legal, accounting, safekeeping agent, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Adjusted Net Investment Income
(investment income – (management fee + other expenses)) = 0.61%
Pre-Incentive Fee Adjusted Net Investment Income does not exceed the hurdle rate, therefore there is no income related incentive fee.
Alternative 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.90%
Hurdle rate(1) = 2.00%
Management fee(2) = 0.44%
Other expenses (legal, accounting, safekeeping agent, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Adjusted Net Investment Income
(investment income – (management fee + other expenses)) = 2.26%
Incentive fee = 100.00% × Pre-Incentive Fee Adjusted Net Investment Income (subject to "catch-up")(4)
= 100.00% × (2.26% – 2.00%)
= 0.26%
Pre-Incentive Fee Adjusted Net Investment Income exceeds the hurdle rate, but does not fully satisfy the "catch-up" provision, therefore the income related
portion of the incentive fee is 0.26%.
Alternative 3
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.50%
Hurdle rate(1) = 2.00%
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Management fee(2) = 0.44%
Other expenses (legal, accounting, safekeeping agent, transfer agent, etc.)(3) = 0.20%
Pre-Incentive Fee Adjusted Net Investment Income
(investment income – (management fee + other expenses)) = 2.86%
Incentive fee = 100.00% × Pre-Incentive Fee Adjusted Net Investment Income (subject to "catch-up")(4)
Incentive fee = 100.00% × "catch-up" + (20.00% × (Pre-Incentive Fee Adjusted Net Investment Income 2.50%))
Catch-up = 2.50% – 2.00%
= 0.50%
Incentive fee = (100.00% × 0.50%) + (20.00% × (2.86% – 2.50%))
= 0.50% + (20.00% × 0.36%)
= 0.50% + 0.07%
= 0.57%
Pre-Incentive Fee Adjusted Net Investment Income exceeds the hurdle rate, and fully satisfies the "catch-up" provision, therefore the income related portion
of the incentive fee is 0.57%.
_______________________________________________________________________________
*
The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets and assumes, for our investments held prior to
the IPO, interest income has been adjusted to reflect the amortization of purchase or original issue discount as if each investment was purchased at the date of the
IPO, or stepped up to fair market value.
(1) Represents 8.00% annualized hurdle rate.
(2) Assumes 1.75% annualized base management fee.
(3) Excludes organizational and offering expenses.
(4) The "catch-up" provision is intended to provide the Investment Adviser with an incentive fee of 20.00% on all Pre-Incentive Fee Adjusted Net Investment Income as
if a hurdle rate did not apply when our net investment income exceeds 2.50% in any calendar quarter.
Example 2: Capital Gains Portion of Incentive Fee*:
Alternative 1:
Assumptions
Year 1: $20.0 million investment made in Company A ("Investment A"), and $30.0 million investment made in Company B ("Investment B")
Year 2: Investment A sold for $50.0 million and fair market value ("FMV") of Investment B determined to be $32.0 million
Year 3: FMV of Investment B determined to be $25.0 million
Year 4: Investment B sold for $31.0 million
The capital gains portion of the incentive fee would be:
Year 1: None
Year 2: Capital gains incentive fee of $6.0 million—($30.0 million realized capital gains on sale of Investment A multiplied by 20.0%)
Year 3: None—$5.0 million (20.0% multiplied by ($30.0 million cumulative capital gains less $5.0 million cumulative capital depreciation)) less
$6.0 million (previous capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of $0.2 million—$6.2 million ($31.0 million cumulative realized capital gains multiplied by 20.0%) less $6.0 million
(capital gains incentive fee taken in Year 2)
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Alternative 2
Assumptions
Year 1: $20.0 million investment made in Company A ("Investment A"), $30.0 million investment made in Company B ("Investment B") and $25.0 million
investment made in Company C ("Investment C")
Year 2: Investment A sold for $50.0 million, FMV of Investment B determined to be $25.0 million and FMV of Investment C determined to be $25.0 million
Year 3: FMV of Investment B determined to be $27.0 million and Investment C sold for $30.0 million
Year 4: FMV of Investment B determined to be $35.0 million
Year 5: Investment B sold for $20.0 million
The capital gains incentive fee, if any, would be:
Year 1: None
Year 2: $5.0 million capital gains incentive fee—20.0% multiplied by $25.0 million ($30.0 million realized capital gains on Investment A less $5.0 million
unrealized capital depreciation on Investment B)
Year 3: $1.4 million capital gains incentive fee—$6.4 million (20.0% multiplied by $32.0 million ($35.0 million cumulative realized capital gains less
$3.0 million unrealized capital depreciation)) less $5.0 million capital gains incentive fee received in Year 2
Year 4: $0.6 million capital gains incentive fee—$7.0 million (20.0% multiplied by $35.0 million cumulative realized capital gains) less cumulative
$6.4 million capital gains incentive fee received in Year 2 and Year 3
Year 5: None—$5.0 million (20.0% multiplied by $25.0 million (cumulative realized capital gains of $35.0 million less realized capital losses of
$10.0 million)) less $7.0 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4(1)
_______________________________________________________________________________
*
The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that positive returns will
be realized and actual returns may vary from those shown in this example. The capital gains incentive fees are calculated on an "adjusted" basis for our investments
held prior to the IPO and assumes those investments have been adjusted to reflect the amortization of purchase or original issue discount as if each investment was
purchased at the date of the IPO, or stepped up to fair market value.
(1) As noted above, it is possible that the cumulative aggregate capital gains fee received by the Investment Adviser ($7.0 million) is effectively greater than $5.0 million
(20.0% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($25.0 million)).
Payment of Expenses
Our primary operating expenses are the payment of a base management fee and any incentive fees under the Investment Management Agreement and the
allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to us under the Administration Agreement. We bear all other
expenses of our operations and transactions, including (without limitation) fees and expenses relating to:
•
•
•
•
•
organizational and offering expenses;
the investigation and monitoring of our investments;
the cost of calculating net asset value;
interest payable on debt, if any, to finance our investments;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
• management and incentive fees payable pursuant to the Investment Management Agreement;
•
fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms);
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•
•
•
•
•
•
•
•
•
•
•
•
•
transfer agent and custodial fees;
fees and expenses associated with marketing efforts (including attendance at investment conferences and similar events);
federal and state registration fees;
any exchange listing fees;
federal, state, local and foreign taxes;
independent directors' fees and expenses;
brokerage commissions;
costs of proxy statements, stockholders' reports and notices;
costs of preparing government filings, including periodic and current reports with the SEC;
fees and expenses associated with independent audits and outside legal costs;
costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws;
fidelity bond, liability insurance and other insurance premiums; and
printing, mailing and all other direct expenses incurred by either the Investment Adviser or us in connection with administering our business, including
payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses incurred by the Administrator in
performing its obligations to us under the Administration Agreement, including the allocable portion of the compensation of our chief financial officer and
chief compliance officer and their respective staffs.
Board Consideration of the Investment Management Agreement
Our board of directors determined at an in-person meeting held on February 8, 2017 to re-approve our Investment Management Agreement with the Investment
Adviser. In the consideration of the re-approval of the Investment Management Agreement, our board of directors focused on information they had received relating to,
among other things:
•
•
•
•
•
•
the nature, extent and quality of advisory and other services provided by the Investment Adviser, including information about our investment performance
relative to our stated objectives and in comparison to our performance peer group and relevant market indices, and concluded that such advisory and other
services are satisfactory and our investment performance is reasonable;
the experience and qualifications of the personnel providing such advisory and other services, including information about the backgrounds of the
investment personnel, the allocation of responsibilities among such personnel and the process by which investment decisions are made, and concluded that
the investment personnel of the Investment Adviser have extensive experience and are well qualified to provide advisory and other services to us;
the current fee structure, the existence of any fee waivers, and our anticipated expense ratios in relation to those of other investment companies having
comparable investment policies and limitations, and concluded that the current fee structure is reasonable;
the advisory fees charged to us by the Investment Adviser and comparative data regarding the advisory fees charged by other investment advisers to BDCs
with similar investment objectives, and concluded that the advisory fees charged to us by the Investment Adviser are reasonable;
the direct and indirect costs, including for personnel and office facilities, that are incurred by the Investment Adviser and its affiliates in performing services
for us and the basis of determining and allocating these costs, and concluded that the direct and indirect costs, including the allocation of such costs, are
reasonable;
possible economies of scale arising from our size and/or anticipated growth, and the extent to which such economies of scale are reflected in the advisory
fees charged to us by the Investment Adviser, and concluded that some economies of scale may be possible in the future;
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•
•
other possible benefits to the Investment Adviser and its affiliates arising from their relationships with us, and concluded that any such other benefits were
not material to the Investment Adviser and its affiliates; and
possible alternative fee structures or bases for determining fees, and concluded that our current fee structure and bases for determining fees are satisfactory.
Based on the information reviewed and the discussions detailed above, our board of directors, including a majority of the directors who are not "interested
persons" as defined in the 1940 Act, concluded that the fees payable to the Investment Adviser pursuant to the Investment Management Agreement were reasonable, and
comparable to the fees paid by other management investment companies with similar investment objectives, in relation to the services to be provided. Our board of
directors did not assign relative weights to the above factors or the other factors considered by it. Individual members of our board of directors may have given different
weights to different factors.
Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying
assets, unless, at the time the acquisition is made, qualifying assets represent at least 70.0% of the BDC's total assets. The principal categories of qualifying assets relevant
to our business are any of the following:
1)
Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions)
is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio
company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any
issuer which:
(a)
is organized under the laws of, and has its principal place of business in, the U.S.;
(b)
is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an
investment company but for certain exclusions under the 1940 Act; and
(c)
satisfies any of the following:
(i)
does not have any class of securities that is traded on a national securities exchange;
(ii)
has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting
common equity of less than $250.0 million;
(iii)
is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible
portfolio company; or
(iv)
is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.
2)
3)
4)
5)
Securities of any eligible portfolio company that the BDC controls.
Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions
incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to
meet its obligations as they came prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other
than conventional lending or financing arrangements.
Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and the BDC
already owns 60.0% of the outstanding equity of the eligible portfolio company.
Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants
or rights relating to such securities.
6)
Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized and have its principal place of business in the U.S. and must be operated for the purpose of making investments in
the types of securities described in (1), (2) or (3) above.
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As of December 31, 2016, 9.9% of our total assets were non-qualifying assets.
Managerial Assistance to Portfolio Companies
BDCs generally must offer to make available to the eligible issuers of its securities significant managerial assistance, except in circumstances where either (i) the
BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and one of the other
persons in the group makes available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC
offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a
portfolio company. The Administrator or its affiliate provides such managerial assistance on our behalf to portfolio companies that request this assistance.
Temporary Investments
Pending investments in other types of qualifying assets, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt
securities maturing in one year or less from the time of investment (collectively, as “temporary investments”), so that 70.0% of our assets are qualifying assets. Typically,
we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S.
government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller
to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no
percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25.0% of our total assets constitute
repurchase agreements from a single counterparty, we would not meet the Diversification Tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus,
we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. The Investment Adviser will monitor the creditworthiness of the
counterparties with which we enter into repurchase agreement transactions. We had no temporary investments as of December 31, 2016.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of debt if our asset coverage, as defined in the 1940 Act, is at least equal to 200.0%
immediately after each such issuance. In addition, while any senior securities remain outstanding (other than any indebtedness issued in consideration of a privately
arranged loan, such as any indebtedness outstanding under the Holdings Credit Facility, or the Senior Secured Revolving Credit Agreement with Goldman Sachs Bank
USA, Morgan Stanley Bank, N.A. and Stifel Bank & Trust, dated June 4, 2014, as amended (together with the related guarantee and security agreement, the "NMFC
Credit Facility"), the convertible notes issued on June 3, 2014 and September 30, 2016 under our indenture with U.S. Bank National Association (the "Convertible
Notes"), or the unsecured notes issued on May 6, 2016 and September 30, 2016 (the "Unsecured Notes")), we must make provisions to prohibit any distribution to our
stockholders or the repurchase of our equity securities unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also
borrow amounts up to 5.0% of the value of our total assets for temporary or emergency purposes without regard to our asset coverage. We will include our assets and
liabilities and all of our wholly-owned direct and indirect subsidiaries for purposes of calculating the asset coverage ratio. We received exemptive relief from the SEC on
November 5, 2014, allowing us to modify the asset coverage requirement to exclude SBA-guaranteed debentures from this calculation. For a discussion of the risks
associated with leverage, see Item 1A.—Risk Factors.
Code of Ethics
We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal
securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by
us, so long as such investments are made in accordance with the code’s requirements. You may read and copy the code of ethics at the SEC’s Public Reference Room
located at 100 F Street, N.E., Washington, District of Columbia 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330
publicinfo@sec.gov. In addition, the code of ethics is available on the SEC’s Internet site at http://www.sec.gov.
, and a copy of the code of ethics may be obtained, after paying a duplication fee, by electronic request at the following e-mail address:
Compliance Policies and Procedures
We and the Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities
laws and we are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our chief
compliance officer is responsible for administering these policies and procedures.
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Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to the Investment Adviser. The proxy voting policies and procedures of the Investment Adviser are set forth
below. The guidelines will be reviewed periodically by the Investment Adviser and our non-interested directors, and, accordingly, are subject to change.
Introduction
As an investment adviser registered under the Advisers Act, the Investment Adviser has a fiduciary duty to act solely in the best interests of its clients. As part of
this duty, it recognizes that it must vote our securities in a timely manner free of conflicts of interest and in our best interests.
The policies and procedures for voting proxies for the investment advisory clients of the Investment Adviser are intended to comply with Section 206 of, and
Rule 206(4)-6 under, the Advisers Act.
Proxy policies
The Investment Adviser will vote proxies relating to our securities in our best interest. It will review on a case-by-case basis each proposal submitted for a
stockholder vote to determine its impact on the portfolio securities held by us. Although the Investment Adviser will generally vote against proposals that may have a
negative impact on its clients’ portfolio securities, it may vote for such a proposal if there exists compelling long-term reasons to do so.
The proxy voting decisions of the Investment Adviser are made by the senior officers who are responsible for monitoring each of its clients’ investments. To
ensure that its vote is not the product of a conflict of interest, it will require that: (a) anyone involved in the decision making process disclose to its chief compliance
officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (b) employees involved
in the decision making process or vote administration are prohibited from revealing how the Investment Adviser intends to vote on a proposal in order to reduce any
attempted influence from interested parties.
Proxy voting records
You may obtain, without charge, information regarding how we voted proxies with respect to our portfolio securities by making a written request for proxy
voting information to: Chief Compliance Officer, 787 Seventh Avenue, 48th Floor, New York, New York 10019.
Staffing
We do not have any employees. Our day-to-day investment operations are managed by the Investment Adviser. See “—Investment Management Agreement”.
We reimburse the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations to us under the Administration
Agreement, including the compensation of our chief financial officer and chief compliance officer, and their respective staffs. For a more detailed discussion of the
Administration Agreement, see Item 8.—Financial Statements and Supplementary Data—Note 5. Agreements.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 imposes a variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect
us. For example:
•
•
•
•
pursuant to Rule 13a-14 of the Exchange Act, our chief executive officer and chief financial officer are required to certify the accuracy of the financial
statements contained in our periodic reports;
pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and
procedures;
pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report regarding their assessment of their internal control over
financial reporting and is required to obtain an audit of the effectiveness of internal control over financial reporting performed by our independent registered
public accounting firm; and
pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports are required to disclose whether there were significant
changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of the
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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The Sarbanes-Oxley Act of 2002 requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act of 2002
and the regulations promulgated thereunder. We intend to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act of 2002 and will
take actions necessary to ensure that we are in compliance therewith.
Available Information
We file or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information as required by the 1940 Act. You may
inspect and copy any materials we file with the SEC at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 or by calling the SEC at
1-800-SEC-0330
SEC at http://www.sec.gov.
. The SEC maintains an internet site that contains reports, proxy and information statements and other information filed electronically by us with the
We make available free of charge on our website, http://www.newmountainfinance.com, our reports, proxies and information statements and other information as
soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC. Information contained on our website or on the SEC's website about
us is not incorporated into this annual report and should not be considered to be a part of this annual report.
Privacy Notice
Your privacy is very important to us. This Privacy Notice sets forth our policies with respect to non-public personal information about our stockholders and
prospective and former stockholders. These policies apply to our stockholders and may be changed at any time, provided a notice of such change is given to you. This
notice supersedes any other privacy notice you may have received from us.
We will safeguard, according to strict standards of security and confidentiality, all information we receive about you. The only information we collect from you
is your name, address, number of shares you hold and your social security number. This information is used only so that we can send you annual reports and other
information about us, and send you proxy statements or other information required by law.
We do not share this information with any non-affiliated third party except as described below.
•
•
•
Authorized Employees of our Investment Adviser. It is our policy that only authorized employees of our investment adviser who need to know your personal
information will have access to it.
Service Providers. We may disclose your personal information to companies that provide services on our behalf, such as recordkeeping, processing your
trades, and mailing you information. These companies are required to protect your information and use it solely for the purpose for which they received it.
Courts and Government Officials. If required by law, we may disclose your personal information in accordance with a court order or at the request of
government regulators. Only that information required by law, subpoena, or court order will be disclosed.
We seek to carefully safeguard your private information and, to that end, restrict access to non-public personal information about you to those employees and
other persons who need to know the information to enable us to provide services to you. We maintain physical, electronic and procedural safeguards to protect your non-
public personal information.
If you have any questions regarding this policy or the treatment of your non-public personal information, please contact our Chief Compliance Officer
at (212) 655-0083.
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Item 1A. Risk Factors
You should carefully consider the significant risks described below, together with all of the other information included in this Form 10-K, including our
consolidated financial statements and the related notes, before making an investment decision in us. The risks set forth below are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, our structure, our financial
condition, our investments and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially
and adversely affected. In such case, our net asset value and the trading price of our common stock could decline. There can be no assurance that we will achieve our
investment objective and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS AND STRUCTURE
Global capital markets could enter a period of severe disruption and instability. These market conditions have historically and could again have a materially adverse
effect on debt and equity capital markets in the U.S., which could have, a materially negative impact on our business, financial condition and results of operations.
The U.S. and global capital markets have experienced periods of disruption characterized by the freezing of available credit, a lack of liquidity in the debt capital
markets, significant losses in the principal value of investments, the re-pricing of credit risk in the broadly syndicated credit market, the failure of certain major financial
institutions and general volatility in the financial markets. During these periods of disruption, general economic conditions deteriorated with material and adverse
consequences for the broader financial and credit markets, and the availability of debt and equity capital for the market as a whole, and financial services firms in
particular, was reduced significantly. These conditions may reoccur for a prolonged period of time or materially worsen in the future. In addition, signs of deteriorating
sovereign debt conditions in Europe and concerns of economic slowdown in China create uncertainty that could lead to further disruptions and instability. We may in the
future have difficulty accessing debt and equity capital, and a severe disruption in the global financial markets, deterioration in credit and financing conditions or
uncertainty regarding U.S. Government spending and deficit levels, European sovereign debt, Chinese economic slowdown or other global economic conditions could
have a material adverse effect on our business, financial condition and results of operations.
Further downgrades of the U.S. credit rating, impending automatic spending cuts or another government shutdown could negatively impact our liquidity, financial
condition and earnings.
Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a
recession in the U.S. The federal debt limit has been suspended since November 2, 2015, but the limit is set to be reinstated on March 15, 2017. If legislation increasing
the debt ceiling is not enacted, as needed, and the debt ceiling is reached, the U.S. federal government may stop or delay making payments on its obligations, which could
negatively impact the U.S. economy and our portfolio companies. Multiple factors relating to the international operations of some of our portfolio companies and to
particular countries in which they operate could negatively impact their business, financial condition and results of operations. In addition, disagreement over the federal
budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect
on our business, financial condition and results of operations.
Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and
profitability.
The current worldwide financial market situation, as well as various social and political tensions in the U.S. and around the world, may contribute to increased
market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause economic uncertainties or deterioration in the U.S. and
worldwide. Since 2010, several European Union ("EU") countries, including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may
have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the Euro and the
accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In June 2016, the United Kingdom ("U.K.")
held a referendum in which voters approved an exit from the EU (“Brexit”), and, accordingly, on February 1, 2017, the U.K. Parliament voted in favor of allowing the
U.K. government to begin the formal process of Brexit. Brexit created political and economic uncertainty and instability in the global markets (including currency and
credit markets), and especially in the U.K. and the EU, and this uncertainty and instability may last indefinitely. In addition, the fiscal policy of foreign nations, such as
Russia and China, may have a severe impact on the worldwide and U.S. financial markets. We cannot predict the effects of these or similar events in the future on the U.S.
economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our
investment objective, but there can be no assurance that we will be successful in doing so.
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As a result of the 2016 U.S. election, the Republican Party currently controls both the executive and legislative branches of government, which increases the
likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal
include the Dodd-Frank Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. The U.S. may also potentially withdraw from or
renegotiate various trade agreements and take other actions that would change current trade policies of the U.S. We cannot predict which, if any, of these actions will be
taken or, if taken, their effect on the financial stability of the U.S. Such actions could have a significant adverse effect on our business, financial condition and results of
operations. We cannot predict the effects of these or similar events in the future on the U.S. economy and securities markets or on our investments. We monitor
developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be
successful in doing so.
We may suffer credit losses.
Investments in small and middle market businesses are highly speculative and involve a high degree of risk of credit loss. These risks are likely to increase during
volatile economic periods, such as the U.S. and many other economies have recently been experiencing.
We do not expect to replicate the Predecessor Entities' historical performance or the historical performance of other entities managed or supported by New Mountain
Capital.
We do not expect to replicate the Predecessor Entities' historical performance or the historical performance of New Mountain Capital's investments. Our
investment returns may be substantially lower than the returns achieved by the Predecessor Entities. Although the Predecessor Entities commenced operations during
otherwise unfavorable economic conditions, this was a favorable environment in which the Predecessor Operating Company could conduct its business in light of its
investment objectives and strategy. In addition, our investment strategies may differ from those of New Mountain Capital or its affiliates. We, as a BDC and as a RIC, are
subject to certain regulatory restrictions that do not apply to New Mountain Capital or its affiliates.
We are generally not permitted to invest in any portfolio company in which New Mountain Capital or any of its affiliates currently have an investment or to make
any co-investments with New Mountain Capital or its affiliates, except to the extent permitted by the 1940 Act. This may adversely affect the pace at which we make
investments. Moreover, we may operate with a different leverage profile than the Predecessor Entities. Furthermore, none of the prior results from the Predecessor Entities
were from public reporting companies, and all or a portion of these results were achieved in particularly favorable market conditions for the Predecessor Operating
Company's investment strategy which may never be repeated. Finally, we can offer no assurance that our investment team will be able to continue to implement our
investment objective with the same degree of success as it has had in the past.
There is uncertainty as to the value of our portfolio investments because most of our investments are, and may continue to be in private companies and recorded at
fair value. In addition, the fair values of our investments are determined by our board of directors in accordance with our valuation policy.
Some of our investments are and may be in the form of securities or loans that are not publicly traded. The fair value of these investments may not be readily
determinable. Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as
determined in good faith by our board of directors, including to reflect significant events affecting the value of our securities. We value our investments for which we do
not have readily available market quotations quarterly, or more frequently as circumstances require, at fair value as determined in good faith by our board of directors in
accordance with our valuation policy, which is at all times consistent with GAAP. See Item 8.—Financial Statements and Supplementary Data—Note 2. Summary of
Significant Accounting Policies or Note 4, Fair Value for additional information on valuations.
Our board of directors utilizes the services of one or more independent third-party valuation firms to aid it in determining the fair value with respect to our
material unquoted assets in accordance with our valuation policy. The inputs into the determination of fair value of these investments may require significant management
judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes, which include
a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by
disclaimers materially reduces the reliability of such information.
The types of factors that the board of directors takes into account in determining the fair value of our investments generally include, as appropriate: available
market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection
provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows
and the markets in which it does business, comparisons of financial ratios of peer companies that are public, comparable merger and acquisition transactions and the
principal market and enterprise values. Since these valuations, and particularly
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valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our
determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed.
Due to this uncertainty, our fair value determinations may cause our net asset value, on any given date, to be materially understated or overstated. In addition,
investors purchasing our common stock based on an overstated net asset value would pay a higher price than the realizable value that our investments might warrant.
We may adjust quarterly the valuation of our portfolio to reflect our board of directors' determination of the fair value of each investment in our portfolio. Any
changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation.
Our ability to achieve our investment objective depends on key investment personnel of the Investment Adviser. If the Investment Adviser were to lose any of its key
investment personnel, our ability to achieve our investment objective could be significantly harmed.
We depend on the investment judgment, skill and relationships of the investment professionals of the Investment Adviser, particularly Steven B. Klinsky, Robert
A. Hamwee and John R. Kline, as well as other key personnel to identify, evaluate, negotiate, structure, execute, monitor and service our investments. The Investment
Adviser, as an affiliate of New Mountain Capital, is supported by New Mountain Capital's team, which as of December 31, 2016 consisted of over 100 staff members of
New Mountain Capital and its affiliates to fulfill its obligations to us under the Investment Management Agreement. The Investment Adviser may also depend upon New
Mountain Capital to obtain access to investment opportunities originated by the professionals of New Mountain Capital and its affiliates. Our future success depends to a
significant extent on the continued service and coordination of the key investment personnel of the Investment Adviser. The departure of any of these individuals could
have a material adverse effect on our ability to achieve our investment objective.
The Investment Committee, which provides oversight over our investment activities, is provided by the Investment Adviser. The Investment Committee currently
consists of five members. The loss of any member of the Investment Committee or of other senior professionals of the Investment Adviser and its affiliates without
suitable replacement could limit our ability to achieve our investment objective and operate as we anticipate. This could have a material adverse effect on our financial
condition, results of operation and cash flows. To achieve our investment objective, the Investment Adviser may hire, train, supervise and manage new investment
professionals to participate in its investment selection and monitoring process. If the Investment Adviser is unable to find investment professionals or do so in a timely
manner, our business, financial condition and results of operations could be adversely affected.
The Investment Adviser has limited experience managing a BDC or a RIC, which could adversely affect our business.
Other than us, the Investment Adviser has not previously managed a BDC or a RIC. The 1940 Act and the Code impose numerous constraints on the operations
of BDCs and RICs that do not apply to the other investment vehicles previously managed by the investment professionals of the Investment Adviser. For example, under
the 1940 Act, BDCs are required to invest at least 70.0% of their total assets primarily in securities of qualifying U.S. private or thinly traded companies, cash, cash
equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Moreover, qualification for taxation as a RIC under
subchapter M of the Code requires satisfaction of source-of-income, asset diversification and annual distribution requirements. The failure to comply with these provisions
in a timely manner could prevent us from qualifying as a BDC or as a RIC and could force us to pay unexpected taxes and penalties, which would have a material adverse
effect on our performance. The Investment Adviser's lack of experience in managing a portfolio of assets under the constraints applicable to BDCs and RICs may hinder
its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. If we fail to maintain our status as a BDC or as a RIC,
our operating flexibility could be significantly reduced.
We operate in a highly competitive market for investment opportunities and may not be able to compete effectively.
We compete for investments with other BDCs and investment funds (including private equity and hedge funds), as well as traditional financial services
companies such as commercial banks and other sources of funding. Many of our competitors are substantially larger and have considerably greater financial, technical and
marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us. In addition,
some of our competitors may have higher risk tolerances or different risk assessments than us. Furthermore, many of our competitors have greater experience operating
under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution
requirements that we must satisfy to maintain our RIC status. These characteristics could allow our competitors to consider a wider variety of investments, establish more
relationships and offer better pricing and more flexible structuring than we are able to do.
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We may lose investment opportunities if our pricing, terms and structure do not match those of our competitors. With respect to the investments that we make,
we do not seek to compete based primarily on the interest rates we may offer, and we believe that some of our competitors may make loans with interest rates that may be
lower than the rates we offer. In the secondary market for acquiring existing loans, we expect to compete generally on the basis of pricing terms. If we match our
competitors' pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss. If we are forced to match our
competitors' pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. Part of our
competitive advantage stems from the fact that we believe the market for middle market lending is underserved by traditional bank lenders and other financial sources. A
significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. We may also compete
for investment opportunities with accounts managed by the Investment Adviser or its affiliates. Although the Investment Adviser allocates opportunities in accordance
with its policies and procedures, allocations to such other accounts reduces the amount and frequency of opportunities available to us and may not be in our best interests
and, consequently, our stockholders. Moreover, the performance of investment opportunities is not known at the time of allocation. If we are not able to compete
effectively, our business, financial condition and results of operations may be adversely affected, thus affecting our business, financial condition and results of operations.
Because of this competition, there can be no assurance that we will be able to identify and take advantage of attractive investment opportunities that we identify or that we
will be able to fully invest our available capital.
Our business, results of operations and financial condition depend on our ability to manage future growth effectively.
Our ability to achieve our investment objective and to grow depends on the Investment Adviser’s ability to identify, invest in and monitor companies that meet
our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of the Investment Adviser’s structuring of the investment process, its
ability to provide competent, attentive and efficient services to us and its ability to access financing on acceptable terms. The Investment Adviser has substantial
responsibilities under the Investment Management Agreement and may also be called upon to provide managerial assistance to our eligible portfolio companies. These
demands on the time of the Investment Adviser and its investment professionals may distract them or slow our rate of investment. In order to grow, we and the Investment
Adviser may need to retain, train, supervise and manage new investment professionals. However, these investment professionals may not be able to contribute effectively
to the work of the Investment Adviser. If we are unable to manage our future growth effectively, our business, results of operations and financial condition could be
materially adversely affected.
The incentive fee may induce the Investment Adviser to make speculative investments.
The incentive fee payable to the Investment Adviser may create an incentive for the Investment Adviser to pursue investments that are risky or more speculative
than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic
downturns. The incentive fee payable to the Investment Adviser is calculated based on a percentage of our return on investment capital. This may encourage the
Investment Adviser to use leverage to increase the return on our investments. In addition, because the base management fee is payable based upon our gross assets, which
includes any borrowings for investment purposes, but excludes borrowings under the SLF Credit Facility and cash and cash equivalents for investment purposes, the
Investment Adviser may be further encouraged to use leverage to make additional investments. Under certain circumstances, the use of leverage may increase the
likelihood of default, which would impair the value of our common stock.
The incentive fee payable to the Investment Adviser also may create an incentive for the Investment Adviser to invest in instruments that have a deferred interest
feature, even if such deferred payments would not provide the cash necessary to pay current distributions to our stockholders. Under these investments, we would accrue
the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment’s term, if at all. Our net investment
income used to calculate the income portion of the incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on income that
we have not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such interest payment obligations. In addition, the “catch-up”
portion of the incentive fee may encourage the Investment Adviser to accelerate or defer interest payable by portfolio companies from one calendar quarter to another,
potentially resulting in fluctuations in timing and dividend amounts.
We may be obligated to pay the Investment Adviser incentive compensation even if we incur a loss.
The Investment Adviser is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our Pre-Incentive Fee
Adjusted Net Investment Income for that quarter (before deducting incentive compensation) above a performance threshold for that quarter. Accordingly, since the
performance threshold is based on a percentage of our net asset value, decreases in our net asset value make it easier to achieve the performance threshold. Our Pre-
Incentive Fee Adjusted Net Investment Income for incentive compensation purposes excludes realized and unrealized capital losses or depreciation that it may incur in the
fiscal quarter, even if such capital losses or depreciation result in a net loss on our
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statement of operations for that quarter. Thus, we may be required to pay the Investment Adviser incentive compensation for a fiscal quarter even if there is a decline in
the value of our portfolio or we incur a net loss for that quarter.
The incentive fee we pay to the Investment Adviser with respect to capital gains may be effectively greater than 20.0%.
As a result of the operation of the cumulative method of calculating the capital gains portion of the incentive fee we pay to the Investment Adviser, the
cumulative aggregate capital gains fee received by the Investment Adviser could be effectively greater than 20.0%, depending on the timing and extent of subsequent net
realized capital losses or net unrealized depreciation. We cannot predict whether, or to what extent, this payment calculation would affect your investment in our common
stock.
We borrow money, which could magnify the potential for gain or loss on amounts invested in us and increase the risk of investing in us.
We borrow money as part of our business plan. Borrowings, also known as leverage, magnify the potential for gain or loss on invested equity capital and may,
consequently, increase the risk of investing in us. We expect to continue to use leverage to finance our investments, through senior securities issued by banks and other
lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to claims of our common stockholders. If the value of our assets
decreases, leveraging would cause our net asset value to decline more sharply than it otherwise would have had it not leveraged. Similarly, any decrease in our income
would cause our net income to decline more sharply than it would have had it not borrowed. Such a decline could adversely affect our ability to make common stock
dividend payments. In addition, because our investments may be illiquid, we may be unable to dispose of them or to do so at a favorable price in the event we need to do
so if we are unable to refinance any indebtedness upon maturity and, as a result, we may suffer losses. Leverage is generally considered a speculative investment
technique.
Our ability to service any debt that we incur depends largely on our financial performance and is subject to prevailing economic conditions and competitive
pressures. Moreover, as the Investment Adviser’s management fee is payable to the Investment Adviser based on gross assets, including those assets acquired through the
use of leverage, the Investment Adviser may have a financial incentive to incur leverage which may not be consistent with our interests and the interests of our common
stockholders. In addition, holders of our common stock will, indirectly, bear the burden of any increase in our expenses as a result of leverage, including any increase in
the management fee payable to the Investment Adviser.
At December 31, 2016, we had $333.5 million, $10.0 million, $155.3 million, $90.0 million and $121.7 million of indebtedness outstanding under the Holdings
Credit Facility, the NMFC Credit Facility, the Convertible Notes, the Unsecured Notes and the SBA-guaranteed debentures, respectively. The Holdings Credit Facility,
NMFC Credit Facility and the SBA-guaranteed debentures had weighted average interest rates of 2.8%, 3.0% and 3.1%, respectively, for the year ended December 31,
2016. The interest rate on the Convertible Notes is 5.0% per annum and the interest rate on the Unsecured Notes is 5.313% per annum.
If we are unable to comply with the covenants or restrictions in our borrowings, our business could be materially adversely affected.
The Holdings Credit Facility includes covenants that, subject to exceptions, restrict our ability to pay distributions, create liens on assets, make investments,
make acquisitions and engage in mergers or consolidations. The Holdings Credit Facility also includes a change of control provision that accelerates the indebtedness
under the facility in the event of certain change of control events. Complying with these restrictions may prevent us from taking actions that we believe would help us
grow our business or are otherwise consistent with our investment objective. These restrictions could also limit our ability to plan for or react to market conditions or meet
extraordinary capital needs or otherwise restrict corporate activities. In addition, the restrictions contained in the Holdings Credit Facility could limit our ability to make
distributions to our stockholders in certain circumstances, which could result in us failing to qualify as a RIC and thus becoming subject to corporate-level U.S. federal
income tax (and any applicable state and local taxes).
The NMFC Credit Facility includes customary covenants, including certain financial covenants related to asset coverage and liquidity and other maintenance
covenants, as well as customary events of default.
Our Convertible Notes are subject to certain covenants, including covenants requiring us to provide financial information to the holders of the Convertible Notes
and the trustee if we cease to be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions. In addition, if
certain corporate events occur, holders of the Convertible Notes may require us 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.
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Our Unsecured Notes are subject to certain covenants, including covenants such as information reporting, maintenance of our status as a BDC under the 1940
Act and a RIC under the Internal Revenue Code, minimum stockholders’ equity, minimum asset coverage ratio, and prohibitions on certain fundamental changes, as well
as customary events of default with customary cure and notice, including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant,
cross-default under our other indebtedness or certain significant subsidiaries, certain judgments and orders, and certain events of bankruptcy. In addition, we are obligated
to offer to prepay the Unsecured Notes at par if the Investment Adviser, or an affiliate thereof, ceases to be our investment adviser or if certain change in control events
occur with respect to the Investment Adviser.
The breach of any of the covenants or restrictions, unless cured within the applicable grace period, would result in a default under the applicable credit facility
that would permit the lenders thereunder to declare all amounts outstanding to be due and payable. In such an event, we may not have sufficient assets to repay such
indebtedness. As a result, any default could have serious consequences to our financial condition. An event of default or an acceleration under the credit facilities could
also cause a cross-default or cross-acceleration of another debt instrument or contractual obligation, which would adversely impact our liquidity. We may not be granted
waivers or amendments to the credit facilities if for any reason we are unable to comply with it, and we may not be able to refinance the credit facilities on terms
acceptable to us, or at all.
We may enter into reverse repurchase agreements, which are another form of leverage.
We may enter into reverse repurchase agreements as part of our management of our investment portfolio. Under a reverse repurchase agreement, we will
effectively pledge our assets as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount equal to a percentage of the
fair value of the pledged collateral. At the maturity of the reverse repurchase agreement, the payor will be required to repay the loan and correspondingly receive back its
collateral. While used as collateral, the assets continue to pay principal and interest which are for our benefit.
Our use of reverse repurchase agreements, if any, involves many of the same risks involved in our use of leverage, as the proceeds from reverse repurchase
agreements generally will be invested in additional securities. There is a risk that the market value of the securities acquired with the proceeds of a reverse repurchase
agreement may decline below the price of the securities that we have sold but remain obligated to repurchase under the reverse repurchase agreement. In addition, there is
a risk that the market value of the securities effectively pledged by us may decline. If a buyer of securities under a reverse repurchase agreement were to file for
bankruptcy or experience insolvency, we may be adversely affected. Also, in entering into reverse repurchase agreements, we would bear the risk of loss to the extent that
the proceeds of such agreements at settlement are more than the fair value of the underlying securities being pledged. In addition, due to the interest costs associated with
reverse repurchase agreements transactions, our net asset value would decline, and, in some cases, we may be worse off than if such instruments had not been used.
Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.
The SEC has proposed a new rule under the 1940 Act that would govern the use of derivatives (defined to include any swap, security-based swap, futures
contract, forward contract, option or any similar instrument) as well as financial commitment transactions (defined to include reverse repurchase agreements, short sale
borrowings and any firm or standby commitment agreement or similar agreement) by BDCs. Under the proposed rule, a BDC would be required to comply with one of
two alternative portfolio limitations and manage the risks associated with derivatives transactions and financial commitment transactions by segregating certain assets.
Furthermore, a BDC that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalized
derivatives risk management program. If the SEC adopts this rule in the form proposed, our ability to enter into transactions involving such instruments may be hindered,
which could have an adverse effect on our business, financial condition and results of operations.
If we are unable to obtain additional debt financing, or if our borrowing capacity is materially reduced, our business could be materially adversely affected.
We may want to obtain additional debt financing, or need to do so upon maturity of our credit facilities, in order to obtain funds which may be made available for
investments. The revolving period under the Holdings Credit Facility ends on December 18, 2017, and the Holdings Credit Facility matures on December 18, 2019. The
NMFC Credit Facility, the Convertible Notes and the Unsecured Notes mature on June 4, 2019, June 15, 2019 and May 15, 2021, respectively. The SBA-guaranteed
debentures have ten year maturities and will begin to mature on March 1, 2025. If we are unable to increase, renew or replace any such facilities and enter into new debt
financing facilities or other debt financing on commercially reasonable terms, our liquidity may be reduced significantly. In addition, if we are unable to repay amounts
outstanding under any such facilities and are declared in default or are unable to renew or refinance these facilities, we may not be able to make new investments or
operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as lack of access to the credit markets, a
severe decline in the value of the U.S. dollar, an economic downturn or an operational problem that affects us or third parties, and could materially damage our business
operations, results of operations and financial condition.
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We may need to raise additional capital to grow.
We may need additional capital to fund new investments and grow. We may access the capital markets periodically to issue equity securities. In addition, we may
also issue debt securities or borrow from financial institutions in order to obtain such additional capital. Unfavorable economic conditions could increase our funding costs
and limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability
to grow. In addition, we are required to distribute at least 90.0% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if
any, to our stockholders to maintain our RIC status. As a result, these earnings will not be available to fund new investments. If we are unable to access the capital
markets or if we are unable to borrow from financial institutions, we may be unable to grow our business and execute our business strategy fully, and our earnings, if any,
could decrease, which could have an adverse effect on the value of our securities.
A renewed disruption in the capital markets and the credit markets could adversely affect our business.
As a BDC, we must maintain our ability to raise additional capital for investment purposes. If we are unable to access the capital markets or credit markets, we
may be forced to curtail our business operations and may be unable to pursue new investment opportunities. The capital markets and the credit markets have experienced
extreme volatility in recent periods, and, as a result, there have been and will likely continue to be uncertainty in the financial markets in general. Disruptions in the capital
markets in recent years increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. In
addition, a prolonged period of market illiquidity may cause us to reduce the volume of loans that we originate and/or fund and adversely affect the value of our portfolio
investments. Unfavorable economic conditions could also increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend
credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results. Ongoing disruptive conditions in
the financial industry and the impact of new legislation in response to those conditions could restrict our business operations and, consequently, could adversely impact
our business, results of operations and financial condition.
If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us by the 1940 Act and contained in the
Holdings Credit Facility, NMFC Credit Facility and the Unsecured Notes. Any such failure would result in a default under such indebtedness and otherwise affect our
ability to issue senior securities, borrow under the Holdings Credit Facility and NMFC Credit Facility and pay distributions, which could materially impair our business
operations. Our liquidity could be impaired further by our inability to access the capital or credit markets. For example, we cannot be certain that we will be able to renew
our credit facilities as they mature or to consummate new borrowing facilities to provide capital for normal operations, including new originations, or reapply for SBIC
licenses. In recent years, reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding
to borrowers. This market turmoil and tightening of credit have led to increased market volatility and widespread reduction of business activity generally in recent years.
In addition, adverse economic conditions due to these disruptive conditions could materially impact our ability to comply with the financial and other covenants in any
existing or future credit facilities. If we are unable to comply with these covenants, this could materially adversely affect our business, results of operations and financial
condition.
Changes in interest rates may affect our cost of capital and net investment income.
To the extent we borrow money to make investments, our net investment income depends, in part, upon the difference between the rate at which we borrow funds
and the rate at which we invest those funds. As a result, a significant change in market interest rates may have a material adverse effect on our net investment income in
the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. We
may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging
activities to the extent permitted by the 1940 Act.
SBIC LP is licensed by the SBA and is subject to SBA regulations.
On August 1, 2014, our wholly-owned direct and indirect subsidiary, SBIC LP, received its license to operate as an SBIC under the 1958 Act and is regulated by
the SBA. The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies, regulates the types of financings, prohibits investing
in small businesses with certain characteristics or in certain industries and requires capitalization thresholds that limit distributions to us. Compliance with SBIC
requirements may cause SBIC LP to invest at less competitive rates in order to find investments that qualify under the SBA regulations.
The SBA regulations require, among other things, an annual periodic examination of a licensed SBIC by an SBA examiner to determine the SBIC's compliance
with the relevant SBA regulations, and the performance of a financial audit by an independent auditor. If SBIC LP fails to comply with applicable regulations, the SBA
could, depending on the severity of the violation, limit or prohibit SBIC LP's use of the debentures, declare outstanding debentures immediately due and payable, and/
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or limit SBIC LP from making new investments. In addition, the SBA could revoke or suspend SBIC LP's license for willful or repeated violation of, or willful or
repeated failure to observe, any provision of the 1958 Act or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively affect us
because SBIC LP is our wholly-owned direct and indirect subsidiary.
SBA-guaranteed debentures are non-recourse to us, have a ten year maturity, and may be prepaid at any time without penalty. Pooling of issued SBA-guaranteed
debentures occurs in March and September of each year. The interest rate of SBA-guaranteed debentures is fixed at the time of pooling at a market-driven spread over ten
year U.S. Treasury Notes. The interest rate on debentures issued prior to the next pooling date is LIBOR plus 30 basis points. Leverage through SBA-guaranteed
debentures is subject to required capitalization thresholds. Current SBA regulations limit the amount that any single SBIC may borrow to two tiers of leverage capped at
$150.0 million, where each tier is equivalent to the SBIC's regulatory capital, which generally equates to the amount of equity capital in the SBIC. In December 2015, the
2016 omnibus spending bill approved by the U.S. Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC
funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval.
RISKS RELATED TO OUR OPERATIONS
Because we intend to distribute substantially all of our income to our stockholders to obtain and maintain our status as a RIC, we will continue to need additional
capital to finance our growth. If additional funds are unavailable or not available on favorable terms, our ability to grow may be impaired.
In order for us to qualify for the tax benefits available to RICs and to avoid payment of excise taxes, we intend to distribute to our stockholders substantially all
of our annual taxable income. As a result of these requirements, we may need to raise capital from other sources to grow our business.
As a BDC, we are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities and excluding SBA-
guaranteed debentures as permitted by exemptive relief obtained from the SEC, to total senior securities, which includes all of our borrowings with the exception of SBA-
guaranteed debentures, of at least 200.0%. This requirement limits the amount that we may borrow. Since we continue to need capital to grow our investment portfolio,
these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. While we expect that we
will be able to borrow and to issue additional debt securities and expect that we will be able to issue additional equity securities, which would in turn increase the equity
capital available to us, we cannot assure you that debt and equity financing will be available to us on favorable terms, or at all. In addition, as a BDC, we generally are not
permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available us, we may be forced to curtail or cease
new investment activities, and our net asset value could decline.
SBIC LP may be unable to make distributions to us that will enable us to meet or maintain our RIC status.
In order for us to continue to qualify for tax benefits available to RICs and to minimize corporate-level U.S. federal income tax, we must distribute to our
stockholders, for each taxable year, at least 90.0% of our “investment company taxable income”, which is generally our net ordinary income plus the excess of realized
net short-term capital gains over realized net long-term capital losses, including investment company taxable income from SBIC LP. We will be partially dependent on
SBIC LP for cash distributions to enable us to meet the RIC distribution requirements. SBIC LP may be limited by SBA regulations governing SBICs from making
certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for SBIC LP to make certain
distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver and if SBIC LP is unable to obtain a waiver, compliance with the SBA
regulations may result in corporate-level U.S. federal income tax.
Our ability to enter into transactions with our affiliates is restricted.
As a BDC, we are prohibited under the 1940 Act from participating in certain transactions with our affiliates without the prior approval of our independent
directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5.0% or more of our outstanding voting securities is an affiliate of ours for purposes of
the 1940 Act. We are generally prohibited from buying or selling any securities (other than our securities) from or to an affiliate. The 1940 Act also prohibits certain
“joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of
independent directors and, in some cases, the SEC. If a person acquires more than 25.0% of our voting securities, we are prohibited from buying or selling any security
(other than our securities) from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior
approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be
prohibited from buying or selling any security from or to any portfolio company of a private equity fund managed by any affiliate of the Investment Adviser without the
prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.
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The Investment Adviser has significant potential conflicts of interest with us and, consequently, your interests as stockholders which could adversely impact our
investment returns.
Our executive officers and directors, as well as the current or future investment professionals of the Investment Adviser, serve or may serve as officers, directors
or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. Accordingly, they may have
obligations to investors in those entities, the fulfillment of which might not be in your interests as stockholders. Although we are currently New Mountain Capital’s only
vehicle focused primarily on investing in the investments that we target, in the future, the investment professionals of the Investment Adviser and/or New Mountain
Capital employees that provide services pursuant to the Investment Management Agreement may manage other funds which may from time to time have overlapping
investment objectives with our own and, accordingly, may invest in, whether principally or secondarily, asset classes similar to those targeted by us. If this occurs, the
Investment Adviser may face conflicts of interest in allocating investment opportunities to us and such other funds. Although the investment professionals endeavor to
allocate investment opportunities in a fair and equitable manner, it is possible that we may not be given the opportunity to participate in certain investments made by the
Investment Adviser or persons affiliated with the Investment Adviser or that certain of these investment funds may be favored over us. When these investment
professionals identify an investment, they may be forced to choose which investment fund should make the investment.
While we may co-invest with investment entities managed by the Investment Adviser or its affiliates to the extent permitted by the 1940 Act and the rules and
regulations thereunder, the 1940 Act imposes significant limits on co-investment. As a result, on September 12, 2016, we, the Investment Adviser and certain affiliates of
the Investment Adviser have applied for exemptive relief from the SEC under the 1940 Act, which, if granted, would allow additional latitude to co-invest. However,
there is no assurance when, or even if, we will obtain such relief. In the event the SEC does not grant us relief, we will be limited in our ability to invest in certain
portfolio companies in which the Investment Adviser or any of its affiliates are investing or are invested. Even if we are able to obtain exemptive relief, we will be unable
to participate in certain transactions originated by our Investment Adviser or its affiliates prior to receipt of such relief.
If the Investment Adviser forms other affiliates in the future, we may co-invest on a concurrent basis with such other affiliate, subject to compliance with
applicable regulations and regulatory guidance or an exemptive order from the SEC and our allocation procedures. In addition, we pay management and incentive fees to
the Investment Adviser and reimburse the Investment Adviser for certain expenses it incurs. As a result, investors in our common stock invest in us on a “gross” basis and
receive distributions on a “net” basis after our expenses. Also, the incentive fee payable to the Investment Adviser may create an incentive for the Investment Adviser to
pursue investments that are riskier or more speculative than would be the case in the absence of such compensation arrangements. Any potential conflict of interest arising
as a result of the arrangements with the Investment Adviser could have a material adverse effect on our business, results of operations and financial condition.
The Investment Committee, the Investment Adviser or its affiliates may, from time to time, possess material non-public information, limiting our investment
discretion.
The Investment Adviser’s investment professionals, Investment Committee or their respective affiliates may serve as directors of, or in a similar capacity with,
companies in which we invest. In the event that material non-public information is obtained with respect to such companies, or we become subject to trading restrictions
under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling
the securities of such companies, and this prohibition may have an adverse effect on us and our stockholders.
The valuation process for certain of our portfolio holdings creates a conflict of interest.
Some of our portfolio investments are made in the form of securities that are not publicly traded. As a result, our board of directors determines the fair value of
these securities in good faith. In connection with this determination, investment professionals from the Investment Adviser may provide our board of directors with
portfolio company valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. In
addition, Steven B. Klinsky, a member of our board of directors, has an indirect pecuniary interest in the Investment Adviser. The participation of the Investment
Adviser’s investment professionals in our valuation process, and the indirect pecuniary interest in the Investment Adviser by a member of our board of directors, could
result in a conflict of interest as the Investment Adviser’s management fee is based, in part, on our gross assets and incentive fees are based, in part, on unrealized gains
and losses.
Conflicts of interest may exist related to other arrangements with the Investment Adviser or its affiliates.
We have entered into a royalty-free license agreement with New Mountain Capital under which New Mountain Capital has agreed to grant us a non-exclusive,
royalty-free license to use the name “New Mountain”. In addition, we reimburse the Administrator for the allocable portion of overhead and other expenses incurred by
the Administrator in performing its obligations to us under the Administration Agreement, such as, but not limited to, the allocable portion of the cost of our chief
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financial officer and chief compliance officer and their respective staffs. This could create conflicts of interest that our board of directors must monitor.
The Investment Management Agreement with the Investment Adviser and the Administration Agreement with the Administrator were not negotiated on an arm’s
length basis.
The Investment Management Agreement and the Administration Agreement were negotiated between related parties. In addition, we may choose not to enforce,
or to enforce less vigorously, our respective rights and remedies under these agreements because of our desire to maintain our ongoing relationship with the Investment
Adviser, the Administrator and their respective affiliates. Any such decision, however, could cause us to breach our fiduciary obligations to our stockholders.
The Investment Adviser’s liability is limited under the Investment Management Agreement, and we have agreed to indemnify the Investment Adviser against certain
liabilities, which may lead the Investment Adviser to act in a riskier manner than it would when acting for its own account.
Under the Investment Management Agreement, the Investment Adviser does not assume any responsibility other than to render the services called for under that
agreement, and it is not responsible for any action of our board of directors in following or declining to follow the Investment Adviser’s advice or recommendations.
Under the terms of the Investment Management Agreement, the Investment Adviser, its officers, members, personnel, any person controlling or controlled by the
Investment Adviser are not liable for acts or omissions performed in accordance with and pursuant to the Investment Management Agreement, except those resulting from
acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of the Investment Adviser’s duties under the Investment Management Agreement. In
addition, we have agreed to indemnify the Investment Adviser and each of its officers, directors, members, managers and employees from and against any claims or
liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or
omitted pursuant to authority granted by the Investment Management Agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless
disregard of such person’s duties under the Investment Management Agreement. These protections may lead the Investment Adviser to act in a riskier manner than it
would when acting for its own account.
The Investment Adviser can resign upon 60 days’ notice, and a suitable replacement may not be found within that time, resulting in disruptions in our operations that
could adversely affect our business, results of operations and financial condition.
Under the Investment Management Agreement, the Investment Adviser has the right to resign at any time upon 60 days’ written notice, whether a replacement
has been found or not. If the Investment Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and
ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If a replacement is not able to be found on a timely basis, our business,
results of operations and financial condition and our ability to pay distributions are likely to be materially adversely affected and the market price of our common stock
may decline. In addition, if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the
Investment Adviser and its affiliates, the coordination of its internal management and investment activities is likely to suffer. Even if we are able to retain comparable
management, whether internal or external, their integration into our business and lack of familiarity with our investment objective may result in additional costs and time
delays that may materially adversely affect our business, results of operations and financial condition.
The Administrator can resign upon 60 days’ notice from its role as Administrator under the Administration Agreement, and a suitable replacement may not be found,
resulting in disruptions that could adversely affect our business, results of operations and financial condition.
The Administrator has the right to resign under the Administration Agreement upon 60 days’ written notice, whether a replacement has been found or not. If the
Administrator resigns, it may be difficult to find a new administrator or hire internal management with similar expertise and ability to provide the same or equivalent
services on acceptable terms, or at all. If a replacement is not found quickly, our business, results of operations and financial condition, as well as our ability to pay
distributions, are likely to be adversely affected, and the market price of our common stock may decline. In addition, the coordination of our internal management and
administrative activities is likely to suffer if we are unable to identify and reach an agreement with a service provider or individuals with the expertise possessed by the
Administrator. Even if a comparable service provider or individuals to perform such services are retained, whether internal or external, their integration into our business
and lack of familiarity with our investment objective may result in additional costs and time delays that may materially adversely affect our business, results of operations
and financial condition.
If we fail to maintain our status as a BDC, our business and operating flexibility could be significantly reduced.
We qualify as a BDC under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at
least 70.0% of their total assets in specified types of securities, primarily in private
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companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or
less. Failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to
claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw their respective election as a BDC. If we decide to
withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a BDC, we may be subject to the substantially greater regulation under the 1940
Act as a closed-end investment company. Compliance with these regulations would significantly decrease our operating flexibility and could significantly increase our
cost of doing business.
If we do not invest a sufficient portion of our assets in qualifying assets, we could be precluded from investing in certain assets or could be required to dispose of
certain assets, which could have a material adverse effect on our business, financial condition and results of operations.
As a BDC, we are prohibited from acquiring any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least
70.0% of our total assets are qualifying assets. We may acquire in the future other investments that are not “qualifying assets” to the extent permitted by the 1940 Act. If
we do not invest a sufficient portion of our assets in qualifying assets, we would be prohibited from investing in additional assets, which could have a material adverse
effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio
companies (which could result in the dilution of our position) or could require us to dispose of investments at inopportune times in order to come into compliance with the
1940 Act. If we need to dispose of these investments quickly, it may be difficult to dispose of such investments on favorable terms. For example, we may have difficulty
in finding a buyer and, even if a buyer is found, it may have to sell the investments at a substantial loss.
Our ability to invest in public companies may be limited in certain circumstances.
To maintain our status as a BDC, we are not permitted to 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 our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and
distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such
issuer has a common equity market capitalization that is less than $250.0 million at the time of such investment.
Regulations governing the operations of BDCs will affect our ability to raise additional equity capital as well as our ability to issue senior securities or borrow for
investment purposes, any or all of which could have a negative effect on our investment objectives and strategies.
Our business requires a substantial amount of capital. We may acquire additional capital from the issuance of senior securities, including borrowing under a
credit facility or other indebtedness. In addition, we may also issue additional equity capital, which would in turn increase the equity capital available to us. However, we
may not be able to raise additional capital in the future on favorable terms or at all.
We may issue debt securities, preferred stock, and we may borrow money from banks or other financial institutions, which we refer to collectively as "senior
securities", up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities in amounts such that our asset coverage, as defined
in the 1940 Act, equals at least 200.0% after each issuance of senior securities. As a result of our SEC exemptive relief, we are permitted to exclude our SBA-guaranteed
debentures from the definition of senior securities in the 200.0% asset coverage ratio we are required to maintain under the 1940 Act. If our asset coverage ratio is not at
least 200.0%, we would be unable to issue senior securities, and if we had senior securities outstanding (other than any indebtedness issued in consideration of a privately
arranged loan, such as any indebtedness outstanding under the Holdings Credit Facility and NMFC Credit Facility), we would be unable to make distributions to our
stockholders. However, at December 31, 2016, our only senior securities outstanding were indebtedness under the Holdings Credit Facility, NMFC Credit Facility,
Convertible Notes and Unsecured Notes and therefore at December 31, 2016, we would not have been precluded from paying distributions. If the value of our assets
declines, we may be unable to satisfy this test. If that happens, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a
time when such sales may be disadvantageous.
The Holdings Credit Facility matures on December 18, 2019 and permits borrowings of $495.0 million as of December 31, 2016. The Holdings Credit Facility
had $333.5 million in debt outstanding as of December 31, 2016. The NMFC Credit Facility matures on June 4, 2019 and permits borrowings of $122.5 million as of
December 31, 2016. The NMFC Credit Facility had $10.0 million in debt outstanding as of December 31, 2016. The Convertible Notes mature on June 15, 2019. The
Convertible Notes had $155.3 million in debt outstanding as of December 31, 2016. The Unsecured Notes mature on May 15, 2021. The Unsecured Notes had $90.0
million in debt outstanding as of December 31, 2016. The SBA-guaranteed debentures have ten year maturities and will begin to mature on March 1, 2025. As of
December 31, 2016, $121.7 million of SBA-guaranteed debentures were outstanding.
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In addition, we may in the future seek to securitize other portfolio securities to generate cash for funding new investments. To securitize loans, we would likely
create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and
we would retain all or a portion of the equity in the subsidiary. If we are unable to successfully securitize its loan portfolio, which must be done in compliance with the
relevant restrictions in the Holdings Credit Facility, our ability to grow our business or fully execute our business strategy could be impaired and our earnings, if any,
could decrease. The securitization market is subject to changing market conditions, and we may not be able to access this market when it would be otherwise deemed
appropriate. Moreover, the successful securitization of our portfolio might expose us to losses as the residual investments in which we do not sell interests will tend to be
those that are riskier and more apt to generate losses. The 1940 Act also may impose restrictions on the structure of any securitization.
We may also obtain capital through the issuance of additional equity capital. As a BDC, we generally are not able to issue or sell our common stock at a price
below net asset value per share. If our common stock trades at a discount to our net asset value per share, this restriction could adversely affect our ability to raise equity
capital. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below our net asset value per share of the
common stock if our board of directors and independent directors determine that such sale is in our best interests and the best interests of our stockholders, and our
stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our
board of directors, closely approximates the market value of such securities (less any underwriting commission or discount). If we raise additional funds by issuing more
shares of our common stock, or if we issue senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders may
decline and you may experience dilution.
Our business model in the future may depend to an extent upon our referral relationships with private equity sponsors, and the inability of the investment
professionals of the Investment Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could
adversely affect our business strategy.
If the investment professionals of the Investment Adviser fail to maintain existing relationships or develop new relationships with other sponsors or sources of
investment opportunities, we may not be able to grow our investment portfolio. In addition, individuals with whom the investment professionals of the Investment Adviser
have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that any relationships they currently or may in the
future have will generate investment opportunities for us.
We may experience fluctuations in our annual and quarterly results due to the nature of our business.
We could experience fluctuations in our annual and quarterly operating results due to a number of factors, some of which are beyond our control, including the
ability or inability of us to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities acquired and the default rate on
such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter
competition in the markets in which we operate and general economic conditions. As a result of these factors, results for any period should not be relied upon as being
indicative of performance in future periods.
Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may
be adverse to your interests as stockholders.
Our board of directors has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without
prior notice and without stockholder approval. As a result, our board of directors may be able to change our investment policies and objectives without any input from our
stockholders. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. Under
Delaware law, we also cannot be dissolved without prior stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies
would have on our business, operating results and the market price of our common stock. Nevertheless, any such changes could adversely affect our business and impair
our ability to make distributions to our stockholders.
We will be subject to corporate-level U.S. federal income tax on all of our income if we are unable to maintain RIC status under Subchapter M of the Code, which
would have a material adverse effect on our financial performance.
Although we intend to continue to qualify annually as a RIC under Subchapter M of the Code, no assurance can be given that we will be able to maintain our RIC
status. To maintain RIC status and be relieved of U.S. federal income taxes on income and gains distributed to our stockholders, we must meet the annual distribution,
source-of-income and asset diversification requirements described below.
•
The annual distribution requirement for a RIC will be satisfied if we distribute (or are deemed to distribute) to our stockholders on an annual basis at least
90.0% of our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses, if any. Because we use
debt financing, we are subject
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•
•
to an asset coverage ratio requirement under the 1940 Act, and we are subject to certain financial covenants contained in the Holdings Credit Facility and
other debt financing agreements (as applicable). This asset coverage ratio requirement and these financial covenants could, under certain circumstances,
restrict us from making distributions to our stockholders, which distributions are necessary for us to satisfy the distribution requirement. If we are unable to
obtain cash from other sources, and thus are unable to make sufficient distributions to our stockholders, we could fail to qualify for RIC tax treatment and
thus become subject to certain corporate-level U.S. federal income tax (and any applicable state and local taxes).
The source-of-income requirement will be satisfied if at least 90.0% of our allocable share of our gross income for each year is derived from dividends,
interest payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income from certain “qualified publicly
traded partnerships” or other income derived with respect to our business of investing in such stock or securities.
The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To
satisfy this requirement, at least 50.0% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs,
and other such securities if such other securities of any one issuer do not represent more than 5.0% of the value of our assets or more than 10.0% of the
outstanding voting securities of the issuer; and no more than 25.0% of the value of our assets can be invested in the securities, other than U.S. government
securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by it and that are
engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships”. Failure to meet these requirements may
result in us having to dispose of certain investments quickly in order to prevent the loss of our RIC status. Because most of our investments are intended to
be in private companies, and therefore may be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in
substantial losses.
If we fail to qualify for or maintain our RIC status for any reason, and we do not qualify for certain relief provisions under the Code, we would be subject to
corporate-level U.S. federal income tax (and any applicable state and local taxes). In this event, the resulting taxes could substantially reduce our net assets, the amount of
income available for distribution and the amount of our distributions, which would have a material adverse effect on our financial performance.
You may have current tax liabilities on distributions you reinvest in our common stock.
Under the dividend reinvestment plan, if you own shares of our common stock registered in your own name, you will have all cash distributions automatically
reinvested in additional shares of our common stock unless you opt out of the dividend reinvestment plan by delivering notice by phone, internet or in writing to the plan
administrator at least three days prior to the payment date of the next dividend or distribution. If you have not “opted out” of the dividend reinvestment plan, you will be
deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in our common stock to the extent the amount reinvested was
not a tax-free return of capital. As a result, you may have to use funds from other sources to pay your U.S. federal income tax liability on the value of the common stock
received.
We may not be able to pay you distributions on our common stock, our distributions to you may not grow over time and a portion of our distributions to you may be a
return of capital for U.S. federal income tax purposes.
We intend to pay quarterly distributions to our stockholders out of assets legally available for distribution. We cannot assure you that we will continue to achieve
investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we are unable to satisfy the asset
coverage test applicable to us as a BDC, or if we violate certain covenants under the Holdings Credit Facility, the NMFC Credit Facility or the Unsecured Notes, our
ability to pay distributions to our stockholders could be limited. All distributions are paid at the discretion of our board of directors and depend on our earnings, financial
condition, maintenance of our RIC status, compliance with applicable BDC regulations, compliance with covenants under the Holdings Credit Facility, the NMFC Credit
Facility and the Unsecured Notes, and such other factors as our board of directors may deem relevant from time to time. The distributions that we pay to our stockholders
in a year may exceed our taxable income for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax
purposes.
We may have difficulty paying our required distributions if we recognize taxable income before or without receiving cash representing such income.
For U.S. federal income tax purposes, we include in our taxable income our allocable share of certain amounts that we have not yet received in cash, such as
original issue discount or accruals on a contingent payment debt instrument, which may occur if we receive warrants in connection with the origination of a loan or
possibly in other circumstances or contracted payment-in-kind (“PIK”) interest, which generally represents contractual interest added to the loan balance and due at the
end of the loan term. Our allocable share of such original issue discount and PIK interest are included in our taxable income before
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we receive any corresponding cash payments. We also may be required to include in our taxable income our allocable share of certain other amounts that we will not
receive in cash.
Because in certain cases we may recognize taxable income before or without receiving cash representing such income, we may have difficulty making
distributions to our stockholders that will be sufficient to enable us to meet the annual distribution requirement necessary for us to qualify as a RIC. Accordingly, we may
need to sell some of our assets at times and/or at prices that we would not consider advantageous. We may need to raise additional equity or debt capital, or we may need
to forego new investment opportunities or otherwise take actions that are disadvantageous to our business (or be unable to take actions that are advantageous to our
business) to enable us to make distributions to our stockholders that will be sufficient to enable us to meet the annual distribution requirement. If we are unable to obtain
cash from other sources to enable us to meet the annual distribution requirement, we may fail to qualify for the U.S. federal income tax benefits allowable to RICs and,
thus, become subject to a corporate-level U.S. federal income tax (and any applicable state and local taxes).
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could
significantly affect our operations and our cost of doing business. Our portfolio companies are subject to U.S. federal, state and local laws and regulations. New legislation
may be enacted or new interpretations, rulings or regulations could be adopted, any of which could materially adversely affect our business, including with respect to the
types of investments we are permitted to make, and your interests as stockholders potentially with retroactive effect. In addition, any changes to the laws and regulations
governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities.
These changes could result in material changes to our strategies which may result in our investment focus shifting from the areas of expertise of the Investment Adviser to
other types of investments in which the Investment Adviser may have less expertise or little or no experience. Any such changes, if they occur, could have a material
adverse effect on our business, results of operations and financial condition and, consequently, the value of your investment in us.
Over the last several years, there has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the
possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether these regulations will be
implemented or what form they will take, increased regulation of non-bank credit extension could negatively impact our operations, cash flows or financial condition,
impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business.
Our business and operations could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur
significant expense, hinder execution of investment strategy and impact our stock price.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that
company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. While we are currently
not subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future
become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in
substantial costs and divert the attention of our management and board of directors and resources from our business. Additionally, such securities litigation and
shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to
attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation or activist shareholder
matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities
litigation or shareholder activism.
The effect of global climate change may impact the operations of our portfolio companies.
There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be adversely
affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent
weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost
of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their business. A decrease in
energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues. Extreme weather conditions in general
require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions.
In December 2015 the United Nations, of which the U.S. is a member, adopted a climate accord (the "Paris Agreement") with the long-term goal of limiting
global warming and the short-term goal of significantly reducing greenhouse
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gas emissions. The U.S. subsequently ratified the Paris Agreement, and it entered into force on November 4, 2016. As a result, our portfolio companies, particularly those
operating in the energy sector, may be subject to new or strengthened regulations or legislation which could increase their operating costs and/or decrease their revenues.
Pending legislation may allow us to incur additional leverage.
As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total
borrowings of at least 200.0% (i.e., the amount of debt may not exceed 50.0% of the value of our total assets or we may borrow an amount equal to 100.0% of net assets).
Legislation introduced in the U.S. House of Representatives would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by
modifying the asset coverage percentage from 200.0% to 150.0%. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an
investment in us may increase.
In addition, in December 2015, the 2016 omnibus spending bill approved by the U.S. Congress and signed into law by the President increased the amount of
SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval. This new legislation may
allow us to issue additional SBIC debentures above the $225.0 million of SBA-guaranteed debentures previously permitted pending application for and receipt of
additional SBIC licenses. If we incur this additional indebtedness in the future, your risk of an investment in our securities may increase.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, which are paid by us, including costs associated with the periodic reporting
requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act”, and other rules implemented by the SEC.
Efforts to comply with Section 404 of the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act may
adversely affect us and the market price of our common stock.
We are subject to the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the SEC. Under current SEC rules since our fiscal year ending
December 31, 2012, our management has been required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, and
rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis
to evaluate and disclose changes in our internal control over financial reporting. As a result, we expect to continue to incur additional expenses, which may negatively
impact our financial performance and our ability to make distributions to our stockholders. This process also may result in a diversion of management’s time and
attention. We cannot be certain as to the timing of completion of any evaluation, testing and remediation actions or the impact of the same on our operations, and we are
not able to ensure that the process is effective or that our internal control over financial reporting is or will continue to be effective in a timely manner. In the event that we
are unable to maintain or achieve compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and, consequently, the market price of our common stock
may be adversely affected.
Our business is highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the
market price of our common stock and our ability to pay distributions.
Our business is highly dependent on the communications and information systems of the Investment Adviser and its affiliates. Any failure or interruption of such
systems could cause delays or other problems in our activities. This, in turn, could have a material adverse effect on our operating results and, consequently, negatively
affect the market price of our common stock and our ability to pay distributions to our stockholders. In addition, because many of our portfolio companies operate and
rely on network infrastructure and enterprise applications and internal technology systems for development, marketing, operational, support and other business activities, a
disruption or failure of any or all of these systems in the event of a major telecommunications failure, cyber-attack, fire, earthquake, severe weather conditions or other
catastrophic event could cause system interruptions, delays in product development and loss of critical data and could otherwise disrupt their business operations.
The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could
impair our ability to conduct business effectively.
The occurrence of a disaster such as a cyber attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster
recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and
financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant
number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
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We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer
systems could be subject to cyber attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we may
experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these
events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems
and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased
costs, regulatory penalties and/or customer dissatisfaction or loss.
RISKS RELATING TO OUR INVESTMENTS
Our investments in portfolio companies may be risky, and we could lose all or part of any of our investments.
Investments in small and middle market businesses are highly speculative and involve a high degree of risk of credit loss. These risks are likely to increase during
volatile economic periods, such as the U.S. and many other economies have recently experienced. Among other things, these companies:
• may have limited financial resources and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a
deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio
companies that we may have obtained in connection with our investment, as well as a corresponding decrease in the value of any equity components of our
investments;
• may have shorter operating histories, narrower product lines, smaller market shares and/or more significant customer concentrations than larger businesses,
which tend to render them more vulnerable to competitors' actions and market conditions, as well as general economic downturns;
•
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are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of
one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;
generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products
subject to a substantial risk of obsolescence;
• may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and
•
generally have less publicly available information about their businesses, operations and financial condition.
In addition, in the course of providing significant managerial assistance to certain of our eligible portfolio companies, certain of our officers and directors may
serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, our officers and directors may be named
as defendants in such litigation, which could result in an expenditure of funds (through our indemnification of such officers and directors) and the diversion of
management time and resources.
Our investment strategy, which is focused primarily on privately held companies, presents certain challenges, including the lack of available information about these
companies.
We invest primarily in privately held companies. There is generally little public information about these companies, and, as a result, we must rely on the ability
of the Investment Adviser to obtain adequate information to evaluate the potential returns from, and risks related to, investing in these companies. If we are unable to
uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Also,
privately held companies frequently have less diverse product lines and smaller market presence than larger competitors. They are, thus, generally more vulnerable to
economic downturns and may experience substantial variations in operating results. These factors could adversely affect our investment returns.
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.
Our investments are almost entirely rated below investment grade or may be unrated, which 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
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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.
Our portfolio may be concentrated in a limited number of industries, which may subject us to a risk of significant loss if there is a downturn in a particular industry
in which a number of our investments are concentrated.
Our portfolio may be concentrated in a limited number of industries. For example, as of December 31, 2016, our investments in the business services and the
software industries represented approximately 29.6% and 27.0%, respectively, of the fair value of our portfolio. A downturn in any particular industry in which we are
invested could significantly impact the portfolio companies operating in that industry, and accordingly, the aggregate returns that we realize from our investment in such
portfolio companies.
Specifically, companies in the business services industry are subject to general economic downturns and business cycles, and will often suffer reduced revenues
and rate pressures during periods of economic uncertainty. In addition, companies in the software industry often have narrow product lines and small market shares.
Because of rapid technological change, the average selling prices of products and some services provided by software companies have historically decreased over their
productive lives. As a result, the average selling prices of products and services offered by software companies in which we invest may decrease over time. If an industry
in which we have significant investments suffers from adverse business or economic conditions, as these industries have to varying degrees, a material portion of our
investment portfolio could be affected adversely, which, in turn, could adversely affect our financial position and results of operations.
If we make unsecured investments, those investments might not generate sufficient cash flow to service their debt obligations to us.
We may make unsecured investments. Unsecured investments may be subordinated to other obligations of the obligor. Unsecured investments often reflect a
greater possibility that adverse changes in the financial condition of the obligor or general economic conditions (including, for example, a substantial period of rising
interest rates or declining earnings) or both may impair the ability of the obligor to make payment of principal and interest. If we make an unsecured investment in a
portfolio company, that portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may increase the risk that its operations might not generate
sufficient cash to service its debt obligations.
If we invest in the securities and obligations of distressed and bankrupt issuers, we might not receive interest or other payments.
From time to time, we may invest in other types of investments which are not our primary focus, including investments in the securities and obligations of
distressed and bankrupt issuers, including debt obligations that are in covenant or payment default. Such investments generally are considered speculative. The repayment
of defaulted obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which
the issuer of those obligations might not make any interest or other payments.
Defaults by our portfolio companies may harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its
loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations
under the debt or equity securities that we hold.
We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company. In addition, lenders in certain cases can be subject to lender liability claims for actions taken by them when they become
too involved in the borrower’s business or exercise control over a borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of
actions taken if we render significant managerial assistance to the borrower. Furthermore, if one of our portfolio companies were to file for bankruptcy protection, even
though we may have structured our investment as senior secured debt, depending on the facts and circumstances, including the extent to which we provided managerial
assistance to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors.
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The lack of liquidity in our investments may adversely affect our business.
We invest, and will continue to invest, in companies whose securities are not publicly traded and whose securities will be subject to legal and other restrictions
on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when
desired. In addition, if we are required or otherwise choose to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which
we had previously recorded these investments. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is
usually no established trading market for such investments. Because most of our investments are illiquid, we may be unable to dispose of them in which case we could fail
to qualify as a RIC and/or a BDC, or we may be unable to do so at a favorable price, and, as a result, we may suffer losses.
Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through
increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by our board
of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments:
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a comparison of the portfolio company's securities to publicly traded securities;
the enterprise value of a portfolio company;
the nature and realizable value of any collateral;
the portfolio company's ability to make payments and its earnings and discounted cash flow;
the markets in which the portfolio company does business; and
changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future
and other relevant factors.
When an external event such as a purchase transaction, public offering or subsequent sale occurs, we will use the pricing indicated by the external event to
corroborate our valuation. We will record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in
the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our net asset
value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional
unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we are unable to make follow-on investments in our portfolio companies, the value of our investment portfolio could be adversely affected.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to
(i) increase or maintain in whole or in part our equity ownership percentage, (ii) exercise warrants, options or convertible securities that were acquired in the original or
subsequent financing or (iii) attempt to preserve or enhance the value of our investment. We may elect not to make follow-on investments or may otherwise lack sufficient
funds to make these investments. We have the discretion to make follow-on investments, subject to the availability of capital resources. If we fail to make follow-on
investments, the continued viability of a portfolio company and our investment may, in some circumstances, be jeopardized and we could miss an opportunity for us to
increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on
investment because we may not want to increase our concentration of risk, either because we prefer other opportunities or because we are subject to BDC requirements
that would prevent such follow-on investments or such follow-on investments would adversely impact our ability to maintain our RIC status.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest in portfolio companies at all levels of the capital structure. Our portfolio companies may have, or may be permitted to incur, other debt that ranks
equally with, or senior to, the debt in which we invest. By their terms, these debt instruments may entitle the holders to receive payment of interest or principal on or
before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. In addition, in the event of insolvency, liquidation,
dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically
be entitled to receive payment in full before we receive any distribution. After repaying the senior creditors, the portfolio company may not have any remaining assets to
use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
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The disposition of our investments may result in contingent liabilities.
Most of our investments will involve private securities. In connection with the disposition of an investment in private securities, we may be required to make
representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required
to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These
arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made
to us.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Even though we may have structured certain of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts
and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt
investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a
borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result
of actions taken in rendering significant managerial assistance.
Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If
there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
Certain loans to portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first
priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be
permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral
will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the
value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance
that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment
in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations
secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio
company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited
pursuant to the terms of one or more intercreditor agreements entered into with the holders of first priority senior debt. Under an intercreditor agreement, at any time that
obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction
of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral, the ability to
control the conduct of such proceedings, the approval of amendments to collateral documents; releases of liens on the collateral and waivers of past defaults under
collateral documents. We may not have the ability to control or direct these actions, even if our rights are adversely affected.
We generally do not control our portfolio companies.
Although we have taken and may in the future take controlling equity positions in our portfolio companies from time to time, we generally do not control most of
our portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants
that limit the business and operations of our portfolio companies. As a result, we are subject to the risk that a portfolio company may make business decisions with which
we disagree and the management of such company may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity of
the investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event that we disagree with the actions of a
portfolio company as readily as we would otherwise like to or at favorable prices which could decrease the value of our investments.
Economic recessions, downturns or government spending cuts could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay its debt investments during these periods.
Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also
may decrease the value of collateral securing some of our debt investments and the value of our equity investments. Economic slowdowns or recessions could lead to
financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also
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could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from
increasing investments and harm our operating results.
A number of our portfolio companies provide services to the U.S. government. Changes in the U.S. government’s priorities and spending, or significant delays or
reductions in appropriations of the U.S. government’s funds, could have a material adverse effect on the financial position, results of operations and cash flows of
such portfolio companies.
A number of our portfolio companies derive a substantial portion of their revenue from the U.S. government. Levels of the U.S. government’s spending in future
periods are very difficult to predict and subject to significant risks. In addition, significant budgetary constraints may result in further reductions to projected spending
levels. In particular, U.S. government expenditures are subject to the potential for automatic reductions, generally referred to as “sequestration.” Sequestration occurred
during 2013, and may occur again in the future, resulting in significant additional reductions to spending by the U.S. government on both existing and new contracts as
well as disruption of ongoing programs. Even if sequestration does not occur again in the future, we expect that budgetary constraints and ongoing concerns regarding the
U.S. national debt will continue to place downward pressure on U.S. government spending levels. Due to these and other factors, overall U.S. government spending could
decline, which could result in significant reductions to the revenues, cash flow and profits of our portfolio companies that provide services to the U.S. government.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, subject to maintenance of
our RIC status, we will generally reinvest these proceeds in temporary investments, pending our future investment in new portfolio companies. These temporary
investments will typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future
investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely
affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which
could result in a decline in the market price of our common stock.
We may not realize gains from our equity investments.
When we invest in portfolio companies, we may acquire warrants or other equity securities of portfolio companies as well. We may also invest in equity
securities directly. To the extent we hold equity investments, we will attempt to dispose of them and realize gains upon our disposition of them. However, the equity
interests we receive may not appreciate in value and, in fact, may decline in value. As a result, we may not be able to realize gains from our equity interests, and any gains
that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a
portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity
interests.
Our performance may differ from our historical performance as our current investment strategy includes significantly more primary originations in addition to
secondary market purchases.
Historically, our investment strategy consisted primarily of secondary market purchases in debt securities. We adjusted that investment strategy to also include
significantly more primary originations. While loans that we originate and loans we purchase in the secondary market face many of the same risks associated with the
financing of leveraged companies, we may be exposed to different risks depending on specific business considerations for secondary market purchases or origination of
loans. Primary originations require substantially more time and resources for sourcing, diligencing and monitoring investments, which may consume a significant portion
of our resources. Further, the valuation process for primary originations may be more cumbersome and uncertain due to the lack of comparable market quotes for the
investment and would likely require more frequent review by a third-party valuation firm. This may result in greater costs for us and fluctuations in the quarterly
valuations of investments that are primary originations. As a result, this strategy may result in different returns from these investments than the types of returns historically
experienced from secondary market purchases of debt securities.
We may be subject to additional risks if we invest in foreign securities and/or engage in hedging transactions.
The 1940 Act generally requires that 70.0% of our investments be in issuers each of whom is organized under the laws of, and has its principal place of business
in, any state of the U.S., the District of Columbia, Puerto Rico, the Virgin Islands or any other possession of the U.S. Our investment strategy does not presently
contemplate significant investments in securities of non-U.S. companies. However, we may desire to make such investments in the future, to the extent that such
transactions and investments are permitted under the 1940 Act. We expect that these investments would focus on the same types of investments that we make in U.S.
middle market companies and accordingly would be complementary to our overall strategy and enhance the diversity of our holdings. Investing in foreign companies
could expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and
social instability,
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expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less
government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and
auditing standards and greater price volatility. Investments denominated in foreign currencies would be subject to the risk that the value of a particular currency will
change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences
in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. We may employ
hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk, or that if we do, such strategies will be effective.
Engaging in hedging transactions would also, indirectly, entail additional risks to our stockholders. Although it is not currently anticipated that we would engage
in hedging transactions as a principal investment strategy, if we determined to engage in hedging transactions, we generally would seek to hedge against fluctuations of
the relative values of our portfolio positions from changes in market interest rates or currency exchange rates. Hedging against a decline in the values of our portfolio
positions would not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of the positions declined. However, such hedging
could establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions.
These hedging transactions could also limit the opportunity for gain if the values of the underlying portfolio positions increased. Moreover, it might not be
possible to hedge against an exchange rate or interest rate fluctuation that was so generally anticipated that we would not be able to enter into a hedging transaction at an
acceptable price. If we choose to engage in hedging transactions, there can be no assurances that we will achieve the intended benefits of such transactions and, depending
on the degree of exposure such transactions could create, such transactions may expose us to risk of loss.
While we may enter into these types of transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange
rates or interest rates could result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of
correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged could vary. Moreover, for
a variety of reasons, we might not seek to establish a perfect correlation between the hedging instruments and the portfolio holdings being hedged. Any imperfect
correlation could prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it might not be possible to hedge fully or perfectly against
currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities would likely fluctuate as a result of factors
not related to currency fluctuations.
Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
Concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of
LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to
profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting
inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law
enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.
Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined. Uncertainty as to the nature of
such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition,
any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could
have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
RISKS RELATING TO OUR SECURITIES
The market price of our common stock may fluctuate significantly.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our
control and may not be directly related to our operating performance. These factors include:
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price and volume fluctuations in the overall stock market or in the market for BDCs from time to time;
investor demand for shares of our common stock;
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significant volatility in the market price and trading volume of securities of registered closed-end management investment companies, BDCs or other
financial services companies, which is not necessarily related to the operating performance of these companies;
the inability to raise equity capital;
our inability to borrow money or deploy or invest our capital;
fluctuations in interest rates;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
operating performance of companies comparable to us;
changes in regulatory policies or tax guidelines with respect to RICs or BDCs;
our loss of status as or ability to operate as a BDC;
our failure to qualify as a RIC, loss of RIC status or ability to operate as a RIC;
actual or anticipated changes in our earnings or fluctuations in our operating results;
changes in the value of our portfolio of investments;
general economic conditions, trends and other external factors;
departures of key personnel; or
loss of a major source of funding.
In addition, we are required to continue to meet certain listing standards in order for our common stock to remain listed on the New York Stock Exchange
("NYSE"). If we were to be delisted by the NYSE, the liquidity of our common stock would be materially impaired.
Investing in our common stock may involve an above average degree of risk.
The investments we may make may result in a higher amount of risk, volatility or loss of principal than alternative investment options. These investments in
portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for investors with lower risk
tolerance.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
Sales of substantial amounts of our common stock could materially adversely affect the prevailing market prices for our common stock. If substantial amounts of
our common stock were sold, this could impair our ability to raise additional capital through the sale of securities should we desire to do so.
Certain provisions of our certificate of incorporation and bylaws, as well as aspects of the Delaware General Corporation Law could deter takeover attempts and have
an adverse impact on the price of our common stock.
Our certificate of incorporation and bylaws as well as the Delaware General Corporation Law contain provisions that may have the effect of discouraging a third
party from making an acquisition proposal for us. Among other things, our certificate of incorporation and bylaws:
•
•
•
•
•
•
•
provide for a classified board of directors, which may delay the ability of our stockholders to change the membership of a majority of our board of directors;
authorize the issuance of "blank check" preferred stock that could be issued by our board of directors to thwart a takeover attempt;
do not provide for cumulative voting;
provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
provide that our directors may be removed only for cause;
require supermajority voting to effect certain amendments to our certificate of incorporation and bylaws; and
require stockholders to provide advance notice of new business proposals and director nominations under specific procedures.
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These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a
premium over the market price for our common stock. The Holdings Credit Facility, the NMFC Credit Facility and the Unsecured Notes also include covenants that,
among other things, restrict our ability to dispose of assets, incur additional indebtedness, make restricted payments, create liens on assets, make investments, make
acquisitions and engage in mergers or consolidations. The Holdings Credit Facility, the NMFC Credit Facility and the Unsecured Notes also include change of control
provisions that accelerate the indebtedness (or require prepayment of such indebtedness) under these agreements in the event of certain change of control events.
Shares of our common stock have traded at a discount from net asset value and may do so in the future.
Shares of closed-end investment companies have frequently traded at a market price that is less than the net asset value that is attributable to those shares. In part
as a result of adverse economic conditions and increasing pressure within the financial sector of which we are a part, our common stock has at times traded below our net
asset value per share since our IPO on May 19, 2011. Our shares could once again trade at a discount to net asset value. The possibility that our shares of common stock
may trade at a discount from net asset value over the long term is separate and distinct from the risk that our net asset value will decrease. We cannot predict whether
shares of our common stock will trade above, at or below our net asset value. If our common stock trades below our net asset value, we will generally not be able to issue
additional shares of our common stock without first obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are
not available to us, we could be forced to curtail or cease our new lending and investment activities, and our net asset value could decrease and our level of distributions
could be impacted.
You may not receive distributions or our distributions may decline or may not grow over time.
We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions or year-
to-year increases in cash distributions. In particular, our future distributions are dependent upon the investment income we receive on our portfolio investments. To the
extent such investment income declines, our ability to pay future distributions may be harmed.
If we issue preferred stock, the net asset value and market value of our common stock will likely become more volatile.
We cannot assure you that the issuance of preferred stock would result in a higher yield or return to the holders of our common stock. The issuance of preferred
stock would likely cause the net asset value and market value of the common stock to become more volatile. If the dividend rate on the preferred stock were to approach
the net rate of return on our investment portfolio, the benefit of leverage to the holders of the common stock would be reduced. If the dividend rate on the preferred stock
were to exceed the net rate of return on our portfolio, the leverage would result in a lower rate of return to the holders of common stock than if we had not issued preferred
stock. Any decline in the net asset value of our investments would be borne entirely by the holders of common stock. Therefore, if the market value of our portfolio were
to decline, the leverage would result in a greater decrease in net asset value to the holders of common stock than if we were not leveraged through the issuance of
preferred stock. This greater net asset value decrease would also tend to cause a greater decline in the market price for the common stock.
We might be in danger of failing to maintain the required asset coverage of the preferred stock or of losing our ratings, if any, on the preferred stock or, in an
extreme case, our current investment income might not be sufficient to meet the dividend requirements on the preferred stock. In order to counteract such an event, we
might need to liquidate investments in order to fund a redemption of some or all of the preferred stock. In addition, we would pay (and the holders of common stock
would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, including higher advisory fees if our total return exceeds the
dividend rate on the preferred stock. Holders of preferred stock may have different interests than holders of common stock and may at times have disproportionate
influence over our affairs.
Holders of any preferred stock we might issue would have the right to elect members of our board of directors and class voting rights on certain matters.
Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of our board of directors at all times
and in the event dividends become two full years in arrears would have the right to elect a majority of the directors until such arrearage is completely eliminated. In
addition, preferred stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status,
and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock
and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, if any, or the terms of our credit facilities, if any, might impair our ability to
maintain our qualification as a RIC for U.S. federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to
distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.
44
Table of Contents
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We do not own any real estate or other physical properties materially important to our operations. Our principal executive offices are located at 787 Seventh
Avenue, 48th Floor, New York, New York 10019, where we occupy our office space pursuant to our Administration Agreement with the Administrator. The office space
is shared with our Investment Adviser, our Administrator and New Mountain Capital. We believe that our current office facilities are suitable and adequate for our
business as currently conducted.
Item 3. Legal Proceedings
We, and our consolidated subsidiaries, the Investment Adviser and the Administrator are not currently subject to any material pending legal proceedings threatened
against us as of December 31, 2016. 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.
Item 4. Mine Safety Disclosures
Not applicable.
45
Table of Contents
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock and Distributions
PART II
New Mountain Finance Corporation's ("NMFC", the "Company", "we", "us" or "our") common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "NMFC". The following table sets forth the net asset value ("NAV") per share of our common stock, the high and low closing sale price for our
common stock, the closing sale price as a percentage of NAV and the quarterly distributions per share for each fiscal quarter for the years ended December 31, 2016 and
December 31, 2015.
Closing Sales Price(2)
NAV Per
Share(1)
High
$
$
$
$
Fiscal Year Ended
December 31, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
December 31, 2015
Fourth Quarter
$
Third Quarter
$
Second Quarter
$
$
First Quarter
_______________________________________________________________________________
13.46
13.28
13.23
12.87
13.08
13.73
13.90
13.89
14.30
14.28
12.90
12.96
14.17
14.94
15.14
15.06
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Low
13.20
13.11
12.10
11.09
12.15
13.34
14.49
14.30
Premium
(Discount) of
High Closing
Sales to NAV(3)
Premium
(Discount) of
Low Closing
Sales to NAV(3)
Declared
Distributions
Per Share(4)(5)
6.24 %
7.53 %
(2.49)%
0.70 %
8.33 %
8.81 %
8.92 %
8.42 %
(1.93)% $
(1.28)% $
(8.54)% $
(13.83)% $
(7.11)% $
(2.84)% $
4.24 % $
2.95 % $
0.34
0.34
0.34
0.34
0.34
0.34
0.34
0.34
(1)
(2)
(3)
(4)
(5)
NAV is determined as of the last date in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low closing sales prices.
The NAVs shown are based on outstanding shares at the end of each period.
Closing sales price is determined as the high or low closing sales price noted within the respective quarter, not adjusted for distributions.
Calculated as of the respective high or low closing sales price divided by the quarter end NAV.
Represents the distributions declared or paid for the specified quarter.
Tax characteristics of all distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. For the years ended December 31, 2016
and December 31, 2015, total distributions were $88.8 million and $81.0 million, respectively, of which the distributions were comprised of approximately 89.46%
and 99.96%, respectively, of ordinary income, 0.00% and 0.00%, respectively, of long-term capital gains and approximately 10.54% and 0.04%, respectively, of a
return of capital.
On February 24, 2017, the last reported sales price of our common stock was $14.90 per share. As of February 24, 2017, we had approximately 19 stockholders
of record and one beneficial owner whose shares are held in the names of brokers, dealers, funds, trusts and clearing agencies.
Distributions
We intend to pay quarterly distributions to our stockholders in amounts sufficient to maintain our status as a regulated investment company ("RIC"). We intend
to distribute approximately our entire 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) on a quarterly basis and substantially all of our taxable income on an annual basis, except that
we may retain certain net capital gains for reinvestment. The distributions we pay to our stockholders in a year may exceed our taxable income for that year and,
accordingly, a portion of such distributions may constitute a return of capital, which is a return of a portion of a stockholders original investment in our common stock, for
United States (U.S.) federal tax purposes. Generally, a return of capital will reduce an investor's basis in our stock for U.S. federal income tax purposes, which will result
in a higher tax liability when the stock is sold. The specific tax characteristics of our distributions will be reported to stockholders after the end of the calendar year.
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Table of Contents
We maintain an "opt out" dividend reinvestment plan on behalf of our stockholders, pursuant to which each of our stockholders' cash distributions will be
automatically reinvested in additional shares of our common stock, unless the stockholder elects to receive cash.
We apply the following in implementing the dividend reinvestment plan. If the price at which newly issued shares are to be credited to stockholders' accounts is
equal to or greater than 110.0% of the last determined NAV of the shares, we will use only newly issued shares to implement the 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 our common stock on the 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 ask 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 NAV of the shares, we 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 our 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 our stockholders have been tabulated. See
Item 8.—Financial Statements and Supplementary Data—Note 2. Summary of Significant Accounting Policies for additional information.
The following table reflects cash distributions, including dividends and returns of capital, if any, per share that have been declared by our board of directors for
the years ended December 31, 2016 and December 31, 2015:
Date Declared
November 4, 2016
August 2, 2016
May 3, 2016
February 22, 2016
November 3, 2015
August 4, 2015
May 5, 2015
February 23, 2015
Record Date
December 15, 2016
September 16, 2016
June 16, 2016
March 17, 2016
December 16, 2015
September 16, 2015
June 16, 2015
March 17, 2015
Payment Date
Per Share Amount
December 29, 2016
September 30, 2016
June 30, 2016
March 31, 2016
December 30, 2015
September 30, 2015
June 30, 2015
March 31, 2015
$
$
$
$
0.34
0.34
0.34
0.34
1.36
0.34
0.34
0.34
0.34
1.36
Tax characteristics of all distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. For the years ended December 31, 2016
and December 31, 2015, total distributions were $88.8 million and $81.0 million, respectively, of which the distributions were comprised of approximately 89.46% and
99.96%, respectively, of ordinary income, 0.00% and 0.00%, respectively, of long-term capital gains and approximately 10.54% and 0.04%, respectively, of a return of
capital. Future quarterly distributions, if any, will be determined by our board of directors.
Unregistered Sales of Equity Securities
We did not engage in unregistered sales of securities during the year ended December 31, 2016.
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Table of Contents
Issuer Purchases of Equity Securities
During the year ended December 31, 2016, as a part of our dividend reinvestment plan for our common stockholders, our dividend reinvestment plan
administrator purchased 257,166 shares of our common stock for $3.3 million in the open market in order to satisfy the reinvestment portion of our distribution. The
following table outlines purchases by our dividend reinvestment plan administrator of our common stock for this purpose during the year ended December 31, 2016.
Period
January 2016
February 2016
March 2016
April 2016
May 2016
June 2016
July 2016
August 2016
September 2016
October 2016
November 2016
December 2016
Total
Total Number of Shares
Purchased
Weighted Average Price Paid
Per Share
Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs
Maximum Number (or Approximate Dollar
Value) of Shares that May Yet Be Purchased
Under the Plans or Programs
$
22,138
—
—
125,436
—
—
109,592
—
—
—
—
—
257,166
$
12.85
—
—
12.65
—
—
13.19
—
—
—
—
—
12.90
48
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Table of Contents
Share Repurchase Program
On February 4, 2016, our board of directors authorized a program for the purpose of repurchasing up to $50.0 million worth of our common stock. Under the
repurchase program, we were permitted, but were not obligated to, repurchase our outstanding common stock in the open market from time to time, provided that we
complied with our code of ethics and the guidelines specified in Rule 10b-18 of the Exchange Act, including certain price, market volume and timing constraints. In
addition, any repurchases were conducted in accordance with the 1940 Act. On December 23, 2016, our board of directors extended our repurchase program and we
expect the repurchase program to be in place until the earlier of December 31, 2017 or until $50.0 million of outstanding shares of common stock have been repurchased.
The following table outlines repurchases of our common stock under our stock repurchase program during the year ended December 31, 2016.
Period
January 2016
February 2016
March 2016
April 2016
May 2016
June 2016
July 2016
August 2016
September 2016
October 2016
November 2016
December 2016
Total
Total Number of Shares
Purchased
Weighted Average Price Paid
Per Share
Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs
Maximum Number (or Approximate Dollar
Value) of Shares that May Yet Be Purchased
Under the Plans or Programs
— $
124,950
—
—
62,319
61,230
—
—
—
—
—
—
248,499
$
—
11.47
—
—
12.29
12.23
—
—
—
—
—
—
11.86
49
— $
124,950
—
—
62,319
61,230
—
—
—
—
—
—
248,499
—
48,567
48,567
48,567
47,801
47,052
47,052
47,052
47,052
47,052
47,052
47,052
Table of Contents
Stock Performance Graph
This graph compares the return on our common stock with that of the Standard & Poor's 500 Total Return Index ("S&P 500 TR") and the Russell 2000 Index
Total Return ("Russell 2000 TR") as we do not believe that there is an appropriate index of companies with an investment strategy similar to our own with which to
compare the return on our common stock, for the period May 19, 2011 (commencement of operations) to December 31, 2016. The graph assumes that, on May 19, 2011, a
person invested $100 in each of our common stock, the S&P 500 TR and the Russell 2000 TR. The graph measures total stockholder return, which takes into account both
changes in stock price and distributions. It assumes that distributions paid are invested in like securities.
The graph and other information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be "soliciting material" or to be filed with the
United States Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the "1934" Act. The stock price performance
included in the above graph is not necessarily indicative of future stock performance.
50
Table of Contents
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with the respective consolidated financial statements and related consolidated notes thereto and
Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. Financial information for the years ended
December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013 and December 31, 2012, has been derived from the Predecessor Operating Company
and our financial statements and related notes thereto that were audited by Deloitte & Touche LLP, an independent registered public accounting firm.
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Table of Contents
The below selected financial and other data is for NMFC.
(in thousands except shares and per share data)
New Mountain Finance Corporation
Statement of Operations Data:
Investment income
Investment income allocated from NMF Holdings
Net expenses
Net expenses allocated from NMF Holdings
Net investment income
Net realized (losses) gains on investments
Net realized and unrealized gains (losses) allocated from NMF
Holdings
Net change in unrealized appreciation (depreciation) of
investments
Net change in unrealized (depreciation) appreciation of securities
purchased under collateralized agreements to resell
Net change in unrealized (depreciation) appreciation of investment
in NMF Holdings
Benefit (provision) for taxes
Net increase in net assets resulting from operations
Per share data:
Net asset value
Net increase in net assets resulting from operations (basic)
Net increase in net assets resulting from operations (diluted)(1)
Distributions declared(2)
Balance sheet data:
Total assets(3)
Holdings Credit Facility
Convertible Notes
SBA-guaranteed debentures
Unsecured Notes
NMFC Credit Facility
Total net assets
Other data:
Total return based on market value(4)
Total return based on net asset value(5)
Number of portfolio companies at period end
Total new investments for the period(6)
Investment sales and repayments for the period(6)
Weighted average Yield to Maturity at Cost on debt portfolio at
period end (unaudited)(7)
2016
2015
2014
2013
2012
Years Ended December 31,
$
168,084
$
153,855
$
—
79,976
—
88,108
(16,717)
—
40,131
(486)
—
642
111,678
—
71,360
—
82,495
(12,789)
—
91,923
43,678
34,727
20,808
80,066
357
9,508
$
— $
90,876
—
40,355
50,521
—
11,443
—
—
(44)
—
—
37,511
—
17,719
19,792
—
12,087
—
—
(95)
—
61,920
31,784
(35,272)
(43,863)
(296)
—
(1,183)
32,955
—
—
(493)
45,575
$
13.46
$
13.08
$
13.83
$
14.38
$
1.72
1.60
1.36
0.55
0.55
1.36
0.88
0.86
1.48
1.76
1.76
1.48
14.06
2.14
2.14
1.71
$
1,656,018
$
1,588,146
$
1,500,868
$
650,107
$
345,331
333,513
155,523
121,745
90,000
10,000
938,562
19.68%
13.98%
78
419,313
115,000
117,745
—
90,000
836,908
(4.00)%
4.32 %
75
$
$
558,068
547,078
$
$
612,737
483,936
$
$
468,108
115,000
37,500
—
50,000
802,170
9.66%
6.56%
71
720,871
384,568
11.1%
10.7 %
10.7%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
650,107
341,926
11.62%
13.27%
N/A
N/A
N/A
N/A
24.84%
16.61%
N/A
N/A
N/A
N/A
Weighted average shares outstanding for the period (basic)
Weighted average shares outstanding for the period (diluted)
64,918,191
72,863,387
59,715,290
66,968,089
51,846,164
56,157,835
Portfolio turnover(6)
_______________________________________________________________________________
36.07%
33.93 %
29.51%
35,092,722
35,092,722
N/A
14,860,838
14,860,838
N/A
52
Table of Contents
(1)
(2)
(3)
(4)
(5)
In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. For the
year ended December 31, 2015, there was anti-dilution. For the years ended December 31, 2016 and December 31, 2014, there was no anti-dilution. For the years
ended December 31, 2013 and December 31, 2012, due to reflecting earnings for the full year of operations of the Predecessor Operating Company assuming
100.0% NMFC ownership of Predecessor Operating Company and assuming all of New Mountain Finance AIV Holdings Corporation's ("AIV Holdings") units in
the Predecessor Operating Company were exchanged for public shares of NMFC during the years then ended, the earnings per share would be $1.79 and $2.18,
respectively.
Distributions declared in the year ended December 31, 2014 include a $0.12 per share special dividend related to realized capital gains attributable to NMF
Holdings' warrant investments in Learning Care Group (US), Inc. Distributions declared in the year ended December 31, 2013 include a $0.12 per share special
dividend related to a distribution received attributable to NMF Holdings' investment in YP Equity Investors LLC. Distributions declared in the year ended
December 31, 2012 include a $0.23 per share special dividend related to estimated realized capital gains attributable to NMF Holdings' investments in Lawson
Software, Inc. and Infor Lux Bond Company and a $0.14 per share special dividend intended to minimize to the greatest extent possible NMFC's U.S. federal
income or excise tax liability.
On January 1, 2016, we adopted Accounting Standard Update No. 2015-03, Interest—Imputation of Interest Subtopic 835-30—Simplifying the Presentation of Debt
Issuance Costs (“ASU 2015-03”). Upon adoption, we revised our presentation of deferred financing costs from an asset to a liability, which is a direct deduction to
our debt on the Consolidated Statements of Assets and Liabilities. In addition, as of December 31, 2015 and December 31, 2014, we retrospectively revised our
presentation of $14.0 million and $14.1 million, respectively, of deferred financing costs that were previously presented as an asset, which resulted in a decrease to
total assets and total liabilities as of December 31, 2015 and December 31, 2014. For the years ended December 31, 2013 and December 31, 2012, NMFC was a
holding company with no direct operations of its own and its sole asset was its ownership in the Predecessor Operating Company and as such ASU 2015-03 did not
apply to NMFC.
Total return is calculated assuming a purchase of common stock at the opening of the first day of the period and a sale on the closing of the last business day of the
respective period ends. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at prices obtained under our dividend
reinvestment plan.
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.
(6)
For the year ended December 31, 2014, amounts include our investment activity and the investment activity of the Predecessor Operating Company.
(7)
The weighted average Yield to Maturity at Cost calculation assumes that all investments, including secured collateralized agreements, not on non-accrual are
purchased at the adjusted cost on the respective period ends and held until their respective maturities with no prepayments or losses and exited at par at maturity.
Adjusted cost reflects the cost for post-IPO investments in accordance with accounting principles generally accepted in the United States of America ("GAAP") and
a stepped up cost basis of pre-IPO investments (assuming a step-up to fair market value occurred on the IPO date).
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Table of Contents
As of May 8, 2014, NMFC assumed all operating activities previously undertaken by NMF Holdings. The following table sets forth selected financial and other
data for NMF Holdings when it was the Predecessor Operating Company.
(in thousands except units and per unit data)
New Mountain Finance Holdings, L.L.C.
Statement of Operations Data:
Total investment income
Net expenses
Net investment income
Net realized and unrealized gains (losses)
Net increase in net assets resulting from operations
Per unit data:
Net asset value
Net increase in net assets resulting from operations (basic and diluted)
Distributions declared(1)
Balance sheet data:
Total assets
Holdings Credit Facility
SLF Credit Facility
Total net assets
Other data:
Total return at net asset value(2)
Number of portfolio companies at period end
Total new investments for the period
Investment sales and repayments for the period
Weighted average Yield to Maturity at Cost on debt portfolio at period end (unaudited)(3)
Weighted average Yield to Maturity on debt portfolio at period end (unaudited)(4)
Weighted average common membership units outstanding for the period
Portfolio turnover
_______________________________________________________________________________
$
$
$
$
$
Years Ended December 31,
2013
2012
$
$
$
114,912
51,235
63,677
15,247
78,924
14.38
1.79
1.48
1,147,841
221,849
214,668
688,516
13.27%
59
529,307
426,561
$
$
11.0%
10.6%
85,786
40,569
45,217
28,779
73,996
14.06
2.18
1.71
1,025,564
206,938
214,262
569,939
16.61%
63
673,218
423,874
10.3%
10.1%
44,021,920
34,011,738
40.52%
52.02%
(1)
(2)
(3)
(4)
Distributions declared in the year ended December 31, 2013 include a $0.12 per unit special dividend related to a distribution received attributable to NMF
Holdings' investment in YP Equity Investors LLC. Distributions declared in the year ended December 31, 2012 include a $0.23 per unit special dividend related to
estimated realized capital gains attributable to NMF Holdings' investments in Lawson Software, Inc. and Infor Lux Bond Company and a $0.14 per unit special
dividend intended to minimize to the greatest extent possible NMFC's U.S. federal income or excise tax liability. Actual cash payments on the distributions
declared to AIV Holdings only, for the quarters ended March 31, 2012, June 30, 2012, December 31, 2012 and March 31, 2013, were made on April 4, 2012,
July 9, 2012, January 7, 2013 and April 5, 2013 respectively.
Total return is calculated assuming a purchase at net asset value on the opening of the first day of the year and a sale at net asset value on the last day of the
respective period ends. 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. 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.
The weighted average Yield to Maturity at Cost calculation assumes that all investments not on non-accrual are purchased at the adjusted cost on the respective
period ends 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).
The weighted average Yield to Maturity calculation assumes that all investments not on non-accrual are purchased at fair value on the respective period ends and
held until their respective maturities with no prepayments or losses and exited at par at maturity. The weighted average Yield to Maturity was not calculated
subsequent to December 31, 2013.
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Item 7. 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 financial data and our financial statements and
the notes thereto contained in Item 8.—Financial Statements and Supplementary Data, in this report. See Item 1A.—Risk Factors for a discussion of the uncertainties,
risks and assumptions associated with these statements.
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 our future performance or our financial condition. 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 we invest;
our future operating results, our business prospects and the adequacy of our cash resources and working capital;
the ability of our portfolio companies to achieve their objectives;
our ability to make investments consistent with our investment objectives, including with respect to the size, nature and terms of our 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 New Mountain Capital, L.L.C. ("New Mountain Capital", defined as New
Mountain Capital Group, L.L.C. and its affiliates); and
the risk factors set forth in Item 1A.—Risk Factors.
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 this annual report.
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.
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Overview
We are a Delaware corporation that was originally incorporated on June 29, 2010 and completed our initial public offering ("IPO") on May 19, 2011. We are a
closed-end, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment
Company Act of 1940, as amended (the "1940 Act"). As such, we are obligated to comply with certain regulatory requirements. We have elected to be treated, and intend
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").
The Investment Adviser is a wholly-owned subsidiary of New Mountain Capital. New Mountain Capital is a firm with a track record of investing in the middle
market and with assets under management totaling more than $15.5 billion(1), which includes total assets held by us. New Mountain Capital focuses on investing in
defensive growth companies across its private equity, public equity and credit investment vehicles. The Investment Adviser manages our day-to-day operations and
provides us with investment advisory and management services. New Mountain Finance Administration, L.L.C. (the "Administrator”), a wholly-owned subsidiary of New
Mountain Capital, provides the administrative services necessary to conduct our day-to-day operations.
Our wholly-owned subsidiary, New Mountain Finance Holdings, L.L.C. (“NMF Holdings” or the "Predecessor Operating Company"), is a Delaware limited
liability company whose assets are used to secure NMF Holdings’ credit facility. For additional information about our organizational structure prior to May 8, 2014, see
"—Historical Structure". NMF Ancora Holdings Inc. (“NMF Ancora”), NMF QID NGL Holdings, Inc. (“NMF QID”) and NMF YP Holdings Inc. (“NMF YP”), our
wholly-owned subsidiaries, are structured as Delaware entities that serve as tax blocker corporations which hold equity or equity-like investments in portfolio companies
organized as limited liability companies (or other forms of pass-through entities). We consolidate our tax blocker corporations for accounting purposes. The tax blocker
corporations are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of the portfolio companies. Additionally, our
wholly-owned subsidiary, New Mountain Finance Servicing, L.L.C. (“NMF Servicing”) 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 our consolidated wholly-owned direct and indirect subsidiaries. SBIC LP received a
license from the United States ("U.S.") Small Business Administration (the “SBA”) to operate as a small business investment company (“SBIC”) under Section 301(c) of
the Small Business Investment Act of 1958, as amended (the “1958 Act”).
Our 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, our 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.
Similar to us, SBIC LP's investment objective is to generate current income and capital appreciation under our investment criteria. However, SBIC LP's investments must
be in SBA eligible companies. Our portfolio may be concentrated in a limited number of industries. As of December 31, 2016, our top five industry concentrations were
business services, software, consumer services, investment fund and education.
As of December 31, 2016, our net asset value was $938.6 million and our portfolio had a fair value of approximately $1,558.8 million in 78 portfolio companies,
with a weighted average yield to maturity at cost ("Yield to Maturity at Cost") of approximately 11.1%. This Yield to Maturity at Cost calculation assumes that all
investments, including secured collateralized agreements, not on non-accrual are purchased at cost on the quarter end date and held until their respective maturities with
no prepayments or losses and exited at par at maturity. 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 our portfolio or other factors.
_______________________________________________________________________________
(1)
Includes amounts committed, not all of which have been drawn down and invested, as of December 31, 2016, as well as amounts called and returned since
inception.
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Historical Structure
On May 19, 2011, we priced our 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, we sold an additional 2,172,000 shares of our 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 (as defined below). In connection with our 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. 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 May 8, 2014, NMF Holdings was externally managed by the Investment Adviser 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 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.
Until April 25, 2014, New Mountain Finance AIV Holdings Corporation ("AIV Holdings") was a Delaware corporation that was originally incorporated on
March 11, 2011. Guardian AIV, a Delaware limited partnership, was AIV Holdings' sole stockholder. AIV Holdings was a closed-end, non-diversified management
investment company that was regulated as a BDC under the 1940 Act. As such, AIV Holdings was obligated to comply with certain regulatory requirements. AIV
Holdings was treated, and complied with the requirements to qualify annually, as a RIC under the Code. AIV Holdings was dissolved on April 25, 2014.
Prior to May 8, 2014, NMFC and AIV Holdings were holding companies with no direct operations of their own, and their sole asset was their 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 our IPO, and through December 31, 2016, we raised approximately $533.1 million in net proceeds from additional offerings of common stock and issued
shares of common stock valued at approximately $288.4 million on behalf of AIV Holdings for exchanged units. We acquired from NMF Holdings units of NMF
Holdings equal to the number of shares of our common stock sold in additional offerings. With the completion of the final secondary offering on February 3, 2014, we
owned 100.0% of the units of NMF Holdings, which became our wholly-owned subsidiary.
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 determined that continuation as a BDC was not in the best interest of AIV Holdings and Guardian AIV. Specifically, given that AIV Holdings was formed for
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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 the 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 joint annual meeting of the stockholders of NMFC and the sole unit holder of NMF Holdings 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 a 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.
Effective May 8, 2014, NMF Holdings amended and restated its 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' 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 direct and indirect 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"). NMFC
continues to remain a BDC regulated under the 1940 Act.
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 held at NMF Holdings will continue to be used to secure
NMF Holdings' credit facility.
Prior to December 18, 2014, New Mountain Finance SPV Funding, L.L.C. ("NMF SLF") was a Delaware limited liability company. NMF SLF was a wholly-
owned subsidiary of NMF Holdings and thus our wholly-owned indirect subsidiary. NMF SLF was bankruptcy-remote and non-recourse to us. As part of an amendment
to our existing credit facilities with Wells Fargo Bank, National Association, NMF SLF merged with and into NMF Holdings on December 18, 2014. See Item 8.—
Financial Statements and Supplementary Data—Note 7. Borrowings for additional information on our borrowings.
Recent Developments
On January 12, 2017, the SBA issued a "green light" letter inviting us to continue our application process to obtain a second license to form and operate a second
SBIC subsidiary. If approved, the additional SBIC license would provide us with an incremental source of attractive long-term capital. Receipt of a green light letter from
the SBA does not assure an applicant that the SBA will ultimately issue an SBIC license and we have received no assurance or indication from the SBA that we will
receive an additional SBIC license, or of the timeframe in which we would receive an additional license, should one ultimately be granted.
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On February 23, 2017, our board of directors declared a first quarter 2017 distribution of $0.34 per share payable on March 31, 2017 to holders of record as of
March 17, 2017.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with 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
We consolidate our wholly-owned direct and indirect subsidiaries: NMF Holdings, NMF Servicing, SBIC LP, SBIC GP, NMF Ancora, NMF QID and NMF YP.
Previously, we consolidated our wholly-owned indirect subsidiary NMF SLF until it merged with and into NMF Holdings on December 18, 2014. See Item 8.—Financial
Statements and Supplementary Data—Note 7. Borrowings for additional information on our credit facilities. We are an investment company following accounting and
reporting guidance as described in Accounting Standards Codification Topic 946, Financial Services—Investment Companies, ("ASC 946"). 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 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, we conduct a valuation of assets, which impacts our net asset value.
We value our assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, our board of directors is ultimately and solely
responsible for determining the fair value of our 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 our portfolio investments require a fair value determination. Security transactions are accounted for
on a trade date basis. Our 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, we look at the number of quotes readily available and perform the following procedures:
i.
ii.
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;
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:
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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 our 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 we do not have a readily available market quotation will be reviewed by an
independent valuation firm engaged by our board of directors; and
d. When deemed appropriate by our 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 a commitment 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 our 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 we have 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 Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), we, to the extent that we hold such investments, do not adjust
the quoted price for these investments, even in situations where we hold 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 and unobservable. 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 and unobservable inputs.
The inputs into the determination of fair value require significant judgment or estimation by management and consideration of factors specific to each
investment. 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 period in which the
reclassifications occur.
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The following table summarizes the levels in the fair value hierarchy that our portfolio investments fall into as of December 31, 2016:
(in thousands)
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
$
700,580
604,203
66,559
187,475
1,558,817
$
— $
—
—
28
28
$
$
169,979
280,026
41,906
—
530,601
324,177
24,653
187,447
491,911
$
1,066,878
We generally use the following framework when determining the fair value of investments where there are little, if any, market activity or observable pricing
inputs. We typically determine the fair value of our performing debt investments utilizing an income approach. Additional consideration is given using a market based
approach, as well as reviewing the overall underlying portfolio company's performance and associated financial risks. The following outlines additional details on the
approaches considered:
Company Performance, Financial Review, and Analysis: Prior to investment, as part of our due diligence process, we evaluate the overall performance and
financial stability of the portfolio company. Post investment, we analyze 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. We also attempt 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
our original investment thesis. This analysis is specific to each portfolio company. We leverage the knowledge gained from our original due diligence process, augmented
by this subsequent monitoring, to continually refine our outlook for each of our portfolio companies and ultimately form the valuation of our investment in each portfolio
company. When an external event such as a purchase transaction, public offering or subsequent sale occurs, we will consider the pricing indicated by the external event to
corroborate the private valuation.
For debt investments, we may employ the Market Based Approach (as described below) to assess the total enterprise value of the portfolio company, in order to
evaluate the enterprise value coverage of our debt investment. For equity investments or in cases where the Market Based Approach implies a lack of enterprise value
coverage for the debt investment, we may additionally employ a discounted cash flow analysis based on the free cash flows of the portfolio company to assess the total
enterprise value.
After enterprise value coverage is demonstrated for our debt investments through the method(s) above, the Income Based Approach (as described below) may be
employed to estimate the fair value of the investment.
Market Based Approach: We may estimate the total enterprise value of each portfolio company by utilizing market value cash flow (EBITDA) multiples of
publicly traded comparable companies and comparable transactions. We consider numerous factors when selecting the appropriate companies whose trading multiples are
used to value our portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, and relevant risk
factors, as well as size, profitability and growth expectations. We 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 the enterprise value of the portfolio company. Significant increases or decreases in
the EBITDA multiple will result in an increase or decrease in enterprise value, which may result in an increase or decrease in the fair value estimate of the investment. In
applying the market based approach as of December 31, 2016, we used the relevant EBITDA multiple ranges set forth in the table below to determine the enterprise value
of our portfolio companies. We believe this was a reasonable range in light of current comparable company trading levels and the specific portfolio companies involved.
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Income Based Approach: We 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
December 31, 2016, we used the discount ranges set forth in the table below to value investments in our portfolio companies.
The unobservable inputs used in the fair value measurement of our Level III investments as of December 31, 2016 were as follows:
Fair Value as of
December 31, 2016
Approach
Unobservable Input
Low
(in thousands)
Type
First lien
$
417,464 Market & income approach
86,801 Market quote
26,336
Other
EBITDA multiple
Revenue multiple
Discount rate
Broker quote
N/A(1)
Second lien
191,419 Market & income approach
EBITDA multiple
Subordinated
24,653 Market & income approach
96,315 Market quote
36,443
Other
Equity and other
158,947 Market & income approach
Discount rate
Broker quote
N/A(1)
EBITDA multiple
Revenue multiple
Discount rate
EBITDA multiple
Revenue multiple
Discount rate
1,498
Black Scholes analysis
Expected life in years
2 Market quote
27,000
Other
$
1,066,878
Volatility
Discount rate
Broker quote
N/A(1)
Range
High
15.0x
8.0x
12.3%
N/A
N/A
16.0x
Weighted
Average
10.2x
3.0x
9.7%
N/A
N/A
11.7x
2.0x
0.5x
7.2%
N/A
N/A
5.3x
8.7%
13.0%
11.3%
N/A
N/A
4.5x
0.5x
8.7%
2.5x
0.5x
8.0%
8.8
32.2%
2.5%
N/A
N/A
N/A
N/A
8.5x
1.0x
15.8%
13.0x
1.0x
18.9%
9.3
43.8%
2.5%
N/A
N/A
N/A
N/A
7.1x
0.8x
13.6%
5.9x
0.8x
14.5%
9.1
36.4%
2.5%
N/A
N/A
_______________________________________________________________________________
(1)
Fair value was determined based on transaction pricing or recent acquisition or sale as the best measure of fair value with no material changes in operations of the
related portfolio company since the transaction date.
NMFC Senior Loan Program I LLC
NMFC Senior Loan Program I LLC ("SLP I") was formed as a Delaware limited liability company on May 27, 2014 and commenced operations on June 10,
2014. SLP I is a portfolio company held by us. SLP I is structured as a private investment fund, in which all of the investors 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 "SLP I Agreement") and will continue in existence until June 10, 2019, subject to earlier termination pursuant to certain terms of the
SLP I Agreement. The term may be extended for up to one year pursuant to certain terms of the SLP I Agreement. SLP I has a three year re-investment period. SLP I
invests in senior secured loans issued by companies within our core industry verticals. These investments are typically broadly syndicated first lien loans.
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SLP I is capitalized with $93.0 million of capital commitments and $275.0 million of debt from a revolving credit facility and is managed by us. Our capital
commitment is $23.0 million, representing less than 25.0% ownership, with third party investors representing the remaining capital commitment. As of December 31,
2016, SLP I had total investments with an aggregate fair value of approximately $348.7 million, debt outstanding of $256.5 million and capital that had been called and
funded of $93.0 million. As of December 31, 2015, SLP I had total investments with an aggregate fair value of approximately $349.7 million, debt outstanding of $267.6
million and capital that had been called and funded of $93.0 million. Our investment in SLP I is disclosed on our Consolidated Schedules of Investments as of
December 31, 2016 and December 31, 2015.
We, as an investment adviser registered under the Advisers Act, act as the collateral manager to SLP I and are entitled to receive a management fee for our
investment management services provided to SLP I. As a result, SLP I is classified as our affiliate. No management fee is charged on our investment in SLP I in
connection with the administrative services provided to SLP I. For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, we earned
approximately $1.2 million, $1.2 million and $0.5 million, respectively, in management fees related to SLP I which is included in other income. As of December 31, 2016
and December 31, 2015, approximately $0.3 million and $0.3 million, respectively, of management fees related to SLP I was included in receivable from affiliates. For
the years ended December 31, 2016, December 31, 2015 and December 31, 2014, we earned approximately $3.7 million, $3.6 million and $1.1 million, respectively, of
dividend income related to SLP I, which is included in dividend income. As of December 31, 2016 and December 31, 2015, approximately $0.9 million and $0.9 million,
respectively, of dividend income related to SLP I was included in interest and dividend receivable.
NMFC Senior Loan Program II LLC
NMFC Senior Loan Program II LLC ("SLP II") was formed as a Delaware limited liability company on March 9, 2016 and commenced operations on April 12,
2016. SLP II is structured as a private joint venture investment fund between us and SkyKnight Income, LLC (“SkyKnight”) and operates under a limited liability
company agreement (the "SLP II Agreement"). The purpose of the joint venture is to invest primarily in senior secured loans issued by portfolio companies within our
core industry verticals. These investments are typically broadly syndicated first lien loans. All investment decisions must be unanimously approved by the board of
managers of SLP II, which has equal representation from us and SkyKnight. SLP II has a three year investment period and will continue in existence until April 12, 2021.
The term may be extended for up to one year pursuant to certain terms of the SLP II Agreement.
SLP II is capitalized with equity contributions which are called from its members, on a pro-rata basis based on their equity commitments, as transactions are
completed. Any decision by SLP II to call down on capital commitments requires approval by the board of managers of SLP II. We and SkyKnight have committed to
provide $79.4 million and $20.6 million of equity to SLP II, respectively. As of December 31, 2016, we and SkyKnight have contributed $71.5 million and $18.5 million,
respectively. Our investment in SLP II is disclosed on our Consolidated Schedule of Investments as of December 31, 2016.
On April 12, 2016, SLP II closed its $275.0 million revolving credit facility with Wells Fargo Bank, National Association which matures on April 12, 2021 and
bears interest at a rate of LIBOR plus 1.75% per annum. As of December 31, 2016, SLP II had total investments with an aggregate fair value of approximately $361.7
million and debt outstanding under its credit facility of $250.0 million.
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The following table is a listing of the individual loans in SLP II's portfolio as of December 31, 2016:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
First lien:
ADG, LLC
Healthcare Services
5.75% (L + 4.75%)
9/28/2023
$
17,207
$
17,040
$
Principal Amount
or Par Value
Cost
Fair
Value (2)
(in thousands)
(in thousands)
(in thousands)
AssuredPartners, Inc.
Business Services
5.25% (L + 4.25%)
Beaver-Visitec International Holdings, Inc.
Healthcare Products
6.00% (L + 5.00%)
Coinstar, LLC
Cvent, Inc.
DigiCert Holdings, Inc.
Eiger Acquisition B.V. (Eiger Co-Borrower, LLC)
Consumer Services
5.25% (L + 4.25%)
Software
Software
Software
6.00% (L + 5.00%)
6.00% (L + 5.00%)
6.25% (L + 5.25%)
Emerald 2 Limited
Business Services
5.00% (L + 4.00%)
Engility Corporation (fka TASC, Inc.)
Federal Services
5.81% (Base + 4.72%)
Evo Payments International, LLC
Business Services
6.00% (L + 5.00%)
Explorer Holdings, Inc.
Globallogic Holdings Inc.
GOBP Holdings Inc.
Healthcare Services
6.00% (L + 5.00%)
Business Services
5.50% (L + 4.50%)
Retail
5.00% (L + 4.00%)
Hyperion Insurance Group Limited
Business Services
5.50% (L + 4.50%)
J.D. Power and Associates
Kronos Incorporated
Masergy Holdings, Inc.
McGraw-Hill Global Education Holdings, LLC
Ministry Brands, LLC
Business Services
5.25% (L + 4.25%)
Software
5.00% (L + 4.00%)
Business Services
5.50% (L + 4.50%)
Education
Software
5.00% (L + 4.00%)
6.00% (L + 5.00%)
Mister Car Wash Holdings, Inc.
Consumer Services
5.25% (L + 4.25%)
Navex Global, Inc.
Software
5.99% (L + 4.75%)
nThrive, Inc. (fka Precyse Acquisition Corp.)
Healthcare Services
6.50% (L + 5.50%)
Poseidon Intermediate, LLC
Quest Software US Holdings Inc.
Rocket Software, Inc.
SolarWinds Holdings, Inc.
TTM Technologies, Inc.
Software
Software
Software
Software
5.25% (L + 4.25%)
7.00% (L + 6.00%)
5.25% (L + 4.25%)
5.50% (L + 4.50%)
Business Products
5.25% (L + 4.25%)
Vencore, Inc. (fka SI Organization, Inc., The)
Federal Services
5.75% (L + 4.75%)
Vision Solutions, Inc.
Vivid Seats LLC
Software
7.50% (Base + 6.50%)
Business Services
6.75% (L + 5.75%)
WD Wolverine Holdings, LLC
Healthcare Services
6.50% (L + 5.50%)
Zywave, Inc.
Software
6.00% (L + 5.00%)
10/21/2022
8/21/2023
9/27/2023
11/29/2023
10/21/2021
2/18/2022
5/14/2021
8/14/2023
12/22/2023
5/2/2023
6/20/2022
10/21/2021
4/29/2022
9/7/2023
11/1/2023
12/15/2023
5/4/2022
12/2/2022
8/20/2021
11/19/2021
10/20/2022
8/15/2022
10/31/2022
10/14/2023
2/3/2023
5/31/2021
11/23/2019
6/16/2022
10/12/2022
10/17/2023
11/17/2022
11,862
14,962
4,987
10,000
14,900
10,507
1,277
13,860
17,500
4,975
10,000
14,955
14,401
9,975
10,000
7,500
9,950
7,846
8,312
14,933
9,950
14,962
10,000
14,962
14,688
13,548
10,801
9,938
4,000
10,200
17,500
11,847
14,819
4,963
9,901
14,814
10,350
1,206
13,793
17,413
4,929
9,900
14,816
14,179
9,927
9,951
7,463
9,905
7,807
8,250
14,718
9,813
14,962
9,853
14,817
14,697
13,444
10,780
9,845
3,922
9,900
17,414
17,121
12,058
14,963
5,054
10,125
14,881
10,402
1,174
14,080
17,602
5,028
10,013
14,985
14,476
10,075
10,105
7,563
9,971
7,807
8,354
14,858
10,083
15,055
10,153
15,129
14,852
13,599
10,942
9,919
3,985
9,894
17,413
_______________________________________________________________________________
(1)
All interest is payable in cash unless otherwise indicated. A majority of the variable rate debt investments bear interest at a rate that may be determined by
reference to the LIBOR (L), the Prime Rate (P) and the alternative base rate (Base). For each investment, the current interest rate provided reflects the rate in
effect as of December 31, 2016.
Represents the fair value in accordance with ASC 820. Our board of directors does not determine the fair value of the investments held by SLP II.
(2)
$
360,458
$
357,438
$
361,719
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Below is certain summarized financial information for SLP II as of December 31, 2016 and for the year ended December 31, 2016:
Selected Balance Sheet Information:
Investments at fair value (cost of $357,438)
Receivable from unsettled securities sold
Cash and other assets
Total assets
Credit facility
Deferred financing costs
Payable for unsettled securities purchased
Distribution payable
Other liabilities
Total liabilities
Members' capital
Total liabilities and members' capital
Selected Statement of Operations Information:
Interest income
Other income
Total investment income
Interest and other financing expenses
Other expenses
Total expenses
Net investment income
Net realized gains on investments
Net change in unrealized appreciation (depreciation) of investments
December 31, 2016
(in thousands)
361,719
1,007
10,138
372,864
249,960
(2,565)
24,862
3,000
3,350
278,607
94,257
372,864
Year Ended
December 31, 2016(1)
(in thousands)
7,463
572
8,035
3,558
650
4,208
3,827
599
4,281
8,707
$
$
$
$
$
$
$
Net increase in members' capital
_______________________________________________________________________________
(1)
For the year ended December 31, 2016, amounts reported relate to the period from April 12, 2016 (commencement of operations) to December 31, 2016.
For the year ended December 31, 2016, we earned approximately $3.5 million of dividend income related to SLP II, which is included in dividend income. As of
December 31, 2016, approximately $2.4 million of dividend income related to SLP II was included in interest and dividend receivable.
We have determined that SLP II is an investment company under ASC 946, however, in accordance with such guidance we will generally not consolidate our
investment in a company other than a wholly-owned investment company subsidiary. Furthermore, Accounting Standards Codification Topic 810, Consolidation,
concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate the joint venture since
neither has control. Accordingly, we do not consolidate SLP II.
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New Mountain Net Lease Corporation
New Mountain Net Lease Corporation ("NMNLC") was formed as a Maryland corporation on April 18, 2016 and commenced operations on August 12, 2016.
NMNLC was formed to acquire commercial real properties that are subject to "triple net" leases and to qualify as a real estate investment trust, or REIT, within the
meaning of Section 856(a) of the Code. As of December 31, 2016, NMNLC had assets of approximately $75.5 million and non-recourse asset level debt outstanding of
approximately $47.9 million. We have contributed $27.0 million to NMNLC as of December 31, 2016. Our investment in NMNLC is disclosed on our Consolidated
Schedule of Investments as of December 31, 2016.
Below is certain summarized property information for NMNLC as of December 31, 2016:
Tenant
Lease Expiration Date
Location
Total Square Feet
December 31, 2016
(in thousands)
(in thousands)
Equity as of
A.P. Plasman, Inc.
Plasman Corp, LLC / A-Brite LP
FMH Conveyors, LLC
J.R. Automation Technologies, LLC
Kirlin Group, LLC
9/30/2031
9/30/2033
10/31/2031
1/31/2031
6/30/2029
Ontario, Canada
Fort Payne, AL
Cleveland, OH
Jonesboro, AR
Holland, MI
Rockville, MD
436
261
195
88
95
$
$
7,294
5,132
5,136
2,061
7,547
27,170
For the year ended December 31, 2016, we earned approximately $0.5 million of dividend income related to NMNLC, which is included in dividend income. For
the year ended December 31, 2016, New Mountain Capital reimbursed NMNLC approximately $0.2 million in non-recurring organizational expenses incurred in
connection with the formation and organization of NMNLC. As of December 31, 2016, approximately $0.5 million of dividend income related to NMNLC was included
in interest and dividend receivable.
Collateralized agreements or repurchase financings
We follow the guidance in Accounting Standards Codification Topic 860, Transfers and Servicing—Secured Borrowing and Collateral, ("ASC 860") when
accounting for transactions involving the purchases of securities under collateralized agreements to resell (resale agreements). These transactions are treated as
collateralized financing transactions and are recorded at their contracted resale or repurchase amounts, as specified in the respective agreements. Interest on collateralized
agreements is accrued and recognized over the life of the transaction and included in interest income. As of December 31, 2016 and December 31, 2015, we held one
collateralized agreement to resell with a cost basis of $30.0 million and $30.0 million, respectively, and a carrying value of $29.2 million and $29.7 million, respectively,
and collateralized by a second lien bond in Northstar GOM Holdings Group LLC with a fair value of $29.2 million and $29.7 million, respectively. The collateralized
agreement to resell is guaranteed by a private hedge fund with the most recently reported assets under management of approximately $690.0 million and assets under
management of approximately $716.6 million as of December 31, 2015. Pursuant to the terms of the collateralized agreement, the private hedge fund is obligated to
repurchase the collateral from us at the par value of the collateralized agreement once called upon by us or if the private hedge fund's total assets under management fall
below the agreed upon thresholds. The collateralized agreement was called upon by us but the counterparty failed to repurchase the collateral at its par value in accordance
with the terms of the collateralized agreement. As of December 31, 2016, litigation is on-going in the state of New York and the Cayman Islands to resolve this matter.
The collateralized agreement earned interest at a weighted average rate of 16.0% and 15.0% per annum as of December 31, 2016 and December 31, 2015, respectively.
Revenue Recognition
Sales and paydowns of investments: Realized gains and losses on investments are determined on the specific identification method.
Interest and dividend 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. We have loans and certain preferred equity investments in the portfolio that contain a payment-in-kind
(“PIK”) interest or dividend provision. PIK interest and dividends are accrued and recorded as income at the contractual rates, if deemed collectible. The PIK interest and
dividends are added to the principal or share balances on the capitalization dates and generally due at maturity or when redeemed by the issuer.
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Dividend income on common equity is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio
companies. Dividend income on preferred securities is recorded as dividend income on an accrual basis to the extent that such amounts are deemed collectible.
Non-accrual income: Investments are placed on non-accrual status when principal or interest payments are past due for 30 days or more and when there is
reasonable doubt that principal or interest will be collected. Accrued cash and un-capitalized PIK interest or dividends are reversed when an investment is placed on non-
accrual status. Previously capitalized PIK interest or dividends are not reversed when an investment is placed on non-accrual status. Interest or dividend payments
received on non-accrual investments may be recognized as income or applied to principal depending upon management’s judgment of the ultimate outcome. Non-accrual
investments are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.
Other income: Other income represents delayed compensation, consent or amendment fees, revolver fees, structuring fees, upfront fees, management fees from
a non-controlled/affiliated investment and other miscellaneous fees received and are typically non-recurring in nature. 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. We 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 for providing such commitments. Structuring fees and upfront fees are recognized as income when
earned, usually when paid at the closing of the investment, and are non-refundable.
Prior to the Restructuring, our 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 us based on our pro-rata interest in the net assets of the
Predecessor Operating Company. This was recorded on our Statements of Operations. Realized gains and losses are recorded upon sales of our 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. We used the proceeds from our IPO and Concurrent Private Placement to purchase units in the Predecessor Operating Company at $13.75 per unit (our 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, we experienced
immediate unrealized appreciation on our investment.
All expenses were paid and recorded by the Predecessor Operating Company. Expenses were allocated to us 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. We recorded our portion of the offering costs as a direct
reduction to net assets and the cost of our investment in the Predecessor Operating Company.
Monitoring of Portfolio Investments
We monitor the performance and financial trends of our portfolio companies on at least a quarterly basis. We attempt to identify any developments within the
portfolio company, the industry or the macroeconomic environment that may alter any material element of our original investment strategy.
We use an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in the portfolio. We use 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 we will not recoup our original cost basis in the investment and may realize a substantial
loss upon exit.
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The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of December 31, 2016:
(in millions)
Investment Rating
Investment Rating 1
Investment Rating 2
Investment Rating 3
Investment Rating 4
Par Value(1)
Percent
Fair Value
Percent
As of December 31, 2016
$
$
136.7
1,278.0
20.5
72.7
1,507.9
9.1% $
84.7%
1.4%
4.8%
100.0% $
136.9
1,399.7
12.6
9.6
1,558.8
8.8%
89.8%
0.8%
0.6%
100.0%
_______________________________________________________________________________
(1)
Excludes shares and warrants.
As of December 31, 2016, all investments in our portfolio had an Investment Rating of 1 or 2 with the exception of four portfolio companies. As of
December 31, 2016, two portfolio companies had an Investment Rating of 3 and three portfolio companies had an Investment Rating of 4, which includes a portfolio
company that had a portion of our investment included in Investment Rating of 3 and a portion included in Investment Rating of 4.
During the fourth quarter of 2016, we placed a portion of our first lien position in Sierra Hamilton LLC / Sierra Hamilton Finance, Inc. ("Sierra") on non-accrual
status due to its ongoing restructuring. As of December 31, 2016, the portion of Sierra first lien placed on non-accrual status represented an aggregate cost basis of $8.2
million, an aggregate fair value of $5.3 million and total unearned interest income of $0.6 million for the year then ended.
During the third quarter of 2016, we placed our entire second lien position in Transtar Holding Company (“Transtar”) on non-accrual status due to its ongoing
restructuring. As of December 31, 2016, our investment in Transtar had an aggregate cost basis of $31.2 million, an aggregate fair value of $3.9 million and total unearned
interest income of approximately $4.0 million for the year then ended.
During the third quarter of 2016, we received notice that there would be no recovery of the outstanding principal and interest owed on our two super priority first
lien positions in ATI Acquisition Company ("ATI"). As of June 30, 2016, our first lien positions in ATI had an aggregate cost of $1.5 million and an aggregate fair value
of $0 and no unearned interest income for the period then ended. We wrote off our first lien positions in ATI and recognized an aggregate realized loss of $1.5 million
during the three months ended September 30, 2016. As of December 31, 2016, our preferred shares and warrants in Ancora Acquisition LLC, which were received as a
result of our first lien positions in ATI, had an aggregate cost basis of $0.1 million and an aggregate fair value of $0.4 million.
During the second quarter of 2016, we placed a portion of our first lien position in Permian Tank & Manufacturing, Inc. (“Permian”) on non-accrual status due to
its ongoing restructuring. As of September 30, 2016, our investment in Permian had an aggregate cost basis of $24.4 million, an aggregate fair value of $7.1 million and
total unearned interest income of $1.3 million for the nine months then ended. In October 2016, Permian completed a restructuring which resulted in a material
modification of the original terms and an extinguishment of our original investment in Permain. Prior to the extinguishment in October 2016, our original investment in
Permian had an aggregate cost of $25.0 million, an aggregate fair value of $7.1 million and total unearned interest income of $1.4 million for the year ended December 31,
2016. The extinguishment resulted in a realized loss of $17.9 million. Post restructuring, our investments in Permian have been restored to full accrual status. As
of December 31, 2016, our investments in Permian have an aggregate cost basis of $9.0 million and an aggregate fair value of $11.2 million.
Portfolio and Investment Activity
The fair value of our investments was approximately $1,558.8 million in 78 portfolio companies at December 31, 2016, approximately $1,512.2 million in 75
portfolio companies at December 31, 2015 and approximately $1,424.7 million in 71 portfolio companies at December 31, 2014.
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The following table shows our portfolio and investment activity for the years ended December 31, 2016, December 31, 2015 and December 31, 2014 :
(in millions)
New investments in 43, 36 and 43 portfolio companies, respectively
Debt repayments in existing portfolio companies
Sales of securities in 10, 15 and 14 portfolio companies, respectively
Change in unrealized appreciation on 71, 23 and 20 portfolio companies, respectively
Change in unrealized depreciation on 24, 70 and 60 portfolio companies, respectively
_______________________________________________________________________________
$
Years Ended December 31,
2016
2015
2014(1)
$
558.1
479.5
67.6
76.5
(36.4)
$
612.7
400.8
83.1
44.7
(79.9)
720.9
267.5
117.0
21.2
(63.9)
(1)
For the year ended December 31, 2014, amounts represent the investment activity of the Predecessor Operating Company through and including May 7, 2014 and
our investment activity from May 8, 2014 through December 31, 2014.
At December 31, 2016 and December 31, 2015, our weighted average Yield to Maturity at Cost was approximately 11.1% and 10.7%, respectively.
Recent Accounting Standards Updates
See Item 8.—Financial Statements and Supplementary Data—Note 15. Recent Accounting Standards for details on recent accounting standards updates.
Results of Operations
Under GAAP, our 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. We track 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 8.—Financial Statements and Supplementary Data—Note 5. Agreements for additional details.
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The following table for the year ended December 31, 2016 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)
Investment income
Interest income
Dividend income
Other income
Total investment income(2)
Total expenses pre-incentive fee(3)
Pre-Incentive Fee Net Investment Income
Incentive fee
Post-Incentive Fee Net Investment Income
Net realized losses on investments(4)
Net change in unrealized appreciation (depreciation) of investments(4)
Net change in unrealized (depreciation) appreciation of securities
purchased under collateralized agreements to resell
Benefit for taxes
Capital gains incentive fees
Year Ended
December 31, 2016
Stepped-up
Cost Basis
Adjustments
Incentive Fee
Adjustments(1)
Adjusted Year Ended
December 31, 2016
$
$
147,425
11,200
9,459
168,084
57,965
110,119
22,011
88,108
(16,717)
40,131
(486)
642
—
(65)
—
—
(65)
—
(65)
—
(65)
(151)
216
—
—
—
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
147,360
11,200
9,459
168,019
57,965
110,054
22,011
88,043
(16,868)
40,347
(486)
642
—
Net increase in net assets resulting from operations
$
111,678
_______________________________________________________________________________
$
111,678
(1)
(2)
(3)
(4)
For the year ended December 31, 2016, we incurred total incentive fees of $22.0 million, of which none was related to the capital gains incentive fee accrual on a
hypothetical liquidation basis.
Includes income from non-controlled/non-affiliated investments, non-controlled/affiliated investments and controlled investments.
Includes expense waivers and reimbursements of $0.7 million and management fee waivers of $4.8 million.
Includes net realized gains and losses on investments and net change in unrealized (depreciation) appreciation of investments from non-controlled/non-affiliated
investments, non-controlled/affiliated investments and controlled investments.
For the year ended December 31, 2016, we had approximately $0.1 million adjustment to interest income for amortization, a decrease of approximately $0.2
million to net realized losses and an increase of approximately $0.2 million to net change in unrealized appreciation (depreciation) to adjust for the stepped-up cost basis
of the transferred investments as discussed above. For the year ended December 31, 2016, total adjusted investment income of $168.0 million consisted of approximately
$135.2 million in cash interest from investments, approximately $4.3 million in PIK interest from investments, approximately $4.9 million in prepayment fees, net
amortization of purchase premiums and discounts of approximately $3.0 million, approximately $8.0 million in cash dividends from investments, $3.2 million in PIK
dividends from investments and approximately $9.4 million in other income. Our Adjusted Net Investment Income was $88.0 million for the year ended December 31,
2016.
In accordance with GAAP, for the year ended December 31, 2016, we did not have an accrual for 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. As of December 31, 2016,
no actual capital gains incentive fee was owed under the Investment Management Agreement, as cumulative net Adjusted Realized Gains did not exceed cumulative
Adjusted Unrealized Depreciation.
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The following table for the year ended December 31, 2015 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)
Investment income
Interest income
Dividend income
Other income
Total investment income(2)
Total expenses pre-incentive fee(3)
Pre-Incentive Fee Net Investment Income
Incentive fee
Post-Incentive Fee Net Investment Income
Net realized losses on investments(4)
Net change in unrealized (depreciation) appreciation of investments(4)
Net change in unrealized (depreciation) appreciation of securities
purchased under collateralized agreements to resell
Provision for taxes
Capital gains incentive fees
Net increase in net assets resulting from operations
Year Ended
December 31, 2015
Stepped-up
Cost Basis
Adjustments
Incentive Fee
Adjustments(1)
Adjusted Year Ended
December 31, 2015
$
$
$
140,074
5,771
8,010
153,855
50,769
103,086
20,591
82,495
(12,789)
(35,272)
(296)
(1,183)
—
32,955
(131)
—
—
(131)
—
(131)
—
(131)
(78)
209
—
—
—
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
$
139,943
5,771
8,010
153,724
50,769
102,955
20,591
82,364
(12,867)
(35,063)
(296)
(1,183)
—
32,955
_______________________________________________________________________________
(1)
(2)
(3)
(4)
For the year ended December 31, 2015, we incurred total incentive fees of $20.6 million, of which none was related to the capital gains incentive fee accrual on a
hypothetical liquidation basis.
Includes income from non-controlled/non-affiliated investments, non-controlled/affiliated investments and controlled investments.
Includes expense waivers and reimbursements of $0.7 million and management fee waivers of $5.2 million.
Includes net realized gains and losses on investments net change in unrealized (depreciation) appreciation of investments from non-controlled/non-affiliated
investments, non-controlled/affiliated investments and controlled investments.
For the year ended December 31, 2015, we had a $0.1 million adjustment to interest income for amortization, a decrease of $0.1 million to net realized losses and
an increase of $0.2 million to net change in unrealized depreciation to adjust for the stepped-up cost basis of the transferred investments as discussed above. For the year
ended December 31, 2015, total adjusted investment income of $153.7 million consisted of approximately $130.0 million in cash interest from investments, approximately
$3.9 million in PIK interest from investments, approximately $3.6 million in prepayment fees, net amortization of purchase premiums and discounts of approximately
$2.4 million, approximately $3.2 million in dividend income, $2.6 million in PIK dividends from investments and approximately $8.0 million in other income. Our
Adjusted Net Investment Income was $82.4 million for the year ended December 31, 2015.
In accordance with GAAP, for the year ended December 31, 2015, we did not have an accrual for 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. As of December 31, 2015,
no actual capital gains incentive fee was owed under the Investment Management Agreement, as cumulative net Adjusted Realized Gains did not exceed cumulative
Adjusted Unrealized Depreciation.
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The following table for the year ended December 31, 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.
Year Ended
December 31, 2014
Stepped-up
Cost Basis
Adjustments
Incentive Fee
Adjustments(1)
Adjusted
Year Ended
December 31, 2014
(in thousands)
Investment income
Interest income
Dividend income
Other income
Investment income allocated from NMF Holdings
Interest income
Dividend income
Other income
Total investment income(2)
Total expenses pre-incentive fee(3)
Pre-Incentive Fee Net Investment Income
Incentive fee
Post-Incentive Fee Net Investment Income
Net realized gains (losses) on investments
Net realized gains on investments allocated from NMF Holdings
Net change in unrealized (depreciation) appreciation of investments(4)
Net change in unrealized appreciation (depreciation) of investments
allocated from NMF Holdings
Provision for taxes
Capital gains incentive fees
$
$
85,123
2,309
4,491
40,515
2,368
795
135,601
43,766
91,835
11,769
80,066
357
8,568
(43,863)
940
(493)
—
(193)
—
—
—
—
—
(193)
—
(193)
—
(193)
(456)
—
649
—
—
—
$
— $
—
—
—
—
—
—
—
—
6,549
(6,549)
—
—
—
—
6,549
84,930
2,309
4,491
40,515
2,368
795
135,408
43,766
91,642
18,318
73,324
(99)
8,568
(43,214)
940
(493)
6,549
45,575
Net increase in net assets resulting from operations
$
45,575
$
_______________________________________________________________________________
(1)
For the year ended December 31, 2014, we incurred total incentive fees of $11.8 million, of which $(6.5) million related to the reduction of the capital gains
incentive fee accrual on a hypothetical liquidation basis.
Includes income from non-controlled/non-affiliated investments and non-controlled/affiliated investments.
Includes expense waivers and reimbursements of $1.1 million and management fee waivers of $0.7 million.
Includes net change in unrealized (depreciation) appreciation of investments from non-controlled/non-affiliated investments and non-controlled/affiliated
investments.
(2)
(3)
(4)
For the year ended December 31, 2014, we had a $0.2 million adjustment to interest income for amortization, a decrease of $0.5 million to net realized gains and
an increase of $0.7 million to net change in unrealized depreciation to adjust for the stepped-up cost basis of the transferred investments as discussed above. For the year
ended December 31, 2014, total adjusted investment income of $135.4 million consisted of approximately $114.5 million in cash interest from investments, approximately
$4.6 million in PIK interest from investments, approximately $3.9 million in prepayment fees, net amortization of purchase premiums and discounts of approximately
$2.5 million, approximately $4.6 million in dividend income and approximately $5.3 million in other income. Our Adjusted Net Investment Income was $73.3 million for
the year ended December 31, 2014.
In accordance with GAAP, for the year ended December 31, 2014, we decreased our hypothetical capital gains incentive fee accrual by $6.5 million 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. As of December 31, 2014,
no actual capital gains
72
Table of Contents
incentive fee was owed under the Investment Management Agreement, as cumulative net Adjusted Realized Gains did not exceed cumulative Adjusted Unrealized
Depreciation.
Results of Operations for the Years Ended December 31, 2016, December 31, 2015 and December 31, 2014
Revenue
(in thousands)
Interest income
Interest income allocated from the Predecessor Operating Company
Total interest income
Dividend income
Dividend income allocated from the Predecessor Operating Company
Total dividend income
Other income
Other income allocated from the Predecessor Operating Company
Total other income
Total investment income
$
Years Ended December 31,
2016
2015
2014
$
147,425
—
147,425
11,200
—
11,200
9,459
—
9,459
$
140,074
—
140,074
5,771
—
5,771
8,010
—
8,010
85,123
40,515
125,638
2,309
2,368
4,677
4,491
795
5,286
$
168,084
$
153,855
$
135,601
Our total investment income increased by approximately $14.2 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
The 9% increase in total investment income primarily results from an increase in interest income of approximately $7.4 million from the year ended December 31, 2015 to
the year ended December 31, 2016, which is attributable to larger invested balances and prepayment fees received associated with the early repayments of nine different
portfolio companies held as of December 31, 2015. Our larger invested balances were driven by the proceeds from the October 2016 primary offering of our common
stock, our May 2016 and September 2016 unsecured notes issuances and our September 2016 convertible notes issuance, as well as, our use of leverage from our
revolving credit facilities and SBA-guaranteed debentures to originate new investments. The increase in dividend income of approximately $5.4 million during the year
ended December 31, 2016 as compared to the year ended December 31, 2015 was primarily attributable to distributions from our investments in SLP I, SLP II and
NMNLC and PIK dividend income from an equity position. The increase in other income, which represents fees that are generally non-recurring in nature, of
approximately $1.4 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015 was primarily attributable to structuring, upfront,
amendment, consent and commitment fees received from 28 different portfolio companies and management fees from a non-controlled/affiliated portfolio company and a
controlled portfolio company.
Our total investment income increased by approximately $18.3 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014.
The 13% increase in total investment income primarily results from an increase in interest income of approximately $14.4 million from the year ended December 31, 2014
to the year ended December 31, 2015, which is attributable to larger invested balances and prepayment fees received associated with the early repayments or partial
repayments of nine different portfolio companies held as of December 31, 2014. Our larger invested balances were driven by the proceeds from the September 2015
primary offering of our common stock, our use of leverage from our revolving credit facilities, SBA-guaranteed debentures and the deployment of the June 2014 proceeds
from the issuance of $115.0 million of convertible notes to originate new investments. The increase in dividend income of approximately $1.1 million during the year
ended December 31, 2015 as compared to the year ended December 31, 2014 was primarily attributable to distributions from our investment in SLP I and PIK dividends
income from an equity position. The increase in other income, which represents fees that are generally non-recurring in nature, of approximately $2.7 million during the
year ended December 31, 2015 as compared to the year ended December 31, 2014 was primarily attributable to structuring, upfront, amendment and consent fees received
from 22 different portfolio companies, commitment fees received from three bridge facilities and management fees from a non-controlled/affiliated portfolio company.
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Table of Contents
Operating Expenses
(in thousands)
Management fee
Management fee allocated from Predecessor Operating Company
Less: management fee waiver
Total management fee
Incentive fee
Incentive fee allocated from Predecessor Operating Company
Total incentive fee
Capital gains incentive fee(1)
Capital gains incentive fee allocated from Predecessor Operating Company(1)
Total capital gains incentive fee(1)
Interest and other financing expenses
Interest and other financing expenses allocated from Predecessor Operating Company
Total interest and other financing expenses
Professional fees
Professional fees allocated from Predecessor Operating Company
Total professional fees
Administrative fees
Administrative expenses allocated from Predecessor Operating Company
Total administrative expenses
Other general and administrative expenses
Other general and administrative expenses allocated from Predecessor Operating Company
Total other general and administrative expenses
Total expenses
Less: expenses waived and reimbursed
Net expenses before income taxes
Income tax expense
Net expenses after income taxes
_______________________________________________________________________________
(1)
Capital gains incentive fee accrual assumes a hypothetical liquidation basis.
$
$
Years Ended December 31,
2016
2015
2014
$
27,551
—
(4,824)
$
25,858
—
(5,219)
22,727
22,011
—
22,011
—
—
—
28,452
—
28,452
3,087
—
3,087
2,683
—
2,683
1,589
—
1,589
80,549
(725)
79,824
152
79,976
$
20,639
20,591
—
20,591
—
—
—
23,374
—
23,374
3,214
3,214
2,450
—
2,450
1,665
—
1,665
71,933
(733)
71,200
160
71,360
$
13,593
5,983
(686)
18,890
12,070
6,248
18,318
(8,573)
2,024
(6,549)
13,269
4,764
18,033
2,390
1,238
3,628
1,470
761
2,231
1,138
555
1,693
56,244
(1,145)
55,099
436
55,535
Our total net operating expenses increased by approximately $8.6 million for the year ended December 31, 2016 as compared to the year ended December 31,
2015. Our management fee increased by approximately $2.1 million, net of a management fee waiver, and incentive fees increased by approximately $1.4 million for the
year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase in management fee and incentive fee from the year ended December 31,
2015 to the year ended December 31, 2016 was attributable to larger invested balances, driven by the proceeds from the October 2016 primary offering of our common
stock, our May 2016 and September 2016 unsecured notes issuances and our September 2016 convertible notes issuance and our use of leverage from our revolving credit
facilities and SBA-guaranteed debentures to originate new investments. No capital gains incentive fee was accrued for the year ended December 31, 2016.
Interest and other financing expenses increased by approximately $5.1 million during the year ended December 31, 2016, primarily due to our issuance of our
unsecured notes and additional issuance of our convertible notes and higher drawn balances on our SBA-guaranteed debentures and NMFC Credit Facility (as defined
below). Our total professional fees, total administrative expenses, net of expenses waived and reimbursed, and total other general and administrative expenses remained
relatively flat for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
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Table of Contents
Our total net operating expenses increased by approximately $15.8 million for the year ended December 31, 2015 as compared to the year ended December 31,
2014. Our management fee increased by approximately $1.7 million, net of a management fee waiver, and incentive fees increased by approximately $2.3 million for the
year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase in management fee and incentive fee from the year ended December 31,
2014 to the year ended December 31, 2015 was attributable to larger invested balances, driven by the proceeds from the September 2015 primary offering of our common
stock, our use of leverage from our revolving credit facilities, SBA-guaranteed debentures and the deployment of the June 2014 Proceeds from the issuance of $115.0
million of convertible notes to originate new investments. No capital gains incentive fee was accrued for the year ended December 31, 2015.
Interest and other financing expenses increased by approximately $5.3 million during the year ended December 31, 2015, to our issuance of $115.0 million of
convertible notes, the closing of the NMFC Credit Facility (as defined below) during the second quarter of 2014 and the drawing on SBA-guaranteed debentures
beginning in the fourth quarter of 2014. Our total professional fees, total administrative expenses and total other general and administrative expenses marginally decreased
by approximately $0.2 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. Our expenses waived and reimbursed decreased
by approximately $0.4 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to the expiration of the expense cap on
March 31, 2014.
Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
(in thousands)
Net realized (losses) gains on investments
Net realized gains on investments allocated from Predecessor Operating Company
Total realized (losses) gains on investments
Net change in unrealized appreciation (depreciation) of investments
Net change in unrealized appreciation (depreciation) of investments allocated from Predecessor
Operating Company
Total change in unrealized appreciation (depreciation) of investments
Net change in unrealized (depreciation) appreciation of securities purchased under collateralized
agreements to resell
Benefit (provision) for taxes
Total net realized gains (losses) and net change in unrealized appreciation (depreciation) of
investments
$
Years Ended December 31,
2016
2015
2014
$
(16,717)
—
(16,717)
40,131
—
40,131
(486)
642
$
(12,789)
—
(12,789)
(35,272)
—
(35,272)
(296)
(1,183)
357
8,568
8,925
(43,863)
940
(42,923)
—
(493)
$
23,570
$
(49,540)
$
(34,491)
Our net realized losses and unrealized gains resulted in a net gain of approximately $23.6 million for the year ended December 31, 2016 compared to the net
realized and unrealized losses resulting in a net loss of approximately $49.5 million for the same period in 2015. 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 year ended December 31, 2016 was primarily driven
by the overall increase in the market prices of our investments during the period and sales or repayments of investments with fair values in excess of December 31, 2015
valuations, resulting in net realized gains being greater than the reversal of the cumulative net unrealized gains for those investments. The net gain was offset by a $17.9
million realized loss on an investment resulting from the modification of terms on a portfolio company that was accounted for as an extinguishment. The benefit for
income taxes was primarily attributable to three equity investments that are held in our three tax blocker corporations as of December 31, 2016.
The net loss of approximately $49.5 million for the year ended December 31, 2015 compared to the net realized gains and unrealized losses resulting in a net loss
of approximately $34.5 million for the same period in 2014. 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 loss for the year ended December 31, 2015 was primarily driven by the overall decrease in the market prices of our
investments during the period and $29.7 million of realized losses on investments resulting from the modification of terms on three portfolio companies that were
accounted for as extinguishments. These losses were partially offset by sales or repayments of investments with fair values in excess of December 31, 2014 valuations,
resulting in net realized gains being greater than the reversal of the cumulative net unrealized gains for those investments which included the sale of two portfolio
companies resulting in realized gains of approximately $14.2 million. The provision for income taxes was primarily attributable to three equity investments that are held
in our three tax blocker corporations as of December 31, 2015.
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Table of Contents
The net loss for the year ended December 31, 2014 was primarily driven by the overall decrease in the market prices of our investments during the period and
the partial write-down related to two portfolio companies. These losses were partially offset by a $5.6 million gain from the sale of NMF Holdings' warrant investments in
one portfolio company and 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. The provision for income taxes was attributable to one warrant investment that is held in a
tax blocker corporation as of December 31, 2014.
Liquidity and Capital Resources
The primary use of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash
distributions to our stockholders or for other general corporate purposes.
Since our IPO, and through December 31, 2016, we raised approximately $533.1 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. We acquired from the Predecessor Operating Company units of the
Predecessor Operating Company equal to the number of shares of our common stock sold in the additional offerings.
On October 28, 2016, we completed a public offering of 5,750,000 shares of common stock (including 750,000 shares of common stock that were issued
pursuant to the full exercise of the option granted to the underwriters to purchase additional shares) at a public offering price of $13.50 per share. The Investment Adviser
paid all of the underwriters' sales load and an additional supplemental payment of $0.25 per share, which reflects the difference between the public offering price of
$13.50 per share and the net proceeds of $13.75 per share. All payments made by the Investment Adviser are not subject to reimbursement by us. We received net
proceeds from this offering of approximately $79.1 million.
Our 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 December 31, 2016, December 31, 2015 and December 31, 2014, we had cash and cash equivalents of approximately $45.9 million, $30.1 million and $23.4
million, respectively. Our cash provided by (used in) operating activities during the years ended December 31, 2016, December 31, 2015 and December 31, 2014, was
approximately $60.5 million, $(63.3) million and $(289.6) million, respectively. Refer to the Predecessor Operating Company's Consolidated Statements of Cash Flows
for the period January 1, 2014 to May 7, 2014 included in an exhibit attached hereto. We expect that all current liquidity needs will be met with cash flows from
operations and other activities.
Borrowings
Holdings Credit Facility—On December 18, 2014 we entered into the Second Amended and Restated Loan and Security Agreement (the "Holdings Credit
Facility"), among us, as the Collateral Manager, NMF Holdings as the Borrower, Wells Fargo Securities, LLC as the Administrative Agent and Wells Fargo Bank,
National Association, as the Lender and Collateral Custodian, which is structured as a revolving credit facility and matures on December 18, 2019.
Immediately prior to amending the Holdings Credit Facility, NMF SLF merged with and into NMF Holdings. The Holdings Credit Facility effectively amended
and restated the Predecessor Holdings Credit Facility (as defined below), merged with the SLF Credit Facility (as defined below), and combined the amount of
borrowings previously available.
The maximum amount of revolving borrowings available under the Holdings Credit Facility is $495.0 million, which is the aggregate of the $280.0 million
previously available under the Predecessor Holdings Credit Facility (as defined below) and the $215.0 million previously available under the SLF Credit Facility (as
defined below). Under the Holdings Credit Facility, NMF Holdings is permitted to borrow up to 25.0%, 45.0% or 70.0% of the purchase price of pledged assets, subject to
approval by Wells Fargo Securities, LLC. The Holdings Credit Facility is non-recourse to us 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 our 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. In addition, the Holdings Credit Facility requires us to maintain a minimum asset coverage ratio. The
covenants are generally not tied to mark to market fluctuations in the prices of NMF Holdings investments, but rather to the performance of the underlying portfolio
companies.
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Effective January 1, 2016, the Holdings Credit Facility bears interest at a rate of LIBOR plus 1.75% per annum for Broadly Syndicated Loans (as defined in the
Loan and Security Agreement) and LIBOR plus 2.50% per annum for all other investments. Previously, the Holdings Credit Facility bore interest at a rate of LIBOR plus
2.00% per annum for Broadly Syndicated Loans (as defined in the Loan and Security Agreement) and LIBOR plus 2.75% per annum for all other investments. The
Holdings Credit Facility also 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).
Prior to December 18, 2014, the Loan and Security Agreement, as amended and restated, dated May 19, 2011 (the "Predecessor Holdings Credit Facility")
among NMF Holdings as the Borrower and Collateral Administrator, Wells Fargo Securities, LLC as the Administrative Agent, and Wells Fargo Bank, National
Association, as the Collateral Custodian, was structured as a revolving credit facility and would mature on October 27, 2016.
The maximum amount of revolving borrowings available under the Predecessor Holdings Credit Facility was $280.0 million. Until December 18, 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, respectively, 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 Predecessor Holdings Credit Facility was amended and restated on May 6, 2014 and as a result, it was non-recourse to us and was 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 Predecessor Holdings Credit
Facility were capitalized on our Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over the life of the Predecessor
Holdings Credit Facility. The Predecessor Holdings Credit Facility contained certain customary affirmative and negative covenants and events of default, including the
occurrence of a change in control. In addition, the Predecessor Holdings Credit Facility required us to maintain a minimum asset coverage ratio. However, the covenants
were generally not tied to mark to market fluctuations in the prices of NMF Holdings' investments, but rather to the performance of the underlying portfolio companies.
The Predecessor Holdings Credit Facility bore interest at a rate of LIBOR plus 2.75% per annum and charged 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, non-usage fees and amortization of financing costs incurred, together, on the Holdings Credit Facility and
the Predecessor Holdings Credit Facility for the years ended December 31, 2016, December 31, 2015 and December 31, 2014.
(in millions)
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
2016
2015
2014
Years Ended December 31,
$
$
$
$
$
$
$
9.5
0.8
1.6
2.8%
3.5%
341.1
$
$
$
$
10.5
0.5
1.6
2.6%
3.2%
394.9
$
7.1
0.2
0.9
2.9%
3.4%
244.6
As of December 31, 2016, December 31, 2015 and December 31, 2014, the outstanding balance on the Holdings Credit Facility was $333.5 million, $419.3
million and $468.1 million, respectively, and NMF Holdings was in compliance with the applicable covenants in the Holdings Credit Facility on such dates.
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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, LLC as the Administrative Agent, and Wells Fargo Bank, National Association,
as the Collateral Custodian, was structured as a revolving credit facility and was set to mature on October 27, 2016. The maximum amount of revolving borrowings
available under the SLF Credit Facility was $215.0 million. The SLF Credit Facility was non-recourse to us 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 were capitalized on our 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 contained certain customary affirmative and
negative covenants and events of default, including the occurrence of a change in control. The covenants were generally not tied to mark to market fluctuations in the
prices of NMF SLF's investments, but rather to the performance of the underlying portfolio companies. NMF SLF was not restricted from the purchase or sale of loans
with an affiliate. Therefore, specified loans could be moved as collateral between the Holdings Credit Facility and the SLF Credit Facility. The SLF Credit Facility
merged with the Holdings Credit Facility on December 18, 2014.
Until December 18, 2014, the SLF Credit Facility permitted 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 was allowed to be derived from second lien loans, subject to approval by Wells Fargo Bank, National Association.
The SLF Credit Facility bore 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 was 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, non-usage fees and amortization of financing costs incurred on the SLF Credit Facility for the years ended
December 31, 2016, December 31, 2015 and December 31, 2014.
(in millions)
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
$
$
$
$
2016(1)
Years Ended December 31,
2015(1)
2014(2)
— $
— $
— $
—%
—%
— $
—
—
—
—%
—%
—
$
$
$
$
4.5
— (3)
0.8
2.2%
2.6%
209.3
(1)
(2)
(3)
Not applicable, as the SLF Credit Facility merged with and into the Holdings Credit Facility on December 18, 2014.
For the year ended December 31, 2014, amounts reported relate to the period from January 1, 2014 to December 17, 2014 (date of merger).
For the year ended December 31, 2014, the total non-usage fee was less than $50 thousand.
As of December 31, 2014, the SLF Credit Facility had merged with the Holdings Credit Facility.
NMFC Credit Facility—The Senior Secured Revolving Credit Agreement, as amended, dated June 4, 2014 (together with the related guarantee and security
agreement, the "NMFC Credit Facility"), among us as the Borrower, Goldman Sachs Bank USA as the Administrative Agent and Collateral Agent, and Goldman Sachs
Bank USA, Morgan Stanley Bank, N.A. and Stifel Bank & Trust 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 of our domestic subsidiaries and proceeds from the NMFC Credit Facility may be used for general corporate purposes,
including the funding of portfolio investments.
As of December 31, 2016, the maximum amount of revolving borrowings available under the NMFC Credit Facility was $122.5 million. We are 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 our 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.
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The NMFC Credit Facility generally bears 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% per annum (as defined in the Senior Secured Revolving Credit Agreement).
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the NMFC Credit Facility for the years
ended December 31, 2016, December 31, 2015 and December 31, 2014.
(in millions)
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
$
$
$
$
2016
2015
2014(1)
Years Ended December 31,
$
$
$
2.0
0.2
0.4
3.0%
3.8%
66.9
$
$
$
$
1.7
0.1
0.4
2.7%
3.5%
60.5
$
0.2
0.1
0.1
2.7%
3.4%
11.2
(1)
For the year ended December 31, 2014, amounts reported relate to the period from June 4, 2014 (commencement of the NMFC Credit Facility) to December 31,
2014.
As of December 31, 2016, December 31, 2015 and December 31, 2014, the outstanding balance on the NMFC Credit Facility was $10.0 million, $90.0 million
and $50.0 million, respectively, and NMFC was in compliance with the applicable covenants in the NMFC Credit Facility on such dates.
Convertible Notes—On June 3, 2014, we closed a private offering of $115.0 million aggregate principal amount of 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 (the "Securities Act"). As of the first anniversary, June 3, 2015, of the Convertible Notes, the
restrictions under Rule 144A under the Securities Act were removed, allowing the Convertible Notes to be eligible and freely tradable without restrictions for resale
pursuant to Rule 144(b)(1) under the Securities Act. On September 30, 2016, the Company closed a public offering of an additional $40.3 million aggregate principal
amount of the Convertible Notes. These additional Convertible Notes constitute a further issuance of, rank equally in right of payment with, and form a single series with
the $115.0 million aggregate principal amount of Convertible Notes that the Company issued on June 3, 2014.
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, which commenced on
December 15, 2014. The Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder's option.
The following table summarizes certain key terms related to the convertible features of our Convertible Notes as of December 31, 2016.
December 31, 2016
$
12.5%
Initial conversion premium
Initial conversion rate(1)
Initial conversion price
Conversion premium at December 31, 2016
Conversion rate at December 31, 2016(1)(2)
Conversion price at December 31, 2016(2)(3)
Last conversion price calculation date
_______________________________________________________________________________
(1)
(2)
(3)
63.2794
15.80
June 3, 2016
62.7746
15.93
11.7%
$
Conversion rates denominated in shares of common stock per $1.0 thousand principal amount of the Convertible Notes converted.
Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
The conversion price in effect at December 31, 2016 was calculated on the last anniversary of the issuance and will be calculated again on the next anniversary,
unless the exercise price shall have changed by more than 1.0% before the anniversary.
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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 $14.05 per share. In no event will the total number of shares of common stock issuable upon conversion exceed 71.1893 per $1.0 thousand principal amount
of the Convertible Notes. We have 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 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 we later secure) 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. As reflected in
Item 8.—Financial Statements and Supplementary Data—Note 12. Earnings Per Share, the issuance is considered part of the if-converted method for calculation of
diluted earnings per share.
We 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,
holders of the Convertible Notes may require us 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 us to provide financial information to the holders of the Convertible Note and the
Trustee if we cease 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.
The following table summarizes the interest expense and amortization of financing costs incurred on the Convertible Notes for the years ended December 31,
2016, December 31, 2015 and December 31, 2014.
(in millions)
Interest expense
Amortization of financing costs
Amortization of premium
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
(1)
(2)
$
$
$
$
2016
2015
2014(1)
Years Ended December 31,
6.3
0.9
— (2)
5.7%
125.2
$
$
$
$
$
5.8
0.7
$
— $
5.6%
115.0
$
3.3
0.4
—
5.6%
115.0
For the year ended December 31, 2014, amounts reported relate to the period from June 3, 2014 (commencement of the Convertible Notes) to December 31, 2014.
For the year ended December 31, 2016, the total amortization of premium was less than $50 thousand.
As of December 31, 2016, December 31, 2015 and December 31, 2014, the outstanding balance on the Convertible Notes was $155.3 million, $115.0 million and
$115.0 million, respectively, and NMFC was in compliance with the terms of the Indenture on such dates.
Unsecured Notes—On May 6, 2016, we issued $50.0 million in aggregate principal amount of five-year unsecured notes that mature on May 15, 2021 (the
“Unsecured Notes”), pursuant to a note purchase agreement, dated May 4, 2016, to an institutional investor in a private placement. On September 30, 2016, we entered
into an amended and restated note purchase agreement (the "NPA") and issued an additional $40.0 million in aggregate principal amount of Unsecured Notes to
institutional investors in a private placement. The NPA provides for future issuances of Unsecured Notes in separate series or tranches. The Unsecured Notes are equal in
priority with our other unsecured indebtedness, including our Convertible Notes.
The Unsecured Notes bear interest at an annual rate of 5.313%, payable semi-annually on May 15 and November 15 of each year, which commenced on
November 15, 2016. This interest rate is subject to increase in the event that: (i) subject to certain exceptions, the Unsecured Notes or we cease to have an investment
grade rating or (ii) the aggregate amount of our unsecured debt falls below $150.0 million. In each such event, we have the option to offer to prepay the Unsecured Notes
at par, in which case holders of the Unsecured Notes who accept the offer would not receive the increased interest rate. In addition, we are obligated to offer to prepay the
Unsecured Notes at par if the Investment Adviser, or an affiliate thereof, ceases to be our investment adviser or if certain change in control events occur with respect to the
Investment Adviser.
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The NPA contains customary terms and conditions for unsecured notes issued in a private placement, including, without limitation, an option to offer to prepay
all or a portion of the Unsecured Notes at par (plus a make-whole amount, if applicable), affirmative and negative covenants such as information reporting, maintenance
of our status as a BDC under the 1940 Act and a RIC under the Internal Revenue Code, minimum stockholders’ equity, minimum asset coverage ratio, and prohibitions on
certain fundamental changes or any subsidiary guarantor, as well as customary events of default with customary cure and notice, including, without limitation,
nonpayment, misrepresentation in a material respect, breach of covenant, cross-default under our other indebtedness or certain significant subsidiaries, certain judgments
and orders, and certain events of bankruptcy.
The following table summarizes the interest expense and amortization of financing costs incurred on the Unsecured Notes for the years ended December 31,
2016, December 31, 2015 and December 31, 2014.
(in millions)
Interest expense
Amortization of financing costs
Effective interest rate
$
Average debt outstanding
_____________________________________________________________________________
(1)
(2)
$
$
2016(1)
2015(2)
2014(2)
Years Ended December 31,
2.3
0.2
5.8%
65.5
$
$
$
— $
— $
—%
— $
—
—
—%
—
For the year ended December 31, 2016, amounts reported relate to the period from May 6, 2016 (issuance of the Unsecured Notes) to December 31, 2016.
Not applicable, as the Unsecured Notes were issued on May 6, 2016.
As of December 31, 2016, the outstanding balance on the Unsecured Notes was $90.0 million and we were in compliance with the terms of the NPA.
SBA-guaranteed debentures—On August 1, 2014, SBIC LP received an SBIC license from the SBA.
The SBIC license allows SBIC LP to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and
other customary procedures. SBA-guaranteed debentures are non-recourse to us, interest only debentures with interest payable semi-annually and have a ten year maturity.
The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-
guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with ten year maturities. The SBA, as a creditor, will have a
superior claim to the assets of SBIC LP over our stockholders in the event SBIC LP is liquidated or the SBA exercises remedies upon an event of default.
The maximum amount of borrowings available under current SBA regulations for a single licensee is $150.0 million as long as the licensee has at least $75.0
million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing.
As of December 31, 2016 and December 31, 2015, SBIC LP had regulatory capital of approximately $75.0 million and $72.4 million, respectively, and SBA-
guaranteed debentures outstanding of $121.7 million and $117.7 million, respectively. The SBA-guaranteed debentures incur upfront fees of 3.425%, which consists of a
1.00% commitment fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. The following table summarizes our SBA-
guaranteed debentures as of December 31, 2016.
(in millions)
Issuance Date
Fixed SBA-guaranteed debentures:
March 25, 2015
September 23, 2015
September 23, 2015
March 23, 2016
September 21, 2016
Total SBA-guaranteed debentures
Maturity Date
Debenture Amount
Interest Rate
SBA Annual Charge
March 1, 2025
September 1, 2025
September 1, 2025
March 1, 2026
September 1, 2026
$
$
81
37.5
37.5
28.8
13.9
4.0
121.7
2.517%
2.829%
2.829%
2.507%
2.051%
0.355%
0.355%
0.742%
0.742%
0.742%
Table of Contents
Prior to pooling, the SBA-guaranteed debentures bear interest at an interim floating rate of LIBOR plus 0.30%. Once pooled, which occurs in March and
September each year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.
The following table summarizes the interest expense and amortization of financing costs incurred on the SBA-guaranteed debentures for the years ended
December 31, 2016, December 31, 2015 and December 31, 2014.
(in millions)
Interest expense
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
(1)
$
$
$
2016
2015
2014(1)
Years ended December 31,
$
$
3.8
0.4
3.1%
3.5%
119.8
$
$
$
1.7
0.2
2.4%
2.7%
71.9
$
— (2)
— (2)
0.9%
1.3%
29.2
For the year ended December 31, 2014, amounts reported relate to the period from August 1, 2014 (receipt of the SBIC license) to December 31, 2014. The initial
SBA-guaranteed debenture borrowing occurred on November 17, 2014.
For the year ended December 31, 2014, the total interest expense and amortization of financing costs were less than $50 thousand.
(2)
The SBIC program is designed to stimulate the flow of private investor capital into eligible small businesses, as defined by the SBA. Under SBA regulations,
SBIC LP is subject to regulatory requirements, including making investments in SBA-eligible businesses, investing at least 25.0% of its investment capital in eligible
smaller businesses, as defined under the 1958 Act, placing certain limitations on the financing terms of investments, regulating the types of financing, prohibiting
investments in small businesses with certain characteristics or in certain industries and requiring capitalization thresholds that limit distributions to us. SBIC LP is subject
to an annual periodic examination by an SBA examiner to determine SBIC LP's compliance with the relevant SBA regulations and an annual financial audit of its
financial statements that are prepared on a basis of accounting other than GAAP (such as ASC 820) by an independent auditor. As of December 31, 2016, December 31,
2015 and December 31, 2014, SBIC LP was in compliance with SBA regulatory requirements.
Off-Balance Sheet Arrangements
We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our 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 December 31, 2016 and December 31, 2015, we had outstanding commitments to third parties to fund investments totaling $44.3
million and $26.3 million, respectively, under various undrawn revolving credit facilities, delayed draw commitments or other future funding commitments.
We may from time to time enter into financing commitment letters or bridge financing commitments, which could require funding in the future. As of
December 31, 2016 and December 31, 2015, we had commitment letters to purchase investments in aggregate par amount of $14.8 million and $0, respectively. As of
December 31, 2016 and December 31, 2015, we had not entered into any bridge financing commitments which could require funding in the future.
As of December 31, 2016 and December 31, 2015, we had unfunded commitments related to our equity investment in SLP II of $7.9 million and $0,
respectively, which may be funded at our discretion.
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Contractual Obligations
A summary of our significant contractual payment obligations as of December 31, 2016 is as follows:
Total
$
(in millions)
Holdings Credit Facility(1)
Convertible Notes(2)
SBA-guaranteed debentures(3)
Unsecured Notes(4)
NMFC Credit Facility(5)
$
Total Contractual Obligations
_______________________________________________________________________________
(1)
333.5
155.3
121.7
90.0
10.0
710.5
$
$
Contractual Obligations Payments Due by Period
Less than
1 Year
1 - 3 Years
3 - 5 Years
More than
5 Years
— $
—
—
—
—
— $
333.5
155.3
—
—
10.0
498.8
$
$
— $
—
—
90.0
—
90.0
$
—
—
121.7
—
—
121.7
Under the terms of the $495.0 million Holdings Credit Facility, all outstanding borrowings under that facility ($333.5 million as of December 31, 2016) must be
repaid on or before December 18, 2019. As of December 31, 2016, there was approximately $161.5 million of possible capacity remaining under the Holdings
Credit Facility.
The $155.3 million Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder's option.
Our SBA-guaranteed debentures will begin to mature on March 1, 2025.
The $90.0 million Unsecured Notes will mature on May 15, 2021 unless earlier repurchased.
Under the terms of the $122.5 million NMFC Credit Facility, all outstanding borrowings under that facility ($10.0 million as of December 31, 2016) must be repaid
on or before June 4, 2019. As of December 31, 2016, there was approximately $112.5 million of possible capacity remaining under the NMFC Credit Facility.
(2)
(3)
(4)
(5)
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 us 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 our 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.
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Distributions and Dividends
Distributions declared and paid to stockholders for the year ended December 31, 2016 totaled $88.8 million.
The following table reflects cash distributions, including dividends and returns of capital, if any, per share that have been declared by our board of directors for
the years ended December 31, 2016 and December 31, 2015:
Fiscal Year Ended
December 31, 2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
December 31, 2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Date Declared
Record Date
Payment Date
Per Share Amount
November 4, 2016
August 2, 2016
May 3, 2016
February 22, 2016
December 15, 2016
September 16, 2016
June 16, 2016
March 17, 2016
December 29, 2016
September 30, 2016
June 30, 2016
March 31, 2016
November 3, 2015
August 4, 2015
May 5, 2015
February 23, 2015
December 16, 2015
September 16, 2015
June 16, 2015
March 17, 2015
December 30, 2015
September 30, 2015
June 30, 2015
March 31, 2015
$
$
$
$
0.34
0.34
0.34
0.34
1.36
0.34
0.34
0.34
0.34
1.36
Tax characteristics of all distributions paid are reported to stockholders on Form 1099 after the end of the calendar year. For the years ended December 31, 2016
and December 31, 2015, total distributions were $88.8 million and $81.0 million, respectively, of which the distributions were comprised of approximately 89.46% and
99.96%, respectively, of ordinary income, 0.00% and 0.00%, respectively, of long-term capital gains and approximately 10.54% and 0.04%, respectively, of a return of
capital. Future quarterly distributions, if any, will be determined by our board of directors.
We intend to pay quarterly distributions to our stockholders in amounts sufficient to maintain our status as a RIC. We intend to distribute approximately all of our
Adjusted Net Investment Income on a quarterly basis and substantially all of our taxable income on an annual basis, except that we may retain certain net capital gains for
reinvestment.
We maintain an "opt out" dividend reinvestment plan on behalf of our common stockholders, pursuant to which each of our stockholders' cash distributions will
be automatically reinvested in additional shares of common stock, unless the stockholder elects to receive cash. See Item 8—Financial Statements and Supplementary
Data—Note 2. Summary of Significant Accounting Policies for additional details regarding our dividend reinvestment plan.
Related Parties
We have entered into a number of business relationships with affiliated or related parties, including the following:
• We have 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.
• We have entered into an Administration Agreement with the Administrator, a wholly-owned subsidiary of New Mountain Capital. The Administrator
arranges our office space and provides office equipment and administrative services necessary to conduct our respective day-to-day operations pursuant to
the Administration Agreement. We reimburse the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its
obligations to us under the Administration Agreement, which includes the fees and expenses associated with performing administrative, finance, and
compliance functions, and the compensation of our chief financial officer and chief compliance officer and their respective staffs. Pursuant to the
Administration Agreement and further restricted by us, the Administrator may, in its own discretion, submit to us for reimbursement some or all of the
expenses that the Administrator has incurred on our behalf during any quarterly period. As a result, the amount of expenses for which we 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
84
Table of Contents
Administrator submits to us for reimbursement in the future. However, it is expected that the Administrator will continue to support part of our expense
burden 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. The Administrator cannot recoup any expenses that the Administrator has previously waived. For the year ended December 31, 2016,
approximately $1.6 million of indirect administrative expenses were included in administrative expenses, of which $0.7 million were waived by the
Administrator. As of December 31, 2016, no indirect administrative expenses were payable to the Administrator.
• We, 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 us, the Investment Adviser and the Administrator, a non-exclusive, royalty-free license to use
the name "New Mountain" and "New Mountain Finance".
In addition, we have adopted a formal code of ethics that governs the conduct of our 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, to
our investment mandates. The Investment Adviser and its affiliates may determine that an investment is appropriate for us 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. On September 12, 2016, we filed an exemptive application with the SEC to permit us to co-
invest with funds or entities managed by the Investment Adviser or its affiliates in certain negotiated transactions where co-investing would otherwise be prohibited under
the 1940 Act. Any such order, if granted by the SEC, will be subject to certain terms and conditions. Furthermore, there is no assurance when, or if, this application for
exemptive relief will be granted by the SEC.
85
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to certain financial market risks, such as interest rate fluctuations. During the year ended December 31, 2016, certain of the loans held in our
portfolio had floating interest rates. As of December 31, 2016, approximately 94.7% of investments at fair value (excluding investments on non-accrual, revolvers,
delayed draws and non-interest bearing equity investments) represent floating-rate investments with a LIBOR floor (includes investments bearing prime interest rate
contracts) and approximately 5.3% of investments at fair value represent fixed-rate investments. Additionally, our 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 our portfolio of investments held on December 31,
2016. Interest expense is calculated based on the terms of our outstanding revolving credit facilities and convertible notes. For our floating rate credit facilities, we use the
outstanding balance as of December 31, 2016. Interest expense on our floating rate credit facilities are calculated using the interest rate as of December 31, 2016, adjusted
for the hypothetical changes in rates, as shown below. The base interest rate case assumes the rates on our portfolio investments remain unchanged from the actual
effective interest rates as of December 31, 2016. These hypothetical calculations are based on a model of the investments in our portfolio, held as of December 31, 2016,
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
–25 Basis Points
Base Interest Rate
+100 Basis Points
+200 Basis Points
+300 Basis Points
_______________________________________________________________________________
(1)
Limited to the lesser of the December 31, 2016 LIBOR rates or a decrease of 25 basis points.
We were not exposed to any foreign currency exchange risks as of December 31, 2016.
86
Estimated Percentage
Change in Interest
Income Net of
Interest Expense
(unaudited)
0.78% (1)
—%
7.84%
17.26%
26.88%
Table of Contents
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
New Mountain Finance Corporation
AUDITED FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities as of December 31, 2016 and December 31, 2015
Consolidated Statements of Operations for the years ended December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Schedule of Investments as of December 31, 2016
Consolidated Schedule of Investments as of December 31, 2015
Notes to the Consolidated Financial Statements of New Mountain Finance Corporation
PAGE
88
89
90
91
92
93
104
115
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Table of Contents
Deloitte & Touche LLP
30 Rockefeller Plaza
New York, NY 10112
USA
Tel: + 1 212 492 4000
Fax: + 1 212 489 1687
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
New Mountain Finance Corporation
We have audited the accompanying consolidated statements of assets and liabilities of New Mountain Finance Corporation and subsidiaries (the “Company”), including
the consolidated schedules of investments, as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in net assets, and cash flows
for each of the three years in the period ended December 31, 2016 and the consolidated financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments as of December 31, 2016
and 2015, by correspondence with the custodian, loan agents and borrowers; where replies were not received we performed other auditing procedures. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements and consolidated financial highlights referred to above present fairly, in all material respects, the financial position
of New Mountain Finance Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations, changes in their net assets, and their cash
flows for each of the three years in the period ended December 31, 2016 and the financial highlights for each of the five years in the period then ended in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 28, 2017, expressed an unqualified opinion on the Company's internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 28, 2017
88
Table of Contents
Assets
Investments at fair value
New Mountain Finance Corporation
Consolidated Statements of Assets and Liabilities
(in thousands, except shares and per share data)
December 31, 2016
December 31, 2015
Non-controlled/non-affiliated investments (cost of $1,379,603 and $1,438,415, respectively)
$
1,346,556
$
1,377,515
Non-controlled/affiliated investments (cost of $54,996 and $89,047, respectively)
Controlled investments (cost of $140,579 and $41,254, respectively)
Total investments at fair value (cost of $1,575,178 and $1,568,716, respectively)
Securities purchased under collateralized agreements to resell (cost of $30,000 and $30,000, respectively)
Cash and cash equivalents
Interest and dividend receivable
Receivable from unsettled securities sold
Receivable from affiliates
Other assets
Total assets
Liabilities
Borrowings
Holdings Credit Facility
Convertible Notes
SBA-guaranteed debentures
Unsecured Notes
NMFC Credit Facility
Deferred financing costs (net of accumulated amortization of $12,279 and $8,822, respectively)
Net borrowings
Management fee payable
Incentive fee payable
Interest payable
Payable for unsettled securities purchased
Deferred tax liability
Payable to affiliates
Other liabilities
Total liabilities
Commitments and contingencies (See Note 9)
Net assets
Preferred stock, par value $0.01 per share, 2,000,000 shares authorized, none issued
Common stock, par value $0.01 per share, 100,000,000 shares authorized, 69,755,387 and 64,005,387 shares issued, respectively,
and 69,717,814 and 64,005,387 shares outstanding, respectively
Paid in capital in excess of par
Treasury stock at cost, 37,573 and 0 shares held, respectively
Accumulated undistributed net investment income
Accumulated undistributed net realized (losses) gains on investments
Net unrealized (depreciation) appreciation (net of provision for taxes of $1,034 and $1,676, respectively)
Total net assets
Total liabilities and net assets
Number of shares outstanding
Net asset value per share
57,440
154,821
1,558,817
29,218
45,928
17,833
990
346
2,886
87,287
47,422
1,512,224
29,704
30,102
13,832
—
360
1,924
1,656,018
$
1,588,146
333,513
$
155,523
121,745
90,000
10,000
(14,041)
696,740
5,852
5,745
3,172
2,740
1,034
136
2,037
419,313
115,000
117,745
—
90,000
(13,992)
728,066
5,466
5,622
2,343
5,441
1,676
564
2,060
717,456
751,238
—
698
1,001,862
(460)
2,073
(36,947)
(28,664)
938,562
1,656,018
69,717,814
13.46
$
$
$
—
640
899,713
—
4,164
1,342
(68,951)
836,908
1,588,146
64,005,387
13.08
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
89
New Mountain Finance Corporation
Consolidated Statements of Operations
(in thousands, except shares and per share data)
Years Ended December 31,
2016
2015
2014
Table of Contents
Investment income(1)
From non-controlled/non-affiliated investments:
Interest income
Dividend income
Other income
From non-controlled/affiliated investments:
Interest income
Dividend income
Other income
From controlled investments:
Interest income
Dividend income
Other income
Investment income allocated from New Mountain Finance Holdings, L.L.C.(2)
Interest income
Dividend income
Other income
Total investment income
Expenses
Incentive fee(1)
Capital gains incentive fee(1)
Total incentive fees(1)
Management fee(1)
Interest and other financing expenses(1)
Professional fees(1)
Administrative expenses(1)
Other general and administrative expenses(1)
Net expenses allocated from New Mountain Finance Holdings, L.L.C.(2)
Total expenses
Less: management fee waived (see Note 5)(1)
Less: expenses waived and reimbursed (see Note 5)(1)
Net expenses
Net investment income before income taxes
Income tax expense(1)
Net investment income
Net realized (losses) gains:
Non-controlled/non-affiliated investments(1)
Investments allocated from New Mountain Finance Holdings, L.L.C.(2)
Net change in unrealized appreciation (depreciation):
Non-controlled/non-affiliated investments(1)
Non-controlled/affiliated investments(1)
Controlled investments(1)
Securities purchased under collateralized agreements to resell(1)
Investments allocated from New Mountain Finance Holdings, L.L.C.(2)
Benefit (provision) for taxes(1)
Net realized and unrealized gains (losses)
Net increase in net assets resulting from operations
Basic earnings per share
Weighted average shares of common stock outstanding—basic (See Note 12)
Diluted earnings per share
Weighted average shares of common stock outstanding—diluted (See Note 12)
Distributions declared and paid per share
_______________________________________________________________________________
$
140,983
$
132,665
$
220
7,708
4,538
3,884
1,193
1,904
7,096
558
—
—
—
(407)
5,996
5,402
3,619
1,965
2,007
2,559
49
—
—
—
168,084
153,855
22,011
—
22,011
27,551
28,452
3,087
2,683
1,589
—
85,373
(4,824)
(725)
79,824
88,260
152
88,108
(16,717)
—
30,742
1,315
8,074
(486)
—
642
23,570
111,678
1.72
64,918,191
1.60
72,863,387
1.36
$
$
$
$
$
$
$
$
20,591
—
20,591
25,858
23,374
3,214
2,450
1,665
—
77,152
(5,219)
(733)
71,200
82,655
160
82,495
(12,789)
—
(40,807)
(633)
6,168
(296)
—
(1,183)
(49,540)
32,955
0.55
59,715,290
0.55
66,968,089
1.36
$
$
$
$
85,123
1,243
4,023
—
1,066
468
—
—
—
40,515
2,368
795
135,601
12,070
(8,573)
3,497
13,593
13,269
2,390
1,470
1,138
20,808
56,165
(686)
(380)
55,099
80,502
436
80,066
357
8,568
(43,324)
(539)
—
—
940
(493)
(34,491)
45,575
0.88
51,846,164
0.86
56,157,835
1.48
(1)
(2)
For the year ended December 31, 2014, the amounts reported relate to the period from May 8, 2014 to December 31, 2014.
For the year ended December 31, 2014, the amounts reported relate to the period from January 1, 2014 to May 7, 2014.
The accompanying notes are an integral part of these consolidated financial statements.
90
Table of Contents
New Mountain Finance Corporation
Consolidated Statements of Changes in Net Assets
(in thousands, except share data)
Years Ended December 31,
2016
2015
2014
Increase (decrease) in net assets resulting from operations:
Net investment income(1)
Net investment income allocated from New Mountain Finance Holdings, L.L.C.(2)
Net realized (losses) gains on investments(1)
Net realized gains on investments allocated from New Mountain Finance Holdings, L.L.C.(2)
Net change in unrealized appreciation (depreciation) of investments(1)
Net change in unrealized (depreciation) appreciation of securities purchased under collateralized agreements to
resell(1)
Net change in unrealized appreciation (depreciation) of investments allocated from New Mountain Finance
Holdings, L.L.C.(2)
Benefit (provision) for taxes(1)
Net increase in net assets resulting from operations
Capital transactions
Net proceeds from shares sold
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C.(2)
Deferred offering costs(1)
Value of shares issued for exchanged units
Distributions declared to stockholders from net investment income
Distributions declared to stockholders from net realized gains
Reinvestment of distributions
Repurchase of shares under repurchase program
Total net (decrease) increase in net assets resulting from capital transactions
Net increase in net assets
Net assets at the beginning of the period
Net assets at the end of the period(3)
Capital share activity
Shares sold
Shares issued for exchanged units
Shares issued from reinvestment of distributions
Shares reissued from repurchase program in connection with reinvestment of distributions
Shares repurchased under repurchase program
Net increase in shares outstanding
_______________________________________________________________________________
$
88,108
$
82,495
$
—
(16,717)
—
40,131
(486)
—
642
111,678
79,063
—
(328)
—
(88,764)
—
2,953
(2,948)
(10,024)
101,654
836,908
—
(12,789)
—
(35,272)
(296)
—
(1,183)
32,955
79,415
—
(285)
—
(81,002)
—
3,655
—
1,783
34,738
802,170
$
938,562
$
836,908
$
57,196
22,870
357
8,568
(43,863)
—
940
(493)
45,575
141,157
(250)
(476)
38,840
(71,365)
(6,247)
4,829
—
106,488
152,063
650,107
802,170
5,750,000
—
—
210,926
(248,499)
5,712,427
5,750,000
—
257,497
—
—
9,775,000
2,671,938
326,197
—
—
6,007,497
12,773,135
(1)
(2)
(3)
For the year ended December 31, 2014, the amounts reported relate to the period from May 8, 2014 to December 31, 2014.
For the year ended December 31, 2014, the amounts reported relate to the period from January 1, 2014 to May 7, 2014.
For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, includes accumulated undistributed net investment income of $2,073, $4,164
and $2,530, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
91
Table of Contents
New Mountain Finance Corporation
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net increase in net assets resulting from operations
Adjustments to reconcile net (increase) decrease in net assets resulting from operations to net cash (used in) provided by
operating activities:
Net investment income allocated from New Mountain Finance Holdings, L.L.C.(2)
Net realized losses (gains) on investments(1)
Net realized gains on investments allocated from New Mountain Finance Holdings, L.L.C.(2)
Net change in unrealized (appreciation) depreciation of investments(1)
Net change in unrealized depreciation (appreciation) of securities purchased under collateralized agreements to resell
Net change in unrealized (appreciation) depreciation of investments allocated from New Mountain Finance Holdings,
L.L.C.(2)
Amortization of purchase discount(1)
Amortization of deferred financing costs(1)
Amortization of premium on Convertible Notes(1)
Non-cash investment income(1)
(Increase) decrease in operating assets:
Cash and cash equivalents from New Mountain Finance Holdings, L.L.C.(3)
Purchase of investments and delayed draw facilities(1)
Proceeds from sales and paydowns of investments(1)
Cash received for purchase of undrawn portion of revolving credit
or delayed draw facilities(1)
Cash paid for purchase of drawn portion of revolving credit facilities(1)
Cash paid for drawn revolvers(1)
Cash repayments on drawn revolvers(1)
Cash paid for securities purchased under collateralized agreements to resell(1)
Interest and dividend receivable(1)
Receivable from affiliates(1)
Receivable from unsettled securities sold(1)
Other assets(1)
Purchase of investment in New Mountain Finance Holdings, L.L.C.(2)
Distributions from New Mountain Finance Holdings, L.L.C.(2)
Increase (decrease) in operating liabilities(1):
Incentive fee payable
Management fee payable
Payable for unsettled securities purchased
Interest payable
Deferred tax liability
Payable to affiliates
Capital gains incentive fee payable
Other liabilities
Net cash flows provided by (used in) operating activities
Cash flows from financing activities
Net proceeds from shares sold
Distributions paid
Offering costs paid(1)
Proceeds from Holdings Credit Facility(1)
Repayment of Holdings Credit Facility(1)
Proceeds from Convertible Notes(1)
Proceeds from SBA-guaranteed debentures(1)
Proceeds from Unsecured Notes
Proceeds from NMFC Credit Facility(1)
Repayment of NMFC Credit Facility(1)
Proceeds from SLF Credit Facility(1)
Repayment of SLF Credit Facility(1)
Deferred financing costs paid(1)
Repurchase of shares under repurchase program
Net cash flows (provided by) used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosure of cash flow information
Cash interest paid
Income taxes paid
Non-cash operating activities:
Non-cash activity on investments
Non-cash financing activities:
Value of shares reissued from repurchase program in connection with dividend reinvestment plan
Value of shares issued in connection with dividend reinvestment plan
Accrual for offering costs(1)
Accrual for deferred financing costs(1)
Years Ended December 31,
2016
2015
2014
$
111,678
$
32,955
$
45,575
—
16,717
—
(40,131)
486
—
(3,096)
3,457
(28)
(7,644)
—
(557,897)
547,078
177
(348)
(11,651)
10,202
—
(4,001)
14
(990)
(1,080)
—
—
123
386
(2,701)
829
(642)
(428)
—
(2)
60,508
79,063
(85,811)
(261)
177,600
(263,400)
40,552
4,000
90,000
166,500
(246,500)
—
—
(3,477)
(2,948)
(44,682)
15,826
30,102
45,928
23,768
85
7,186
2,953
—
598
99
$
$
$
$
—
12,789
—
35,272
296
—
(2,511)
2,955
—
(5,978)
—
(609,667)
483,936
157
(3,227)
(4,376)
6,052
—
(2,088)
130
8,912
(156)
—
—
819
322
(21,019)
991
1,183
(258)
—
(836)
(63,347)
79,415
(77,347)
(325)
400,355
(449,150)
—
80,245
—
148,800
(108,800)
—
—
(3,189)
—
70,004
6,657
23,445
30,102
18,683
217
$
$
60,652
$
— $
3,655
638
81
(22,870)
(357)
(8,568)
43,863
—
(940)
(1,721)
1,713
—
(3,479)
957
(529,540)
261,747
29
(2,548)
—
380
(30,000)
(207)
(106)
(8,912)
196
(58,644)
15,247
(1,522)
(911)
17,054
1,259
493
589
(8,573)
225
(289,571)
141,157
(72,783)
(478)
384,721
(314,400)
115,000
37,500
—
72,000
(22,000)
21,255
(37,700)
(11,256)
—
313,016
23,445
—
23,445
9,924
437
—
—
4,829
516
375
$
$
$
$
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C(2)
SLF Credit Facility merger with the Holdings Credit Facility(1)
New Mountain Finance AIV Holdings Corporation exchange of New Mountain Finance Holdings, L.L.C. units for shares
_______________________________________________________________________________
—
—
—
—
—
—
(250)
198,555
38,840
(1)
(2)
(3)
For the year ended December 31, 2014, the amounts reported relate to the period from May 8, 2014 to December 31, 2014.
For the year ended December 31, 2014, the amounts reported relate to the period from January 1, 2014 to May 7, 2014.
Represents the cash and cash equivalent balance of New Mountain Finance Holdings, L.L.C.'s at the date of restructuring. See Note 1. Formation and Business Purpose.
The accompanying notes are an integral part of these consolidated financial statements.
92
Table of Contents
Portfolio Company, Location and Industry(1)
Non-Controlled/Non-Affiliated Investments
Funded Debt Investments - Australia
Project Sunshine IV Pty Ltd**
New Mountain Finance Corporation
Consolidated Schedule of Investments
December 31, 2016
(in thousands, except shares)
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Media
First lien (2)
8.00% (L + 7.00%/M)
9/23/2019
Total Funded Debt Investments - Australia
Funded Debt Investments - Luxembourg
Pinnacle Holdco S.à.r.l. / Pinnacle (US) Acquisition
Co Limited**
Software
Total Funded Debt Investments - Luxembourg
Funded Debt Investments - Netherlands
Eiger Acquisition B.V. (Eiger Co-Borrower, LLC)
**
Second lien (2)
Second lien (3)
10.50% (L + 9.25%/Q)
10.50% (L + 9.25%/Q)
7/30/2020
7/30/2020
Software
Second lien (3)
10.13% (L + 9.13%/Q)
2/17/2023
$
$
$
$
$
$
$
$
$
6,012
6,012
$
$
5,992
5,992
$
$
6,005
6,005
0.64 %
0.64 %
24,630
$
24,362
$
18,103
8,204
32,834
8,332
32,694
32,834
$
32,694
$
6,030
24,133
24,133
2.57 %
2.57 %
10,000
10,000
32,500
32,500
$
$
$
$
9,371
9,371
31,814
31,814
$
$
$
$
29,475
$
28,444
$
15,000
44,475
4,563
2,583
18,187
19,813
45,146
14,659
43,103
4,530
2,563
17,984
19,282
44,359
9,799
9,799
1.04 %
1.04 %
29,514
29,514
29,634
15,038
44,672
4,540
2,570
17,823
19,417
44,350
3.14 %
3.14 %
4.76 %
4.73 %
Second lien (3)
10.50% (L + 9.50%/Q)
1/31/2023
First lien (2)
Subordinated (3)
6.50% (L + 5.50%/M)
11.38%/S
First lien (4)
First lien (2)
Second lien (4)
Second lien (3)
5.99% (L + 4.75%/Q)
5.99% (L + 4.75%/Q)
10.31% (L + 8.75%/Q)
10.31% (L + 8.75%/Q)
12/4/2020
12/1/2021
11/19/2021
11/19/2021
11/18/2022
11/18/2022
First lien (2)
7.75% (L + 6.75%/Q)
9/28/2020
41,544
41,150
41,543
4.43 %
Second lien (3)
Second lien (2)
10.00% (L + 9.00%/M)
10.00% (L + 9.00%/M)
10/20/2023
10/20/2023
20,200
20,000
40,200
19,480
19,282
38,762
20,394
20,192
40,586
4.32 %
First lien (3)
10.50% (Base + 8.00%/Q)
5/12/2019
40,000
39,903
39,825
4.24 %
Second lien (2)
9.25% (L + 8.25%/Q)
11/1/2024
36,000
35,458
37,159
3.96 %
The accompanying notes are an integral part of these consolidated financial statements.
93
Total Funded Debt Investments - Netherlands
Funded Debt Investments - United Kingdom
Air Newco LLC**
Software
Total Funded Debt Investments - United Kingdom
Funded Debt Investments - United States
TIBCO Software Inc.
Software
Navex Global, Inc.
Software
Hill International, Inc.
Business Services
AssuredPartners, Inc.
Business Services
Tenawa Resource Holdings LLC (13)
Tenawa Resource Management LLC
Energy
Kronos Incorporated
Software
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
PetVet Care Centers LLC
Consumer Services
Ascend Learning, LLC
Education
Weston Solutions, Inc.
Business Services
Redbox Automated Retail, LLC
Second lien (3)
Second lien (3)
Second lien (3)
10.25% (L + 9.25%/Q)
6/17/2021
$
24,000
$
23,820
$
24,240
10.50% (L + 9.50%/Q)
9.50% (L + 8.50%/Q)
6/17/2021
6/17/2021
6,500
6,000
36,500
6,444
5,910
36,174
6,565
5,910
36,715
3.91 %
Second lien (3)
9.50% (L + 8.50%/Q)
11/30/2020
35,227
34,895
34,963
3.73 %
First lien (2)
10.50% (L + 9.50%/M)
12/31/2020
34,821
34,821
34,821
3.71 %
Consumer Services
First lien (2)
8.50% (L + 7.50%/Q)
9/27/2021
33,469
32,987
32,601
3.47 %
Valet Waste Holdings, Inc.
Business Services
First lien (2)
8.00% (L + 7.00%/Q)
First lien (3)(11) - Drawn
8.00% (L + 7.00%/Q)
VetCor Professional Practices LLC
Consumer Services
Integro Parent Inc.
Business Services
ProQuest LLC
Business Services
CRGT Inc.
Federal Services
Evo Payments International, LLC
Business Services
Severin Acquisition, LLC
Software
Marketo, Inc.
Software
Ansira Holdings, Inc.
Business Services
Pelican Products, Inc.
Business Products
First lien (4)
First lien (2)
First lien (4)
7.25% (L + 6.25%/Q)
7.25% (L + 6.25%/Q)
7.25% (L + 6.25%/Q)
First lien (4)(11) - Drawn
7.25% (L + 6.25%/Q)
First lien (2)
Second lien (3)
6.75% (L + 5.75%/Q)
10.25% (L + 9.25%/Q)
10/31/2022
10/30/2023
9/24/2021
9/24/2021
4/20/2021
4/20/2021
4/20/2021
4/20/2021
29,625
2,250
31,875
19,306
7,793
2,677
373
30,149
19,806
10,000
29,806
29,320
2,222
31,542
19,159
7,652
2,655
365
29,831
19,463
9,910
29,373
3.40 %
29,625
2,250
31,875
19,306
7,793
2,677
373
30,149
3.21 %
19,607
9,750
29,357
3.13 %
Second lien (3)
10.00% (L + 9.00%/M)
12/15/2022
28,700
28,188
28,700
3.06 %
First lien (2)
7.50% (L + 6.50%/M)
12/19/2020
27,409
27,252
27,478
2.93 %
First lien (2)
Second lien (2)
6.00% (L + 5.00%/M)
10.00% (L + 9.00%/M)
12/22/2023
12/23/2024
2,500
25,000
27,500
2,487
24,813
27,300
2,515
24,813
27,328
2.91 %
Second lien (4)
Second lien (4)
Second lien (4)
Second lien (3)
Second lien (3)
Second lien (4)
9.75% (L + 8.75%/Q)
9.75% (L + 8.75%/Q)
10.25% (L + 9.25%/Q)
10.00% (L + 9.00%/Q)
10.25% (L + 9.25%/Q)
10.25% (L + 9.25%/Q)
7/29/2022
7/29/2022
7/29/2022
7/29/2022
7/29/2022
7/29/2022
15,000
14,873
15,000
4,154
3,273
2,361
1,825
300
4,118
3,243
2,338
1,807
297
4,154
3,305
2,384
1,843
303
26,913
26,676
26,989
2.88 %
First lien (3)
10.50% (L + 9.50%/Q)
8/16/2021
26,820
26,442
26,418
2.81 %
First lien (2)
7.50% (L + 6.50%/Q)
12/20/2022
26,182
26,051
26,051
2.78 %
Second lien (3)
Second lien (2)
9.25% (L + 8.25%/Q)
9.25% (L + 8.25%/Q)
4/9/2021
4/9/2021
15,500
10,000
25,500
15,506
10,107
25,613
15,170
9,788
24,958
2.66 %
The accompanying notes are an integral part of these consolidated financial statements.
94
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
DigiCert Holdings, Inc.
Software
nThrive, Inc. (fka Precyse Acquisition Corp.)
Healthcare Services
AAC Holding Corp.
Education
Ryan, LLC
Business Services
EN Engineering, LLC
Business Services
TWDiamondback Holdings Corp. (15)
Diamondback Drugs of Delaware, L.L.C.
(TWDiamondback II Holdings LLC)
Distribution & Logistics
Vision Solutions, Inc.
Software
KeyPoint Government Solutions, Inc.
First lien (2)
6.00% (L + 5.00%/Q)
10/21/2021
$
24,750
$
24,134
$
24,719
2.63 %
Second lien (2)
10.75% (L + 9.75%/M)
4/20/2023
25,000
24,593
24,711
2.63 %
First lien (2)
8.25% (L + 7.25%/M)
9/30/2020
23,918
23,637
23,918
2.55 %
First lien (2)
6.75% (L + 5.75%/M)
8/7/2020
23,927
23,656
23,785
2.53 %
First lien (2)
First lien (2)
7.00% (L + 6.00%/Q)
7.78% (Base + 5.55%/Q)
6/30/2021
6/30/2021
First lien (4)
First lien (3)
First lien (4)
9.75% (L + 8.75%/Q)
9.75% (L + 8.75%/Q)
9.75% (L + 8.75%/Q)
11/19/2019
11/19/2019
11/19/2019
21,107
2,189
23,296
19,895
2,158
605
22,658
20,940
2,170
23,110
19,895
2,158
605
22,658
21,107
2,189
23,296
19,895
2,158
605
22,658
2.48 %
2.41 %
First lien (2)
7.50% (Base + 6.50%/Q)
6/16/2022
22,359
22,153
22,317
2.38 %
Federal Services
First lien (2)
7.75% (L + 6.50%/Q)
11/13/2017
22,411
22,312
22,299
2.38 %
TW-NHME Holdings Corp. (20)
National HME, Inc.
Healthcare Services
IT'SUGAR LLC
Retail
First American Payment Systems, L.P.
Second lien (4)
Second lien (3)
10.25% (L + 9.25%/Q)
10.25% (L + 9.25%/Q)
7/14/2022
7/14/2022
21,500
500
22,000
21,268
494
21,762
21,500
500
22,000
2.34 %
First lien (4)
10.50% (L + 9.50%/Q)
10/23/2019
20,790
20,189
20,467
2.18 %
Business Services
Second lien (2)
10.75% (L + 9.50%/M)
4/12/2019
18,643
18,483
18,643
1.99 %
DCA Investment Holding, LLC
Healthcare Services
First lien (2)
6.25% (L + 5.25%/Q)
First lien (3)(11) - Drawn
8.00% (P + 4.25%/Q)
7/2/2021
7/2/2021
17,632
752
18,384
17,493
744
18,237
17,632
752
18,384
1.96 %
AgKnowledge Holdings Company, Inc.
Business Services
Second lien (2)
9.25% (L + 8.25%/M)
7/23/2020
18,500
18,379
18,046
1.92 %
Project Alpha Intermediate Holding, Inc.
Software
First lien (2)
9.25% (L + 8.25%/M)
8/22/2022
17,955
17,784
17,775
1.89 %
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
First lien (4)
8.25% (L + 7.25%/Q)
8/4/2022
17,775
17,626
17,775
1.89 %
Sierra Hamilton LLC / Sierra Hamilton Finance, Inc.
Energy
First lien (2)
First lien (3)
12.25%/S (8)
12.25%/S (8)
12/15/2018
12/15/2018
25,000
2,660
27,660
25,000
2,231
27,231
16,012
1,704
17,716
1.89 %
The accompanying notes are an integral part of these consolidated financial statements.
95
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Greenway Health, LLC (fka Vitera Healthcare
Solutions, LLC)
Software
YP Holdings LLC / Print Media Holdings LLC (12)
YP LLC / Print Media LLC
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
First lien (2)
Second lien (2)
6.00% (L + 5.00%/Q)
9.25% (L + 8.25%/Q)
11/4/2020
$
1,891
$
1,880
$
11/4/2021
14,000
15,891
13,448
15,328
1,865
13,650
15,515
1.65 %
Media
First lien (2)
12.25% (L + 11.00%/M)
6/4/2018
15,267
15,197
15,191
1.62 %
Netsmart Inc. / Netsmart Technologies, Inc.
Healthcare Information Technology
Second lien (2)
10.50% (L + 9.50%/Q)
10/19/2023
15,000
14,648
14,944
1.59 %
Cvent, Inc.
Software
Amerijet Holdings, Inc.
Distribution & Logistics
SW Holdings, LLC
Business Services
Poseidon Intermediate, LLC
Software
Zywave, Inc.
Software
Aricent Technologies
Business Services
QC McKissock Investment, LLC (14)
McKissock, LLC
Education
Quest Software US Holdings Inc.
Software
Masergy Holdings, Inc.
Business Services
PowerPlan Holdings, Inc.
Software
FR Arsenal Holdings II Corp.
First lien (3)
Second lien (3)
6.00% (L + 5.00%/Q)
11.00% (L + 10.00%/Q)
First lien (4)
First lien (4)
9.00% (L + 8.00%/M)
9.00% (L + 8.00%/M)
11/29/2023
5/29/2024
7/15/2021
7/15/2021
5,000
10,000
15,000
12,536
2,089
14,625
4,963
9,851
14,814
12,449
2,075
14,524
5,064
9,850
14,914
12,442
2,074
14,516
1.59 %
1.55 %
Second lien (4)
9.75% (L + 8.75%/Q)
12/30/2021
14,265
14,147
14,265
1.52 %
Second lien (2)
9.50% (L + 8.50%/Q)
8/15/2023
13,000
12,829
13,000
1.39 %
Second lien (4)
10.00% (L + 9.00%/Q)
11/17/2023
11,000
10,918
10,918
1.16 %
Second lien (2)
9.50% (L + 8.50%/Q)
4/14/2022
12,500
12,316
10,719
1.14 %
First lien (2)
First lien (2)
First lien (2)
7.50% (L + 6.50%/Q)
7.50% (L + 6.50%/Q)
7.50% (L + 6.50%/Q)
8/5/2019
8/5/2019
8/5/2019
6,463
3,081
994
10,538
6,421
3,064
988
10,473
6,463
3,081
994
10,538
1.12 %
First lien (2)
7.00% (L + 6.00%/Q)
10/31/2022
10,000
9,854
10,152
1.08 %
Second lien (2)
9.50% (L + 8.50%/Q)
12/16/2024
10,000
9,938
10,000
1.07 %
Second lien (2)
10.00% (L + 9.00%/M)
2/23/2023
10,000
9,916
10,000
1.07 %
Business Services
First lien (2)
8.25% (L + 7.25%/Q)
9/8/2022
9,975
9,879
9,875
1.05 %
American Tire Distributors, Inc.
Distribution & Logistics
Subordinated (3)
10.25%/S
3/1/2022
9,700
9,523
9,353
1.00 %
Harley Marine Services, Inc.
Distribution & Logistics
Second lien (2)
10.50% (L + 9.25%/Q)
12/20/2019
9,000
8,897
8,640
0.92 %
Ministry Brands, LLC
Software
First lien (3)(11) - Drawn
6.00% (L + 5.00%/Q)
Second lien (3)
10.25% (L + 9.25%/Q)
12/2/2022
6/2/2023
350
7,840
8,190
348
7,782
8,130
348
7,781
8,129
0.87 %
The accompanying notes are an integral part of these consolidated financial statements.
96
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Lonestar Intermediate Super Holdings, LLC
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Business Services
Subordinated (3)
10.00% (L + 9.00%/M)
8/31/2021
$
7,000
$
6,934
$
7,210
0.77 %
J.D. Power and Associates
Business Services
Second lien (3)
9.50% (L + 8.50%/Q)
9/7/2024
7,000
6,898
7,035
0.75 %
Confie Seguros Holding II Co.
Consumer Services
Second lien (2)
10.25% (L + 9.00%/M)
5/8/2019
6,957
6,952
6,919
0.74 %
Sotera Defense Solutions, Inc. (Global Defense
Technology & Systems, Inc.)
Federal Services
First lien (2)
9.00% (L + 7.50%/Q)
4/21/2017
6,396
6,389
6,300
0.67 %
Solera LLC / Solera Finance, Inc.
Software
VF Holding Corp.
Software
ADG, LLC
Subordinated (3)
10.50%/S
3/1/2024
5,000
4,768
5,650
0.60 %
Second lien (3)
10.00% (L + 9.00%/Q)
6/28/2024
5,000
4,952
4,950
0.53 %
Healthcare Services
Second lien (3)
10.00% (L + 9.00%/Q)
3/28/2024
5,000
4,926
4,925
0.53 %
Vencore, Inc. (fka The SI Organization Inc.)
Federal Services
Second lien (3)
9.75% (L + 8.75%/Q)
5/23/2020
4,000
3,928
4,039
0.43 %
Transtar Holding Company
Distribution & Logistics
York Risk Services Holding Corp.
Second lien (3)
Second lien (2)
13.50% (P + 9.75%/Q) (8)
13.50% (P + 9.75%/Q) (8)
10/9/2019
10/9/2019
36,112
28,300
64,412
3,155
28,011
31,166
2,167
1,698
3,865
0.41 %
Business Services
Subordinated (3)
8.50%/S
10/1/2022
3,000
3,000
2,520
0.27 %
Ensemble S Merger Sub, Inc.
Software
Subordinated (3)
9.00%/S
9/30/2023
2,000
1,939
2,135
0.23 %
Education Management Corporation (19)
Education Management II LLC
Education
First lien (2)
First lien (3)
First lien (2)
First lien (3)
5.50% (L + 4.50%/Q)
5.50% (L + 4.50%/Q)
8.50% (L + 1.00% + 6.50% PIK/Q)*
8.50% (L + 1.00% + 6.50% PIK/Q)*
7/2/2020
7/2/2020
7/2/2020
7/2/2020
250
141
467
263
239
136
416
235
61
35
22
12
Total Funded Debt Investments - United States
Total Funded Debt Investments
Equity - United States
Tenawa Resource Holdings LLC (13)
QID NGL LLC
Energy
TWDiamondback Holdings Corp. (15)
Ordinary shares (7)
Distribution & Logistics
Preferred shares (4)
TW-NHME Holdings Corp. (20)
Healthcare Services
Ancora Acquisition LLC
Education
Preferred shares (4)
Preferred shares (4)
Preferred shares (4)
Preferred shares (6)
1,121
1,026
130
0.01 %
$
$
1,339,099
1,420,445
$
$
1,290,033
1,369,904
$
$
1,261,394
134.41 %
1,330,845
141.80 %
—
—
—
—
—
—
—
—
—
—
—
—
5,290,997
$
5,291
$
6,434
0.69 %
200
100
16
6
2,000
2,664
0.28 %
1,000
158
68
1,226
1,497
236
91
1,824
0.19 %
372
83
393
0.04 %
The accompanying notes are an integral part of these consolidated financial statements.
97
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Portfolio Company, Location and Industry(1)
Education Management Corporation (19)
Education
Total Shares - United States
Warrants - United States
YP Holdings LLC / Print Media Holdings LLC (12)
YP Equity Investors LLC
Media
IT'SUGAR LLC
Retail
ASP LCG Holdings, Inc.
Education
Ancora Acquisition LLC
Education
Total Warrants - United States
Total Funded Investments
Unfunded Debt Investments - United States
Mister Car Wash Holdings, Inc.
Preferred shares (2)
Preferred shares (3)
Ordinary shares (2)
Ordinary shares (3)
Warrants (5)
Warrants (3)
Warrants (3)
Warrants (6)
Consumer Services
First lien (3)(11) - Undrawn
DCA Investment Holding, LLC
Healthcare Services
First lien (3)(11) - Undrawn
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
First lien (3)(11) - Undrawn
Valet Waste Holdings, Inc.
Business Services
First lien (3)(11) - Undrawn
VetCor Professional Practices LLC
Consumer Services
Weston Solutions, Inc.
Business Services
Zywave, Inc.
Software
Ansira Holdings, Inc.
Business Services
Marketo, Inc.
Software
First lien (3)(11) - Undrawn
First lien (4)(11) - Undrawn
First lien (2)(11) - Undrawn
First lien (3)(11) - Undrawn
First lien (3)(11) - Undrawn
First lien (3)(11) - Undrawn
First lien (3)(11) - Undrawn
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,331
$
1,879
2,994,065
1,688,976
$
200
113
100
56
469
1
1
18
10
30
$
9,069
$
11,345
— %
1.20 %
5/8/2022
5
$
— $
2,966
0.32 %
10/23/2025
94,672
5/5/2026
8/12/2020
622
20
$
$
817
37
—
854
1,379,827
$
$
549
949
—
4,464
0.06 %
0.10 %
— %
0.48 %
1,346,654
143.48 %
12/14/2017
$
1,667
$
(13)
$
7/2/2021
8/4/2021
9/24/2021
4/20/2021
3/30/2018
6/22/2018
1,348
1,000
1,500
2,700
127
1,644
4,471
12/31/2020
10,000
11/17/2022
12/20/2018
8/16/2021
2,000
3,818
1,788
(13)
(10)
(19)
(27)
(3)
(33)
(63)
—
(15)
(19)
(27)
8
—
—
—
—
—
—
—
—
(15)
(19)
(27)
— %
— %
— %
— %
— %
— %
— %
— %
— %
The accompanying notes are an integral part of these consolidated financial statements.
98
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Ministry Brands, LLC
Software
First lien (3)(11) - Undrawn
First lien (3)(11) - Undrawn
Second lien (3)(11) - Undrawn
—
—
—
12/2/2022
$
650
$
(3)
$
12/2/2017
12/2/2017
5,169
2,160
7,979
$
35,571
(26)
(16)
(45)
(224)
$
1,379,603
$
$
(3)
(26)
(16)
(45)
(98)
(0.01)%
(0.01)%
1,346,556
143.47 %
Subordinated (3)
Subordinated (2)
Subordinated (3)
8.50% PIK/Q*
10.00% PIK/Q*
10.00% PIK/Q*
6/9/2020
6/9/2020
6/9/2020
$
4,124
$
4,118
$
15,163
3,730
23,017
15,163
3,730
23,011
4,124
12,814
3,152
20,090
Energy
Subordinated (3)
14.00% PIK/Q*
10/15/2021
1,749
1,749
1,749
$
24,766
$
24,760
$
21,839
2.14 %
0.19 %
2.33 %
Total Unfunded Debt Investments - United States
Total Non-Controlled/Non-Affiliated Investments
Non-Controlled/Affiliated Investments(21)
Funded Debt Investments - United States
Edmentum Ultimate Holdings, LLC (16)
Education
Permian Holdco 1, Inc. (10)
Permian Holdco 2, Inc.
Total Funded Debt Investments - United States
Equity - United States
NMFC Senior Loan Program I LLC**
Investment Fund
Membership interest (3)
Preferred shares (3)(17)
Ordinary shares (3)
Ordinary shares (3)
Ordinary shares (2)
Permian Holdco 1, Inc. (10)
Energy
Edmentum Ultimate Holdings, LLC (16)
Education
Total Shares - United States
Unfunded Debt Investments - United States
Edmentum Ultimate Holdings, LLC (16)
Edmentum, Inc. (fka Plato, Inc.) (Archipelago
Learning, Inc.)
Education
Second lien (3)(11) - Undrawn
Permian Holdco 1, Inc. (10)
Permian Holdco 2, Inc.
Energy
Subordinated (3)(11) - Undrawn
Total Unfunded Debt Investments - United States
Total Non-Controlled/Affiliated Investments
—
—
—
—
—
—
—
—
—
—
—
—
— $
23,000
$
23,000
2.45 %
1,394,237
1,366,452
123,968
107,143
5,866
1,350
7,216
11
9
20
7,668
1,776
9,444
1,693
1,464
3,157
$
30,236
$
35,601
1.00 %
0.34 %
3.79 %
6/9/2020
10/15/2021
$
$
4,881
$
— $
—
— %
1,025
5,906
$
$
—
— $
—
—
— %
— %
54,996
$
57,440
6.12 %
The accompanying notes are an integral part of these consolidated financial statements.
99
Table of Contents
Portfolio Company, Location and Industry(1)
Controlled Investments(22)
Funded Debt Investments - United States
UniTek Global Services, Inc.
Business Services
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
Type of
Investment
Interest Rate(9)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
First lien (2)
First lien (2)
Subordinated (2)
Subordinated (3)
8.50% (L + 7.50%/Q)
1/13/2019
$
10,846
$
10,846
$
11,063
9.50% (L + 7.50% + 1.00% PIK/Q)*
1/13/2019
15.00% PIK/Q*
15.00% PIK/Q*
7/13/2019
7/13/2019
4,784
1,726
1,032
18,388
4,784
1,726
1,032
18,388
$
18,388
$
18,388
$
4,879
1,760
1,054
18,756
18,756
2.00 %
2.00 %
Total Funded Debt Investments - United States
Equity - United States
NMFC Senior Loan Program II LLC**
Investment Fund
Membership interest (3)
UniTek Global Services, Inc.
Business Services
Preferred shares (2)(18)
Preferred shares (3)(18)
Ordinary shares (2)
Ordinary shares (3)
New Mountain Net Lease Corporation
Net Lease
Ordinary shares (3)
Total Shares - United States
Total Funded Investments
Unfunded Debt Investments - United States
UniTek Global Services, Inc.
Business Services
Total Unfunded Debt Investments - United States
Total Controlled Investments
Total Investments
First lien (3)(11) - Undrawn
First lien (3)(11) - Undrawn
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
71,460
$
71,460
7.61 %
19,048,426
5,264,079
2,096,477
579,366
16,668
4,606
1,925
532
23,731
17,207
4,755
12,256
3,387
37,605
270,000
27,000
122,191
140,579
$
$
27,000
136,065
154,821
$
$
1/13/2019
1/13/2019
$
$
2,048
$
— $
758
2,806
2,806
—
—
$
$
$
— $
140,579
1,575,178
$
$
—
—
—
—
154,821
16.50 %
1,558,817
166.09 %
4.01 %
2.88 %
14.50 %
16.50 %
— %
— %
_______________________________________________________________________________
(1)
(2)
(3)
New Mountain Finance Corporation (the "Company") generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments are
generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.
Investment is pledged as collateral for the Holdings Credit Facility, a revolving credit facility among the Company as Collateral Manager, New Mountain Finance Holdings, L.L.C. ("NMF Holdings") as the Borrower, Wells Fargo
Securities, LLC as the Administrative Agent, and Wells Fargo Bank, National Association, as the Lender and Collateral Custodian. See Note 7. Borrowings, for details.
Investment is pledged as collateral for the NMFC Credit Facility, a revolving credit facility among the Company as the Borrower and Goldman Sachs Bank USA as the Administrative Agent and the Collateral Agent and Goldman
Sachs Bank USA, Morgan Stanley Bank, N.A. and Stifel Bank & Trust as Lenders. See Note 7. Borrowings, for details.
(4)
Investment is held in New Mountain Finance SBIC, L.P.
(5)
Investment is held in NMF YP Holdings, Inc.
(6)
Investment is held in NMF Ancora Holdings, Inc.
(7)
Investment is held in NMF QID NGL Holdings, Inc.
The accompanying notes are an integral part of these consolidated financial statements.
100
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
(8)
Investment or a portion of the investment is on non-accrual status. See Note 3. Investments, for details.
(9)
All interest is payable in cash unless otherwise indicated. A majority of the variable rate debt investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (L), the Prime Rate (P) and the
alternative base rate (Base) and which resets monthly (M), quarterly (Q), semi-annually (S) or annually (A). For each investment the current interest rate provided reflects the rate in effect as of December 31, 2016.
(10)
The Company holds preferred and common equity in Permian Holdco 1, Inc., as well as subordinated notes in Permian Holdco 2, Inc., a wholly-owned subsidiary of Permian Holdco 1, Inc.
(11)
(12)
(13)
(14)
(15)
(16)
Par Value amounts represent the drawn or undrawn (as indicated in type of investment) portion of revolving credit facilities or delayed draws. Cost amounts represent the cash received at settlement date net the impact of paydowns and
cash paid for drawn revolvers or delayed draws.
The Company holds investments in three related entities of YP Holdings LLC/Print Media Holdings LLC. The Company directly holds warrants to purchase a 4.96% membership interest of YP Equity Investors, LLC (which at closing
represented an indirect 1.0% equity interest in YP Holdings LLC) and holds an investment in the Term Loan B loans issued by YP LLC and Print Media LLC, wholly-owned subsidiaries of YP Holdings LLC and Print Media Holdings
LLC, respectively.
The Company holds investments in two related entities of Tenawa Resource Holdings LLC. The Company holds 4.77% of the common units in QID NGL LLC (which at closing represented 98.1% of the ownership in the common
units in Tenawa Resource Holdings LLC) and holds a first lien investment in Tenawa Resource Management LLC, a wholly-owned subsidiary of Tenawa Resource Holdings LLC.
The Company holds investments in QC McKissock Investment, LLC and one related entity of QC McKissock Investment, LLC. The Company holds a first lien term loan in QC McKissock Investment, LLC (which at closing
represented 71.1% of the ownership in the Series A common units of McKissock Investment Holdings, LLC) and holds a first lien term loan and a delayed draw term loan in McKissock, LLC, a wholly-owned subsidiary of McKissock
Investment Holdings, LLC.
The Company holds investments in TWDiamondback Holdings Corp. and one related entity of TWDiamondback Holdings Corp. The Company holds preferred equity in TWDiamondback Holdings Corp. and holds a first lien last out
term loan and a delayed draw term loan in Diamondback Drugs of Delaware LLC, a wholly-owned subsidiary of TWDiamondback Holdings Corp.
The Company holds investments in Edmentum Ultimate Holdings, LLC and its related entities. The Company holds subordinated notes and ordinary equity in Edmentum Ultimate Holdings, LLC and holds a second lien revolver in
Edmentum, Inc. and Archipelago Learning, Inc., which are wholly-owned subsidiaries of Edmentum Ultimate Holdings, LLC.
(17)
The Company holds preferred equity in Permian Holdco 1, Inc. that is entitled to receive cumulative preferential dividends at a rate of 12.0% per annum payable in additional shares.
(18)
The Company holds preferred equity in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 13.5% per annum payable in additional shares.
(19)
The Company holds investments in Education Management Corporation and one related entity of Education Management Corporation. The Company holds series A-1 convertible preferred stock and common stock in Education
Management Corporation and holds a tranche A first lien term loan and a tranche B first lien term loan in Education Management II LLC, which is an indirect subsidiary of Education Management Corporation.
(20)
The Company holds an equity investment in TW-NHME Holdings Corp., as well as a second lien term loan investment in National HME, Inc., a wholly-owned subsidiary of TW-NHME Holdings Corp.
(21)
Denotes investments in which the Company is an “Affiliated Person”, as defined in the Investment Company Act of 1940, as amended, due to owning or holding the power to vote 5.0% or more of the outstanding voting securities of
the investment but not controlling the company. Fair value as of December 31, 2015 and December 31, 2016 along with transactions during the year ended December 31, 2016 in which the issuer was a non-controlled/affiliated
investment is as follows:
Portfolio Company (1)
Edmentum Ultimate Holdings,
LLC/Edmentum Inc.
NMFC Senior Loan Program I LLC
Permian Holdco 1, Inc. / Permian Holdco 2,
Inc.
Tenawa Resource Holdings LLC
Total Non-Controlled/Affiliated
Investments
$
$
Fair Value at
December 31, 2015
Gross
Additions(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31, 2016
Interest
Income
Dividend
Income
Other
Income
22,782
$
6,147
$
(4,002)
$
21,914
—
42,591
—
8,965
16
—
—
(42,288)
87,287
$
15,128
$
(46,290)
$
—
—
—
—
—
$
$
(1,680)
$
23,247
$
2,254
$
—
$
—
1,086
2,228
(319)
23,000
11,193
—
—
41
2,243
3,728
1,163
156
—
5
25
1,315
$
57,440
$
4,538
$
3,884
$
1,193
_______________________________________________________________________________
(A) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind (“PIK”) interest or dividends, the amortization of discounts, reorganizations or restructurings and
the movement at fair value of an existing portfolio company into this category from a different category.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, reorganizations or restructurings and the movement of an existing portfolio
company out of this category into a different category.
The accompanying notes are an integral part of these consolidated financial statements.
101
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
(in thousands, except shares)
(22)
Denotes investments in which the Company is in “Control”, as defined in the Investment Company Act of 1940, as amended, due to owning or holding the power to vote 25.0% or more of the outstanding voting securities of the
investment. Fair value as of December 31, 2015 and December 31, 2016 along with transactions during the year ended December 31, 2016 in which the issuer was a controlled investment is as follows:
Portfolio Company (1)
New Mountain Net Lease Corporation
NMFC Senior Loan Program II LLC
UniTek Global Services, Inc.
Total Controlled Investments
Fair Value at
December 31, 2015
Gross
Additions
(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31, 2016
Interest
Income
Dividend
Income
Other
Income
$
$
—
—
47,422
$
27,000
$
71,460
3,464
$
—
—
(2,599)
47,422
$
101,924
$
(2,599)
$
—
—
—
—
$
$
—
—
8,074
8,074
$
$
27,000
$
71,460
56,361
154,821
$
—
—
1,904
1,904
$
$
540
$
3,533
3,023
7,096
$
—
—
558
558
_______________________________________________________________________________
(A) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of discounts, reorganizations or restructurings and the movement at fair
value of an existing portfolio company into this category from a different category.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, reorganizations or restructurings and the movement of an existing portfolio
company out of this category into a different category.
All or a portion of interest contains PIK interest.
Indicates assets that the Company deems to be “non-qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70.00% of the Company’s total assets at the
time of acquisition of any additional non-qualifying assets. As of December 31, 2016, 9.9% of the Company’s total assets were non-qualifying assets.
*
**
The accompanying notes are an integral part of these consolidated financial statements.
102
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2016
Table of Contents
Investment Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Industry Type
Business Services
Software
Consumer Services
Investment Fund
Education
Energy
Healthcare Services
Distribution & Logistics
Federal Services
Net Lease
Business Products
Media
Retail
Healthcare Information Technology
Total investments
Interest Rate Type
Floating rates
Fixed rates
Total investments
The accompanying notes are an integral part of these consolidated financial statements.
103
December 31, 2016
Percent of Total
Investments at Fair Value
44.94%
38.76%
4.27%
12.03%
100.00%
December 31, 2016
Percent of Total
Investments at Fair Value
29.64%
27.00%
6.82%
6.06%
6.04%
4.82%
4.61%
3.96%
3.86%
1.73%
1.60%
1.55%
1.35%
0.96%
100.00%
December 31, 2016
Percent of Total
Investments at Fair Value
93.16%
6.84%
100.00%
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Non-Controlled/Non-Affiliated Investments
Funded Debt Investments - Australia
Project Sunshine IV Pty Ltd**
Media
First lien (2)
8.00% (L + 7.00%/M)
9/23/2019
Total Funded Debt Investments - Australia
Funded Debt Investments - Luxembourg
Pinnacle Holdco S.à.r.l. / Pinnacle (US) Acquisition Co
Limited**
Software
Total Funded Debt Investments - Luxembourg
Funded Debt Investments - Netherlands
Eiger Acquisition B.V. (Eiger Co-Borrower, LLC)**
Second lien (2)
Second lien (3)
10.50% (L + 9.25%/Q)
10.50% (L + 9.25%/Q)
7/30/2020
7/30/2020
Software
Second lien (3)
10.13% (L + 9.13%/Q)
2/17/2023
Second lien (3)
10.50% (L + 9.50%/Q)
1/31/2023
$
$
$
$
$
$
$
$
10,800
10,800
$
$
10,752
10,752
$
$
10,314
10,314
1.23 %
1.23 %
24,630
$
24,339
$
19,581
8,204
32,834
8,324
32,663
32,834
$
32,663
$
6,522
26,103
26,103
3.12 %
3.12 %
10,000
10,000
32,500
32,500
$
$
$
$
9,303
9,303
31,736
31,736
$
$
$
$
9,049
9,049
1.08 %
1.08 %
31,363
31,363
3.75 %
3.75 %
20,000
41,000
29,775
15,000
44,775
20,000
20,000
40,000
32,641
5,000
37,641
19,619
40,591
28,508
14,611
43,119
19,212
19,212
38,424
32,443
4,961
37,404
20,948
19,950
40,898
27,021
12,600
39,621
19,600
19,600
39,200
32,546
4,985
37,531
4.89 %
4.73 %
4.68 %
4.48 %
Second lien (3)
Second lien (2)
9.50% (L + 8.50%/Q)
6/26/2023
$
21,000
$
20,972
$
9.50% (L + 8.50%/Q)
6/26/2023
First lien (2)
6.50% (L + 5.50%/M)
Subordinated (3)
11.38%/S
12/4/2020
12/1/2021
Second lien (2)
Second lien (3)
10.00% (L + 9.00%/Q)
10.00% (L + 9.00%/Q)
10/20/2023
10/20/2023
Second lien (2)
Second lien (3)
9.75% (L + 8.50%/Q)
9.75% (L + 8.50%/Q)
4/30/2020
4/30/2020
First lien (2)
7.75% (L + 6.75%/Q)
9/28/2020
37,056
36,752
36,779
4.39 %
Second lien (3)
10.00% (L + 9.00%/M)
12/15/2022
35,000
34,302
34,300
4.10 %
The accompanying notes are an integral part of these consolidated financial statements.
104
Total Funded Debt Investments - Netherlands
Funded Debt Investments - United Kingdom
Air Newco LLC**
Software
Total Funded Debt Investments - United Kingdom
Funded Debt Investments - United States
Deltek, Inc.
Software
TIBCO Software Inc.
Software
AssuredPartners, Inc.
Business Services
Kronos Incorporated
Software
Hill International, Inc.
Business Services
ProQuest LLC
Business Services
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Navex Global, Inc.
Software
Ascend Learning, LLC
Education
CRGT Inc.
First lien (4)
First lien (2)
Second lien (4)
Second lien (3)
5.75% (L + 4.75%/Q)
11/19/2021
$
4,610
$
4,570
$
5.75% (L + 4.75%/Q)
9.75% (L + 8.75%/Q)
9.75% (L + 8.75%/Q)
11/19/2021
11/18/2022
11/18/2022
2,610
17,879
10,121
35,220
2,587
17,683
10,001
34,841
4,471
2,531
17,343
9,817
34,162
4.08 %
Second lien (3)
9.50% (L + 8.50%/Q)
11/30/2020
34,727
34,352
33,077
3.95 %
Federal Services
First lien (2)
7.50% (L + 6.50%/Q)
12/19/2020
33,261
33,030
32,928
3.93 %
Physio-Control International, Inc.
Healthcare Products
Valet Waste Holdings, Inc.
Second lien (2)
Second lien (3)
10.00% (L + 9.00%/Q)
10.00% (L + 9.00%/Q)
Business Services
First lien (2)
8.00% (L + 7.00%/Q)
First lien (3)(11) - Drawn
8.00% (L + 7.00%/Q)
6/5/2023
6/5/2023
9/24/2021
9/24/2021
30,000
4,000
34,000
29,925
1,500
31,425
29,426
3,703
33,129
29,564
1,481
31,045
27,451
3,660
31,111
29,505
1,479
30,984
3.72 %
3.70 %
Rocket Software, Inc.
Software
TASC, Inc.
Federal Services
Pittsburgh Glass Works, LLC (24)
Manufacturing
Integro Parent Inc.
Business Services
CompassLearning, Inc. (15)
Education
Ryan, LLC
Second lien (2)
10.25% (L + 8.75%/Q)
2/8/2019
30,875
30,781
30,759
3.68 %
First lien (2)
Second lien (3)
7.00% (L + 6.00%/Q)
12.00%/Q
5/22/2020
5/21/2021
28,314
2,000
30,314
28,001
1,964
29,965
28,396
2,062
30,458
3.64 %
First lien (2)
10.13% (L + 9.13%/M)
11/25/2021
30,000
29,852
29,850
3.57 %
First lien (2)
First lien (2)
6.75% (L + 5.75%/Q)
6.75% (L + 5.75%/M)
Second lien (3)
10.25% (L + 9.25%/Q)
10/31/2022
10/31/2022
10/30/2023
17,370
2,630
10,000
30,000
17,029
2,578
9,901
29,508
16,980
2,570
9,625
29,175
3.49 %
First lien (2)
8.00% (L + 6.75%/Q)
11/26/2018
30,000
29,531
28,471
3.40 %
Business Services
First lien (2)
6.75% (L + 5.75%/M)
8/7/2020
27,300
26,918
26,583
3.18 %
McGraw-Hill Global Education Holdings, LLC
Education
First lien (2)(9)
9.75%/S
4/1/2021
24,500
24,378
26,093
3.12 %
KeyPoint Government Solutions, Inc.
Federal Services
DigiCert Holdings, Inc.
Software
Pelican Products, Inc.
Business Products
First lien (2)
7.75% (L + 6.50%/M)
11/13/2017
25,876
25,636
25,747
3.08 %
First lien (2)
6.00% (L + 5.00%/Q)
10/21/2021
25,000
24,268
24,375
2.91 %
Second lien (3)
Second lien (2)
9.25% (L + 8.25%/Q)
9.25% (L + 8.25%/Q)
4/9/2021
4/9/2021
15,500
10,000
25,500
15,519
10,115
25,634
14,764
9,524
24,288
2.90 %
The accompanying notes are an integral part of these consolidated financial statements.
105
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Confie Seguros Holding II Co.
Consumer Services
AAC Holding Corp.
Education
Transtar Holding Company
Second lien (2)
Second lien (3)
10.25% (L + 9.00%/M)
10.25% (L + 9.00%/M)
5/8/2019
5/8/2019
$
18,886
$
18,789
$
18,673
5,571
24,457
5,648
24,437
5,508
24,181
2.89 %
First lien (2)
8.25% (L + 7.25%/M)
9/30/2020
25,000
24,640
24,110
2.88 %
Distribution & Logistics
Second lien (2)
10.00% (L + 8.75%/Q)
10/9/2019
28,300
27,974
23,630
2.82 %
PetVet Care Centers LLC
Consumer Services
EN Engineering, L.L.C.
Business Services
Aricent Technologies
Business Services
Second lien (3)
9.75% (L + 8.75%/Q)
6/17/2021
24,000
23,789
23,149
2.77 %
First lien (2)
7.00% (L + 6.00%/Q)
First lien (2)(11) - Drawn
8.50% (P + 5.00%/Q)
Second lien (2)
Second lien (3)
9.50% (L + 8.50%/M)
9.50% (L + 8.50%/M)
6/30/2021
6/30/2021
4/14/2022
4/14/2022
21,321
1,223
22,544
20,000
2,550
22,550
21,121
1,211
22,332
19,881
2,558
22,439
20,554
1,179
21,733
19,133
2,440
21,573
2.60 %
2.58 %
McGraw-Hill School Education Holdings, LLC
Education
First lien (2)
6.25% (L + 5.00%/M)
12/18/2019
21,560
21,408
21,237
2.54 %
VetCor Professional Practices LLC
Consumer Services
First lien (4)
7.00% (L + 6.00%/Q)
First lien (4)(11) - Drawn
7.00% (L + 6.00%/Q)
4/20/2021
4/20/2021
19,502
1,753
21,255
19,324
1,736
21,060
19,254
1,731
20,985
2.51 %
IT'SUGAR LLC
Retail
Weston Solutions, Inc.
Business Services
TWDiamondback Holdings Corp. (18)
Diamondback Drugs of Delaware, L.L.C.
(TWDiamondback II Holdings LLC)
First lien (4)
10.50% (L + 9.50%/Q)
10/23/2019
21,000
20,215
20,183
2.41 %
Subordinated (4)
16.00%/Q
7/3/2019
20,000
20,000
19,430
2.32 %
Distribution & Logistics
First lien (4)
9.75% (L + 8.75%/Q)
11/19/2019
19,895
19,895
19,117
2.28 %
Severin Acquisition, LLC
Software
First American Payment Systems, L.P.
Second lien (4)
Second lien (4)
9.25% (L + 8.25%/Q)
9.75% (L + 8.75%/Q)
7/29/2022
7/29/2022
15,000
4,154
19,154
14,857
4,113
18,970
14,272
4,112
18,384
2.20 %
Business Services
Second lien (2)
10.75% (L + 9.50%/M)
4/12/2019
18,643
18,423
18,362
2.20 %
DCA Investment Holding, LLC
Healthcare Services
First lien (2)
6.25% (L + 5.25%/Q)
First lien (3)(11) - Drawn
7.75% (P + 4.25%/Q)
YP Holdings LLC / Print Media Holdings LLC (12)
YP LLC / Print Media LLC
7/2/2021
7/2/2021
17,811
53
17,864
17,645
52
17,697
17,632
52
17,684
2.11 %
Media
First lien (2)
8.00% (L + 6.75%/M)
6/4/2018
18,320
18,182
17,679
2.11 %
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
First lien (4)
8.25% (L + 7.25%/Q)
8/4/2022
17,955
17,783
17,550
2.10 %
The accompanying notes are an integral part of these consolidated financial statements.
106
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
AgKnowledge Holdings Company, Inc.
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Business Services
Second lien (2)
9.25% (L + 8.25%/M)
7/23/2020
$
18,500
$
18,352
$
17,066
2.04 %
Vertafore, Inc.
Software
GSDM Holdings Corp.
Healthcare Services
MailSouth, Inc. (d/b/a Mspark)
Second lien (2)
Second lien (3)
9.75% (L + 8.25%/M)
9.75% (L + 8.25%/M)
10/27/2017
10/27/2017
13,855
2,000
15,855
13,848
2,016
15,864
13,844
1,999
15,843
1.89 %
Subordinated (4)
10.00%/M
6/23/2020
15,000
14,880
15,000
1.79 %
Media
First lien (2)
6.75% (L + 5.00%/Q)
12/14/2016
14,998
14,736
14,586
1.74 %
TW-NHME Holdings Corp. (23)
National HME, Inc.
Healthcare Services
Sierra Hamilton LLC / Sierra Hamilton Finance, Inc.
Energy
Vision Solutions, Inc.
Software
SW Holdings, LLC
Business Services
Poseidon Intermediate, LLC
Second lien (4)
10.25% (L + 9.25%/Q)
7/14/2022
14,000
13,833
13,825
1.65 %
First lien (2)
First lien (3)
12.25%/S
12.25%/S
12/15/2018
12/15/2018
25,000
2,660
27,660
25,000
2,064
27,064
12,251
1,302
13,553
1.62 %
Second lien (2)
9.50% (L + 8.00%/M)
7/23/2017
14,000
13,978
12,740
1.52 %
Second lien (4)
9.75% (L + 8.75%/Q)
12/30/2021
13,500
13,373
12,701
1.52 %
Software
Second lien (2)
9.50% (L + 8.50%/Q)
8/15/2023
13,000
12,811
12,427
1.49 %
American Tire Distributors, Inc.
Distribution & Logistics
Subordinated (3)
10.25%/S
3/1/2022
13,000
12,798
11,960
1.43 %
PowerPlan Holdings, Inc.
Software
Permian Tank & Manufacturing, Inc.
Second lien (2)
10.75% (L + 9.75%/M)
2/23/2023
10,000
9,907
9,573
1.14 %
Energy
First lien (2)
10.50%/S
1/15/2018
24,357
24,493
9,377
1.12 %
TTM Technologies, Inc.**
Business Products
Smile Brands Group Inc.
Healthcare Services
Harley Marine Services, Inc.
First lien (2)
6.00% (L + 5.00%/Q)
5/31/2021
9,980
9,554
9,132
1.09 %
First lien (2)
9.00% (L + 6.25% + 1.50% PIK/Q)*
8/16/2019
12,204
12,091
8,878
1.06 %
Distribution & Logistics
Second lien (2)
10.50% (L + 9.25%/Q)
12/20/2019
9,000
8,868
8,865
1.06 %
QC McKissock Investment, LLC (17)
McKissock, LLC
Education
Greenway Health, LLC (fka Vitera Healthcare
Solutions, LLC)
Software
First lien (2)
First lien (2)
7.50% (L + 6.50%/Q)
7.50% (L + 6.50%/Q)
First lien (2)(11) - Drawn
7.50% (L + 6.50%/Q)
First lien (2)
Second lien (2)
6.00% (L + 5.00%/Q)
9.25% (L + 8.25%/Q)
8/5/2019
8/5/2019
8/5/2019
11/4/2020
11/4/2021
4,875
3,148
1,016
9,039
1,960
7,000
8,960
4,838
3,124
1,007
8,969
1,946
6,917
8,863
4,707
3,039
981
8,727
1,877
6,720
8,597
1.04 %
1.03 %
The accompanying notes are an integral part of these consolidated financial statements.
107
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Novitex Acquisition, LLC (fka ARSloane Acquisition,
LLC)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Business Services
First lien (2)
7.50% (L + 6.25%/Q)
7/7/2020
$
7,242
$
7,064
$
6,807
0.81 %
Sotera Defense Solutions, Inc. (Global Defense
Technology & Systems, Inc.)
Federal Services
Brock Holdings III, Inc.
Industrial Services
Packaging Coordinators, Inc. (13)
First lien (2)
9.00% (L + 7.50%/M)
4/21/2017
6,859
6,828
6,344
0.76 %
Second lien (2)
10.00% (L + 8.25%/Q)
3/16/2018
7,000
6,953
5,443
0.65 %
Healthcare Products
Second lien (3)
9.00% (L + 8.00%/Q)
8/1/2022
5,000
4,957
4,925
0.59 %
Immucor, Inc.
Healthcare Services
Subordinated (2)(9)
11.13%/S
8/15/2019
5,000
4,963
4,575
0.55 %
GCA Services Group, Inc.
Business Services
Second lien (3)
9.25% (L + 8.00%/Q)
11/2/2020
4,000
3,973
3,950
0.47 %
York Risk Services Holding Corp.
Business Services
Subordinated (3)
8.50%/S
10/1/2022
3,000
3,000
2,471
0.30 %
Synarc-Biocore Holdings, LLC
Healthcare Services
Second lien (3)
9.25% (L + 8.25%/Q)
3/10/2022
2,500
2,479
2,313
0.28 %
Ensemble S Merger Sub, Inc.
Software
Subordinated (3)
9.00%/S
9/30/2023
2,000
1,933
1,940
0.23 %
First lien (2)
First lien (3)
First lien (2)
First lien (3)
First lien (2)
First lien (2)
5.50% (L + 4.50%/Q)
5.50% (L + 4.50%/Q)
8.50% (L + 1.00% + 6.50% PIK/Q)*
8.50% (L + 1.00% + 6.50% PIK/Q)*
7/2/2020
7/2/2020
7/2/2020
7/2/2020
17.25% (P + 10.00% + 4.00%
PIK/Q) (8)*
17.25% (P + 10.00% + 4.00%
PIK/Q) (8)*
6/30/2012 - Past Due
6/30/2012 - Past Due
Education Management Corporation (22)
Education Management II LLC
Education
ATI Acquisition Company (fka Ability Acquisition,
Inc.) (14)
Education
Total Funded Debt Investments - United States
Total Funded Debt Investments
Equity - United Kingdom
Packaging Coordinators, Inc. (13)
PCI Pharma Holdings UK Limited**
Healthcare Products
Ordinary shares (2)
—
Total Shares - United Kingdom
Equity - United States
Crowley Holdings Preferred, LLC
Distribution & Logistics
Preferred shares (3)(20)
12.00% (10.00% + 2.00% PIK/Q)*
TWDiamondback Holdings Corp. (18)
Distribution & Logistics
Preferred shares (4)
TW-NHME Holdings Corp. (23)
Healthcare Services
Preferred shares (4)
—
—
—
—
—
—
250
141
437
247
1,075
1,665
103
1,768
$
$
1,314,464
1,400,598
19,427
$
$
$
$
238
134
375
212
959
1,434
94
1,528
1,297,775
1,382,229
578
578
$
$
$
$
69
39
46
26
180
—
—
—
0.02 %
— %
1,237,175
147.83 %
1,314,004
157.01 %
1,612
1,612
0.19 %
0.19 %
52,058
$
51,518
$
51,911
6.20 %
200
100
2,000
2,000
0.24 %
1,000
1,000
0.12 %
The accompanying notes are an integral part of these consolidated financial statements.
108
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Ancora Acquisition LLC (14)
Education
Preferred shares (6)
Education Management Corporation (22)
Education
Total Shares - United States
Total Shares
Warrants - United States
YP Holdings LLC / Print Media Holdings LLC (12)
YP Equity Investors, LLC
Media
IT'SUGAR LLC
Retail
ASP LCG Holdings, Inc.
Education
Ancora Acquisition LLC (14)
Education
Total Warrants - United States
Total Funded Investments
Preferred shares (2)
Preferred shares (3)
Ordinary shares (2)
Ordinary shares (3)
Warrants (5)
Warrants (3)
Warrants (3)
Warrants (6)
Unfunded Debt Investments - United States
DCA Investment Holdings, LLC
Healthcare Services
First lien (3)(11) - Undrawn
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
First lien (3)(11) - Undrawn
Valet Waste Holdings, Inc.
Business Services
First lien (3)(11) - Undrawn
VetCor Professional Practices LLC
Consumer Services
QC McKissock Investment, LLC (17)
McKissock, LLC
Education
MailSouth, Inc. (d/b/a Mspark)
Media
EN Engineering, L.L.C.
Business Services
First lien (3)(11) - Undrawn
First lien (4)(11) - Undrawn
First lien (2)(11) - Undrawn
First lien (3)(11) - Undrawn
First lien (2)(11) - Undrawn
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
372
$
83
$
393
0.05 %
3,331
1,879
2,994,065
1,688,976
200
113
100
56
469
10
5
202
114
331
$
$
55,070
55,648
$
$
55,635
57,247
0.04 %
6.65 %
6.84 %
5/8/2022
5
$
—
$
5,304
0.63 %
10/23/2025
94,672
5/5/2026
8/12/2020
622
20
$
$
817
37
—
854
1,438,731
$
$
817
610
—
6,731
0.10 %
0.07 %
— %
0.80 %
1,377,982
164.65 %
7/2/2021
$
2,047
$
(20)
$
(20)
— %
8/4/2021
9/24/2021
4/20/2021
4/20/2021
1,000
3,000
2,700
947
3,647
(10)
(38)
(27)
(9)
(36)
(23)
(42)
(34)
(12)
(46)
— %
— %
(0.01)%
12/31/2015
1,862
(19)
(64)
(0.01)%
12/14/2016
1,900
(181)
(79)
(0.01)%
12/30/2016
2,348
(12)
(85)
(0.01)%
The accompanying notes are an integral part of these consolidated financial statements.
109
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
TWDiamondback Holdings Corp. (18)
Diamondback Drugs of Delaware, L.L.C.
(TWDiamondback II Holdings LLC)
Distribution & Logistics
Total Unfunded Debt Investments
Total Non-Controlled/Non-Affiliated Investments
Non-Controlled/Affiliated Investments(25)
Funded Debt Investments - United States
Tenawa Resource Holdings LLC (16)
Tenawa Resource Management LLC
First lien (3)(11) - Undrawn
First lien (4)(11) - Undrawn
—
—
2/16/2016
2/16/2016
$
$
2,158
$
605
2,763
18,567
—
—
—
(316)
$
1,438,415
$
$
$
(84)
(24)
(108)
(467)
(0.01)%
(0.05)%
1,377,515
164.60 %
Energy
First lien (3)
10.50% (Base + 8.00%/Q)
5/12/2019
$
40,000
$
39,869
$
38,813
4.64 %
Edmentum Ultimate Holdings, LLC (19)
Education
Subordinated (3)
Subordinated (2)
Subordinated (3)
8.50% PIK/Q*
10.00% PIK/Q*
10.00% PIK/Q*
Total Funded Debt Investments - United States
Equity - United States
NMFC Senior Loan Program I LLC**
Investment Fund
Membership interest (3)
Edmentum Ultimate Holdings, LLC (19)
Education
Tenawa Resource Holdings LLC (16)
QID NGL LLC
Energy
Total Shares - United States
Unfunded Debt Investments - United States
Edmentum Ultimate Holdings, LLC (19)
Edmentum, Inc. (fka Plato, Inc.) (Archipelago
Learning, Inc.)
Ordinary shares (3)
Ordinary shares (2)
Ordinary shares (7)
6/9/2020
6/9/2020
6/9/2020
3,786
13,715
3,374
20,875
3,778
13,715
3,374
20,867
$
60,875
$
60,736
$
3,622
10,547
2,595
16,764
55,577
2.00 %
6.64 %
—
—
—
—
—
—
—
—
—
$
23,000
$
21,914
2.62 %
123,968
107,143
11
9
20
3,341
2,888
6,229
5,290,997
5,291
3,778
$
28,311
$
31,921
0.74 %
0.45 %
3.81 %
Education
Second lien (3)(11) - Undrawn
—
6/9/2020
Total Unfunded Debt Investments
Total Non-Controlled/Affiliated Investments
$
$
4,881
4,881
$
$
$
—
—
89,047
$
$
$
(211)
(211)
87,287
(0.02)%
(0.02)%
10.43 %
The accompanying notes are an integral part of these consolidated financial statements.
110
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate(10)
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Controlled Investments(26)
Funded Debt Investments - United States
UniTek Global Services, Inc.
Business Services
Total Funded Debt Investments - United States
Equity - United States
UniTek Global Services, Inc.
Business Services
Total Shares - United States
Total Funded Investments
Unfunded Debt Investments - United States
UniTek Global Services, Inc.
Business Services
Total Unfunded Debt Investments
Total Controlled Investments
First lien (2)
First lien (3)
First lien (3)
Subordinated (2)
Subordinated (3)
8.50% (L + 7.50%/Q)
1/13/2019
$
6,786
$
6,786
$
8.50% (L + 7.50%/Q)
1/13/2019
9.50% (L + 7.50% + 1.00% PIK/Q)*
1/13/2019
15.00% PIK/Q*
15.00% PIK/Q*
7/13/2019
7/13/2019
4,060
7,323
1,487
890
4,060
7,323
1,487
890
20,546
20,546
$
20,546
$
20,546
$
6,640
3,973
7,257
1,417
848
20,135
20,135
Preferred shares (2)(21)
Preferred shares (3)(21)
Ordinary shares (2)
Ordinary shares (3)
First lien (3)(11) - Undrawn
First lien (3)(11) - Undrawn
—
—
—
—
—
—
2.40 %
2.40 %
3.26 %
3.26 %
5.66 %
— %
— %
3,833
7,528
2,081
27,312
27,312
47,447
(18)
(7)
(25)
(25)
$
$
$
$
$
$
—
—
—
—
16,680,037
$
14,299
$
13,870
4,609,569
2,096,477
579,366
3,952
1,925
532
20,708
20,708
41,254
$
$
1/13/2019
1/13/2019
$
$
2,048
$
758
2,806
2,806
$
$
$
—
—
—
—
41,254
1,568,716
47,422
5.66 %
1,512,224
180.69 %
Total Investments
______________________________________________________________________________
(1)
(2)
(3)
New Mountain Finance Corporation (the "Company") generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities
Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.
Investment is pledged as collateral for the Holdings Credit Facility, a revolving credit facility among the Company as Collateral Manager, New Mountain Finance Holdings, L.L.C. ("NMF Holdings") as
the Borrower, Wells Fargo Securities, LLC as the Administrative Agent, and Wells Fargo Bank, National Association, as the Lender and Collateral Custodian. See Note 7. Borrowings, for details.
Investment is pledged as collateral for the NMFC Credit Facility, a revolving credit facility among the Company as the Borrower and Goldman Sachs Bank USA as the Administrative Agent and the
Collateral Agent and Goldman Sachs Bank USA, Morgan Stanley Bank, N.A. and Stifel Bank & Trust as Lenders. See Note 7. Borrowings, for details.
(4)
Investment is held in New Mountain Finance SBIC, L.P.
(5)
Investment is held in NMF YP Holdings, Inc.
(6)
Investment is held in NMF Ancora Holdings, Inc.
(7)
Investment is held in NMF QID NGL Holdings, Inc.
(8)
Investment or a portion of the investment is on non-accrual status. See Note 3. Investments, for details.
(9)
Securities are registered under the Securities Act.
The accompanying notes are an integral part of these consolidated financial statements.
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New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
(10)
(11)
(12)
(13)
(14)
All interest is payable in cash unless otherwise indicated. A majority of the variable rate debt investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate
(L), the Prime Rate (P) and the alternative base rate (Base) and which resets monthly (M), quarterly (Q), semi-annually (S) or annually (A). For each investment the current interest rate provided reflects
the rate in effect as of December 31, 2015.
Par Value amounts represent the drawn or undrawn (as indicated in type of investment) portion of revolving credit facilities or delayed draws. Cost amounts represent the cash received at settlement date
net the impact of paydowns and cash paid for drawn revolvers or delayed draws.
The Company holds investments in three related entities of YP Holdings LLC/Print Media Holdings LLC. The Company directly holds warrants to purchase a 4.96% membership interest of YP Equity
Investors, LLC (which at closing represented an indirect 1.0% equity interest in YP Holdings LLC) and holds an investment in the Term Loan B loans issued by YP LLC and Print Media LLC, wholly-
owned subsidiaries of YP Holdings LLC and Print Media Holdings LLC, respectively.
The Company holds investments in Packaging Coordinators, Inc. and one related entity of Packaging Coordinators, Inc. The Company has a debt investment in Packaging Coordinators, Inc. and holds
ordinary equity in PCI Pharma Holdings UK Limited, a wholly-owned subsidiary of Packaging Coordinators, Inc.
The Company holds investments in ATI Acquisition Company and Ancora Acquisition LLC. The Company has debt investments in ATI Acquisition Company and preferred equity and warrants to
purchase units of common membership interests of Ancora Acquisition LLC. The Company received its investments in Ancora Acquisition LLC as a result of its investments in ATI Acquisition Company.
(15)
The Company holds an investment in CompassLearning, Inc. that is structured as a first lien last out term loan.
(16)
(17)
(18)
(19)
The Company holds investments in two related entities of Tenawa Resource Holdings LLC. The Company holds 5.25% of the common units in QID NGL LLC (which at closing represented 98.1% of the
ownership in the common units in Tenawa Resource Holdings LLC) and holds a first lien investment in Tenawa Resource Management LLC, a wholly-owned subsidiary of Tenawa Resource
Holdings LLC.
The Company holds investments in QC McKissock Investment, LLC and one related entity of QC McKissock Investment, LLC. The Company holds a first lien term loan in QC McKissock Investment,
LLC (which at closing represented 71.1% of the ownership in the Series A common units of McKissock Investment Holdings, LLC) and holds a first lien term loan and a delayed draw term loan in
McKissock, LLC, a wholly-owned subsidiary of McKissock Investment Holdings, LLC.
The Company holds investments in TWDiamondback Holdings Corp. and one related entity of TWDiamondback Holdings Corp. The Company holds preferred equity in TWDiamondback Holdings Corp.
and holds a first lien last out term loan and a delayed draw term loan in Diamondback Drugs of Delaware LLC, a wholly-owned subsidiary of TWDiamondback Holdings Corp.
The Company holds investments in Edmentum Ultimate Holdings, LLC and its related entities. The Company holds subordinated notes and ordinary equity in Edmentum Ultimate Holdings, LLC and
holds a second lien revolver in Edmentum, Inc. and Archipelago Learning, Inc., which are wholly-owned subsidiaries of Edmentum Ultimate Holdings, LLC.
(20)
Total shares reported assumes shares issued for the capitalization of PIK interest. Actual shares owned total 50,000 as of December 31, 2015.
(21)
The Company holds preferred equity in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 13.5% per annum payable in additional shares.
(22)
The Company holds investments in Education Management Corporation and one related entity of Education Management Corporation. The Company holds series A-1 convertible preferred stock and
common stock in Education Management Corporation and holds a tranche A first lien term loan and a tranche B first lien term loan in Education Management II LLC, which is an indirect subsidiary of
Education Management Corporation.
(23)
The Company holds an equity investment in TW-NHME Holdings Corp., as well as a second lien term loan investment in National HME, Inc., a wholly-owned subsidiary of TW-NHME Holdings Corp.
(24)
The Company holds an investment in Pittsburgh Glass Works, LLC that is structured as a first lien last out term loan.
The accompanying notes are an integral part of these consolidated financial statements.
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New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
(in thousands, except shares)
(25)
Denotes investments in which the Company is an “Affiliated Person”, as defined in the Investment Company Act of 1940, as amended, due to owning or holding the power to vote 5.0% or more of the
outstanding voting securities of the investment but not controlling the company. Fair value as of December 31, 2014 and December 31, 2015 along with transactions during the year ended December 31,
2015 in which the issuer was a non-controlled/affiliated investment is as follows:
Portfolio Company (1)
Edmentum Ultimate Holdings,
LLC/Edmentum Inc.
NMFC Senior Loan Program I LLC
Tenawa Resource Holdings LLC
Total Non-Controlled/Affiliated
Investments
Fair Value at
December 31, 2014
Gross
Additions(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31, 2015
Interest
Income
Dividend
Income
Other
Income
$
$
—
$
23,937
$
(3,050)
$
22,461
—
—
44,572
—
—
22,461
$
68,509
$
(3,050)
$
—
—
—
—
$
$
1,895
$
22,782
$
1,171
$
—
$
—
(547)
(1,981)
21,914
42,591
—
4,231
3,619
—
1,215
750
(633)
$
87,287
$
5,402
$
3,619
$
1,965
(A) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind (“PIK”) interest or dividends, the amortization of discounts,
reorganizations or restructurings and the movement at fair value of an existing portfolio company into this category from a different category.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, reorganizations or restructurings and the
movement of an existing portfolio company out of this category into a different category.
(26)
Denotes investments in which the Company is in “Control”, as defined in the Investment Company Act of 1940, as amended, due to owning or holding the power to vote 25.0% or more of the outstanding
voting securities of the investment. Fair value as of December 31, 2014 and December 31, 2015 along with transactions during the year ended December 31, 2015 in which the issuer was a controlled
investment is as follows:
Portfolio Company (1)
UniTek Global Services, Inc.
Total Controlled Investments
Fair Value at
December 31, 2014
Gross
Additions
(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31, 2015
Interest
Income
Dividend
Income
Other
Income
$
$
—
—
$
$
42,780
42,780
$
$
(1,526)
(1,526)
$
$
—
—
$
$
6,168
6,168
$
$
47,422
47,422
$
$
2,007
2,007
$
$
2,559
2,559
$
$
49
49
(A) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of discounts, reorganizations or
restructurings and the movement at fair value of an existing portfolio company into this category from a different category.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, reorganizations or restructurings and the
movement of an existing portfolio company out of this category into a different category.
All or a portion of interest contains PIK interest.
Indicates assets that the Company deems to be “non-qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70.00% of the
Company’s total assets at the time of acquisition of any additional non-qualifying assets. As of December 31, 2015, 6.8% of the Company’s total assets were non-qualifying assets.
*
**
.
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Investment Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Industry Type
Software
Business Services
Education
Distribution & Logistics
Federal Services
Consumer Services
Energy
Healthcare Services
Media
Healthcare Products
Business Products
Manufacturing
Investment Fund
Retail
Industrial Services
Total investments
Interest Rate Type
Floating rates
Fixed rates
Total investments
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2015
December 31, 2015
Percent of Total
Investments at Fair Value
44.31%
41.79%
5.75%
8.15%
100.00%
December 31, 2015
Percent of Total
Investments at Fair Value
24.53%
24.36%
10.97%
7.76%
6.31%
4.52%
4.33%
4.18%
3.16%
2.49%
2.21%
1.98%
1.45%
1.39%
0.36%
100.00%
December 31, 2015
Percent of Total
Investments at Fair Value
86.26%
13.74%
100.00%
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Note 1. Formation and Business Purpose
New Mountain Finance Corporation
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation
December 31, 2016
(in thousands, except share data)
New Mountain Finance Corporation (“NMFC” or the “Company”) is a Delaware corporation that was originally incorporated on June 29, 2010 and completed its
initial public offering ("IPO") on May 19, 2011. NMFC is a closed-end, non-diversified management investment company that has elected to be regulated as a business
development company (“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”).
New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) is a wholly-owned subsidiary of New Mountain Capital, L.L.C. ("New Mountain
Capital", defined as New Mountain Capital Group, L.L.C. and its affiliates). New Mountain Capital is a firm with a track record of investing in the middle market. New
Mountain Capital focuses on investing in defensive growth companies across its private equity, public equity and credit investment vehicles. The Investment Adviser
manages the Company's day-to-day operations and provides it with investment advisory and management services. New Mountain Finance Administration, L.L.C. (the
"Administrator”), a wholly-owned subsidiary of New Mountain Capital, provides the administrative services necessary to conduct the Company's day-to-day operations.
The Company’s wholly-owned subsidiary, New Mountain Finance Holdings, L.L.C. (“NMF Holdings” or the "Predecessor Operating Company"), is a Delaware
limited liability company whose assets are used to secure NMF Holdings’ credit facility. For additional information about the Company's historical organizational
structure prior to May 8, 2014, see “—Historical Structure". NMF Ancora Holdings Inc. (“NMF Ancora”), NMF QID NGL Holdings, Inc. (“NMF QID”) and NMF YP
Holdings Inc. (“NMF YP”), the Company's wholly-owned subsidiaries, are structured as Delaware entities that serve as tax blocker corporations which hold equity or
equity-like investments in portfolio companies organized as limited liability companies (or other forms of pass-through entities). The Company consolidates its tax
blocker corporations for accounting purposes. The tax blocker corporations are not consolidated for income tax purposes and may incur income tax expense as a result of
their ownership of portfolio companies. Additionally, the Company has a wholly-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-owned direct and indirect subsidiaries of the Company. SBIC LP received a license from the United States ("U.S.") Small Business Administration (the “SBA”) to
operate as a small business investment company (“SBIC”) under Section 301(c) of the Small Business Investment Act of 1958, as amended (the “1958 Act”).
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. Similar to the Company, SBIC LP’s investment objective is to generate current income and capital appreciation under the investment criteria used by
the Company, however, SBIC LP’s investments must be in SBA eligible companies. The Company’s portfolio may be concentrated in a limited number of industries. As
of December 31, 2016, the Company’s top five industry concentrations were business services, software, consumer services, investment fund and education.
Historical Structure
On May 19, 2011, NMFC priced its 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 (as defined below). In connection with NMFC’s
IPO and through a series of transactions, NMF Holdings acquired all
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
of the operations of the Predecessor Entities, including all of the assets and liabilities related to such operations. 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 May 8, 2014, NMF Holdings was externally managed by the Investment Adviser 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 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.
Until April 25, 2014, New Mountain Finance AIV Holdings Corporation (“AIV Holdings”) was a Delaware corporation that was originally incorporated on
March 11, 2011. Guardian AIV, a Delaware limited partnership, was AIV Holdings’ sole stockholder. AIV Holdings was a closed-end, non-diversified management
investment company that was regulated as a BDC under the 1940 Act. As such, AIV Holdings was obligated to comply with certain regulatory requirements. AIV
Holdings was treated, and complied with the requirements to qualify annually, as a RIC under the Code. AIV Holdings was dissolved on April 25, 2014.
Prior to May 8, 2014, NMFC and AIV Holdings were holding companies with no direct operations of their own, and their sole asset was their 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 December 31, 2016, NMFC raised approximately $533,103 in net proceeds from additional offerings of common stock and
issued shares of its common stock valued at approximately $288,416 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 the additional offerings. With the completion of the final secondary offering on February 3,
2014, NMFC owned 100.0% of the units of NMF Holdings, which became a wholly-owned subsidiary of NMFC.
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 determined that continuation as a BDC was not in the best interest of AIV Holdings and Guardian AIV. 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
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 the 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 joint annual meeting of the stockholders of NMFC and the sole unit holder of NMF Holdings 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 a 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.
Effective May 8, 2014, NMF Holdings amended and restated its 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’ 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 direct and indirect 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”). NMFC
continues to remain a BDC under the 1940 Act.
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 held at NMF Holdings will continue to be used to secure
NMF Holdings’ credit facility.
Prior to December 18, 2014, New Mountain Finance SPV Funding, L.L.C. (“NMF SLF”) was a Delaware limited liability company. NMF SLF was a wholly-
owned subsidiary of NMF Holdings and thus a wholly-owned indirect subsidiary of the Company. NMF SLF was bankruptcy-remote and non-recourse to NMFC. As part
of an amendment to the Company’s existing credit facilities with Wells Fargo Bank, National Association, NMF SLF merged with and into NMF Holdings on
December 18, 2014. See Note 7. Borrowings, for details.
Note 2. Summary of Significant Accounting Policies
Basis of accounting—The Company's consolidated financial statements have been prepared in conformity with GAAP. The Company is an investment company
following accounting and reporting guidance in Accounting Standards Codification Topic 946, Financial Services—Investment Companies, ("ASC 946"). NMFC
consolidates its wholly-owned direct and indirect subsidiaries: NMF Holdings, NMF Servicing, SBIC LP, SBIC GP, NMF Ancora, NMF QID and NMF YP. Previously,
the Company consolidated its wholly-owned indirect subsidiary NMF SLF until it merged with and into NMF Holdings on December 18, 2014. See Note 7. Borrowings,
for details. Prior to the Restructuring, the Predecessor Operating
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 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 consolidated 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.
The Company's consolidated financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-K and
Article 6 of Regulation S-X. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation
of financial statements have been included.
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 procedures:
i.
ii.
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.
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:
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 a commitment 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.
Collateralized agreements or repurchase financings—The Company follows the guidance in Accounting Standards Codification Topic 860, Transfers and
Servicing—Secured Borrowing and Collateral, ("ASC 860") when accounting for transactions involving the purchases of securities under collateralized agreements to
resell (resale agreements). These transactions are treated as collateralized financing transactions and are recorded at their contracted resale or repurchase amounts, as
specified in the respective agreements. Interest on collateralized agreements is accrued and recognized over the life of the transaction and included in interest income. As
of December 31, 2016 and December 31, 2015, the Company held one collateralized agreement to resell with a cost basis of $30,000 and $30,000, respectively, and a
carrying value of $29,218 and $29,704, respectively, and collateralized by a second lien bond in Northstar GOM Holdings Group LLC with a fair value of $29,218 and
$29,704, respectively. The collateralized agreement to resell is guaranteed by a private hedge fund with the most recently reported assets under management of
approximately $690,000 and assets under management of approximately $716,590 as of December 31, 2015. Pursuant to the terms of the collateralized agreement, the
private hedge fund is obligated to repurchase the collateral from the Company at the par value of the collateralized agreement once called upon by the Company or if the
private hedge fund's total assets under management fall below the agreed upon thresholds. The collateralized agreement was called upon by the Company but the
counterparty failed to repurchase the collateral at its par value in accordance with the terms of the collateralized agreement. As of December 31, 2016, litigation is on-
going in the state of New York and the Cayman Islands to resolve this matter. The collateralized agreement earned interest at a weighted average rate of 16.0% and 15.0%
per annum as of December 31, 2016 and December 31, 2015, respectively.
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
119
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
that there is insignificant risk of changes in value. These securities have original maturities of three months or less. The Company did not hold any cash equivalents as of
December 31, 2016 and December 31, 2015.
Revenue recognition
Sales and paydowns of investments: Realized gains and losses on investments are determined on the specific identification method.
Interest and dividend 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 and certain preferred equity investments in the portfolio that contain a payment-in-
kind ("PIK") interest or dividend provision. PIK interest and dividends are accrued and recorded as income at the contractual rates, if deemed collectible. The PIK interest
and dividends are added to the principal or share balances on the capitalization dates and are generally due at maturity or when redeemed by the issuer.
Dividend income on common equity is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio
companies. Dividend income on preferred securities is recorded as dividend income on an accrual basis to the extent that such amounts are deemed collectible.
Non-accrual income: Investments are placed on non-accrual status when principal or interest payments are past due for 30 days or more and when there is
reasonable doubt that principal or interest will be collected. Accrued cash and un-capitalized PIK interest or dividends are reversed when an investment is placed on non-
accrual status. Previously capitalized PIK interest or dividends are not reversed when an investment is placed on non-accrual status. Interest or dividend payments
received on non-accrual investments may be recognized as income or applied to principal depending upon management's judgment of the ultimate outcome. Non-accrual
investments are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current.
Other income: Other income represents delayed compensation, consent or amendment fees, revolver fees, structuring fees, upfront fees, management fees from
a non-controlled/affiliated investment and other miscellaneous fees received and are typically non-recurring in nature. 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 and upfront fees are
recognized as income when earned, usually when paid at the closing of the investment and are non-refundable.
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.
120
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 over the stated life of the related borrowing. See Note 7. Borrowings, for details. On January 1,
2016, the Company adopted Accounting Standards Update No. 2015-03, Interest-Imputation of Interest Subtopic 835-30-Simplifying the Presentation of Debt Issuance
Costs (“ASU 2015-03”). Upon adoption, the Company revised its presentation of deferred financing costs from an asset to a liability, which is a direct deduction to its
debt on the Consolidated Statements of Assets and Liabilities. In addition, the Company retrospectively revised its presentation of $13,992 of deferred financing costs that
were previously presented as an asset as of December 31, 2015, which resulted in a decrease to total assets and total liabilities as of December 31, 2015.
Deferred offering costs—The Company's deferred offering costs consist of fees and expenses incurred in connection with equity offerings and the filing of shelf
registration statements. Upon the issuance of shares, offering costs are charged as a direct reduction to net assets. Deferred offering costs are included in other assets on
the Company's Consolidated Statements of Assets and Liabilities.
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 U.S. federal income tax on the portion of taxable income and gains timely distributed to its stockholders.
To continue to qualify and be subject to tax 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 U.S. 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 U.S. 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 year ended December 31, 2016, the Company recognized a total income tax benefit of approximately $490 for the Company's consolidated subsidiaries.
For the year ended December 31, 2016, the Company recorded current income tax expense of approximately $152 and deferred income tax benefit of approximately $642.
For the year ended December 31, 2015, the Company recognized a total provision for income taxes of $1,343 for the Company's consolidated subsidiaries. For the year
ended December 31, 2015, the Company recorded current income tax expense of approximately $160 and deferred income tax expense of approximately $1,183. For the
year ended December 31, 2014, the Company recognized a total provision for income taxes of $929 for the Company's consolidated subsidiaries. For the year ended
December 31, 2014, the Company recorded current income tax expense of approximately $436 and deferred income tax expense of approximately $493.
As of December 31, 2016 and December 31, 2015, the Company had $1,034 and $1,676, respectively, of deferred tax liabilities primarily relating to deferred
taxes attributable to certain differences between the computation of income for U.S. federal income tax purposes as compared to GAAP. As of December 31, 2015, the
Company had a deferred tax asset of $520 attributable to one of the Company’s consolidated subsidiaries primarily related to net operating losses. The Company
determined that it was more likely than not that the subsidiary would have insufficient taxable income to realize some portion
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
or all of the deferred tax asset. As such, as of December 31, 2015, a full valuation allowance of $520 has been recorded against the deferred tax asset.
The Company has adopted the Income Taxes topic of the Accounting Standards Codification Topic 740 ("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 uncertain income tax positions that do not meet the more likely than not threshold through December 31, 2016. The 2013 through 2016 tax
years remain subject to examination by the U.S. federal, state, and local tax authorities.
Distributions—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 equal to or 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 ask 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.
Share repurchase program—On February 4, 2016, the Company's board of directors authorized a program for the purpose of repurchasing up to $50,000 worth
of the Company's common stock. Under the repurchase program, the Company was permitted, but was not obligated to, repurchase its outstanding common stock in the
open market from time to time provided that it complied with the Company's code of ethics and the guidelines specified in Rule 10b-18 of the Exchange Act, including
certain price, market volume and timing constraints. In addition, any repurchases were conducted in accordance with the 1940 Act. On December 23, 2016, the
Company's board of directors extended the Company's repurchase program and the Company expects the repurchase program to be in place until the earlier of December
31, 2017 or until $50,000 of its outstanding shares of common stock have been repurchased. During the year ended December 31, 2016, the Company repurchased a total
of 248,499 shares of the Company's common stock in the open market for $2,948, including commissions paid.
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 EPS is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average number of
shares of common stock outstanding during the period of computation. Diluted EPS is computed by dividing net increase (decrease) in net assets resulting from operations
by the weighted average number of shares of common stock assuming all potential shares had been issued, and its related net impact to net assets accounted for, and the
additional shares of common stock were dilutive. 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.
122
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 consolidated 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 consolidated 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 year ended December 31, 2015, the Company adjusted accounting estimates related to the classification of dividend income for
distributions received from three of the Company's equity investments. Based on updated tax projections received during the year ended December 31, 2015, the
Company decreased dividend income by $533, which decreased the equity investments cost basis by $3 and increased the realized gain by $530 to agree to the tax
treatment on the equity investments.
Note 3. Investments
At December 31, 2016, the Company's investments consisted of the following:
Investment Cost and Fair Value by Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Cost
Fair Value
$
706,140
638,347
68,341
162,350
700,580
604,203
66,559
187,475
1,575,178
$
1,558,817
$
$
123
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Investment Cost and Fair Value by Industry
Business Services
Software
Consumer Services
Investment Fund
Education
Energy
Healthcare Services
Distribution & Logistics
Federal Services
Net Lease
Business Products
Media
Retail
Healthcare Information Technology
Total investments
At December 31, 2015, the Company's investments consisted of the following:
Investment Cost and Fair Value by Type
First lien
Second lien
Subordinated
Equity and other
Total investments
124
Cost
Fair Value
$
446,008
424,965
105,868
94,460
93,651
81,390
70,731
88,768
59,881
27,000
25,613
21,189
21,006
14,648
461,997
420,896
106,392
94,460
94,168
75,168
71,844
61,696
60,116
27,000
24,958
24,162
21,016
14,944
1,575,178
1,558,817
Cost
Fair Value
$
711,601
656,165
95,429
105,521
670,023
631,985
87,005
123,211
1,568,716
$
1,512,224
$
$
$
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Investment Cost and Fair Value by Industry
Software
Business Services
Education
Distribution & Logistics
Federal Services
Consumer Services
Energy
Healthcare Services
Media
Healthcare Products
Business Products
Manufacturing
Investment Fund
Retail
Industrial Services
Total investments
$
Cost
Fair Value
$
384,805
367,109
167,222
123,053
95,459
69,250
96,717
66,923
43,489
38,664
35,188
29,852
23,000
21,032
6,953
370,892
368,409
165,947
117,375
95,477
68,269
65,521
63,255
47,804
37,648
33,420
29,850
21,914
21,000
5,443
$
1,568,716
$
1,512,224
During the fourth quarter of 2016, the Company placed a portion of its first lien position in Sierra Hamilton LLC / Sierra Hamilton Finance, Inc. ("Sierra") on
non-accrual status due to its ongoing restructuring. As of December 31, 2016, the portion of Sierra first lien placed on non-accrual status represented an aggregate cost
basis of $8,169, an aggregate fair value of $5,315 and total unearned interest income of $553 for the year then ended.
During the third quarter of 2016, the Company placed its entire second lien position in Transtar Holding Company (“Transtar”) on non-accrual status due to its
ongoing restructuring. As of December 31, 2016, the Company's investment in Transtar had an aggregate cost basis of $31,166, an aggregate fair value of $3,865 and total
unearned interest income of $3,963 for the year then ended.
During the second quarter of 2016, the Company placed a portion of its first lien position in Permian Tank & Manufacturing, Inc. (“Permian”) on non-accrual
status due to its ongoing restructuring. As of September 30, 2016, the Company’s investment in Permian had an aggregate cost basis of $24,444, an aggregate fair value of
$7,064 and total unearned interest income of $1,273 for the nine months then ended. In October 2016, Permian completed a restructuring which resulted in a material
modification of the original terms and an extinguishment of the Company’s original investment in Permain. Prior to the extinguishment in October 2016, the Company’s
original investment in Permian had an aggregate cost of $25,047, an aggregate fair value of $7,064 and total unearned interest income of $1,422 for the year ended
December 31, 2016. The extinguishment resulted in a realized loss of $17,983. Post restructuring, the Company’s investments in Permian have been restored to full
accrual status. As of December 31, 2016, the Company’s investments in Permian have an aggregate cost basis of $8,965 and an aggregate fair value of $11,193.
During the third quarter of 2016, the Company received notice that there would be no recovery of the outstanding principal and interest owed on its two super
priority first lien positions in ATI Acquisition Company ("ATI"). As of June 30, 2016, the Company’s first lien positions in ATI had an aggregate cost of $1,528 and an
aggregate fair value of $0 and no unearned interest income for the period then ended. The Company wrote off its first lien positions in ATI and recognized an aggregate
realized loss of $1,528 during the three months ended September 30, 2016. As of December 31, 2016, the Company's preferred shares and warrants in Ancora Acquisition
LLC, which were received as a result of the Company's first lien positions in ATI, had an aggregate cost basis of $83 and an aggregate fair value of $393.
125
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
During the first quarter of 2015, the Company placed a portion of its second lien position in Edmentum, Inc. (“Edmentum”) on non-accrual status due to its
ongoing restructuring. As of March 31, 2015, the Company’s investment in Edmentum had an aggregate cost basis of $30,771, an aggregate fair value of $15,575 and
total unearned interest income of $438 for the three months then ended. In June 2015, Edmentum completed a restructuring which resulted in a material modification of
the original terms and an extinguishment of the Company’s original investment in Edmentum. Prior to the extinguishment in June 2015, the Company’s original
investment in Edmentum had an aggregate cost of $31,636, an aggregate fair value of $16,437 and total unearned interest income of $851 for the six months ended
June 30, 2015. The extinguishment resulted in a realized loss of $15,199. Post restructuring, the Company’s investments in Edmentum have been restored to full accrual
status. As of December 31, 2016, the Company’s investments in Edmentum have an aggregate cost basis of $23,031 and an aggregate fair value of $23,247.
During the first quarter of 2015, the Company’s first lien position in Education Management LLC (“EDMC”) was non-income producing as a result of the
portfolio company undergoing a restructuring. As of December 31, 2014, the Company’s investment in EDMC had an aggregate cost basis of $2,987, an aggregate fair
value of $1,376 and no unearned interest income for the three months then ended. In January 2015, EDMC completed a restructuring which resulted in a material
modification of the original terms and an extinguishment of the Company’s original investment in EDMC. Prior to the extinguishment in January 2015, the Company’s
original investment in EDMC had an aggregate cost of $2,987, an aggregate fair value of $1,376 and no unearned interest income for the period then ended. The
extinguishment resulted in a realized loss of $1,611. Post restructuring, the Company’s investments in EDMC are income producing. As of December 31, 2016, the
Company’s investments in EDMC have an aggregate cost basis of $1,495 and an aggregate fair value of $160.
During the third quarter of 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 December 31, 2014, the Company's investments in UniTek had an aggregate cost basis of $47,357, an aggregate fair value of $35,227 and total
unearned interest income of $975 for the year then ended. In January 2015, UniTek emerged from “Pre-Packaged” Chapter 11 Bankruptcy and completed its
restructuring. The restructuring resulted in a material modification of the original terms and an extinguishment of the Company’s original investments in UniTek. Prior to
the extinguishment in January 2015, the Company’s original investments in UniTek had an aggregate cost of $52,902, an aggregate fair value of $40,137 and total
unearned interest income of $68 for the period then ended. The extinguishment resulted in a realized loss of $12,765. Post restructuring, the Company’s investments in
UniTek have been restored to full accrual status. As of December 31, 2016, the Company’s investments in UniTek have an aggregate cost basis of $42,119 and an
aggregate fair value of $56,361.
As of December 31, 2016, the Company had unfunded commitments on revolving credit facilities and bridge facilities of $27,915 and $0, respectively. As of
December 31, 2016, the Company had unfunded commitments in the form of delayed draws or other future funding commitments of $16,368. The unfunded commitments
on revolving credit facilities and delayed draws are disclosed on the Company's Consolidated Schedule of Investments as of December 31, 2016.
As of December 31, 2015, the Company had unfunded commitments on revolving credit facilities and bridge facilities of $17,576 and $0, respectively. As of
December 31, 2015, the Company had unfunded commitments in the form of delayed draws or other future funding commitments of $8,678. The unfunded commitments
on revolving credit facilities and delayed draws are disclosed on the Company's Consolidated Schedule of Investments as of December 31, 2015.
NMFC Senior Loan Program I LLC
NMFC Senior Loan Program I LLC (“SLP I”) was formed as a Delaware limited liability company on May 27, 2014 and commenced operations on June 10,
2014. SLP I is a portfolio company held by the Company. SLP I is structured as a private investment fund, in which all of the investors 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 “SLP I Agreement”) and will continue in existence until June 10, 2019, subject to earlier termination pursuant to certain terms of
the SLP I Agreement. The term may be extended for up to one year pursuant to certain terms of the SLP I Agreement. SLP I has a three year re-investment period. 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.
126
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
SLP I is capitalized with $93,000 of capital commitments and $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 25.0% ownership, with third party investors representing the remaining capital commitment. As of December 31,
2016, SLP I had total investments with an aggregate fair value of approximately $348,672, debt outstanding of $256,517 and capital that had been called and funded of
$93,000. As of December 31, 2015, SLP I had total investments with an aggregate fair value of approximately $349,704, debt outstanding of $267,617 and capital that
had been called and funded of $93,000. The Company's investment in SLP I is disclosed on the Company's Consolidated Schedules of Investments as of December 31,
2016 and December 31, 2015.
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 to SLP I. As a result, SLP I is classified as an affiliate of the Company. No management fee is charged on the Company's
investment in SLP I in connection with the administrative services provided to SLP I. For the years ended December 31, 2016, December 31, 2015 and December 31,
2014, the Company earned approximately $1,163, $1,215 and $468, respectively, in management fees related to SLP I which is included in other income. As of
December 31, 2016 and December 31, 2015, approximately $286 and $311, respectively, of management fees related to SLP I was included in receivable from affiliates.
For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, the Company earned approximately $3,728, $3,619 and $1,066, respectively, of
dividend income related to SLP I, which is included in dividend income. As of December 31, 2016 and December 31, 2015, approximately $861 and $918, respectively,
of dividend income related to SLP I was included in interest and dividend receivable.
New Mountain Net Lease Corporation
New Mountain Net Lease Corporation ("NMNLC") was formed as a Maryland corporation on April 18, 2016 and commenced operations on August 12, 2016.
NMNLC was formed to acquire commercial real properties that are subject to "triple net" leases and to qualify as a real estate investment trust, or REIT, within the
meaning of Section 856(a) of the Code. As of December 31, 2016, NMNLC had assets of approximately $75,544 and non-recourse asset level debt outstanding of
approximately $47,936. The Company has contributed $27,000 to NMNLC as of December 31, 2016. The Company's investment in NMNLC is disclosed on the
Company's Consolidated Schedule of Investments as of December 31, 2016.
Below is certain summarized property information for NMNLC as of December 31, 2016:
Tenant
Lease Expiration Date
Location
Total Square Feet
December 31, 2016
Equity as of
A.P. Plasman, Inc.
Plasman Corp, LLC / A-Brite LP
FMH Conveyors, LLC
J.R. Automation Technologies, LLC
Kirlin Group, LLC
9/30/2031
9/30/2033
10/31/2031
1/31/2031
6/30/2029
Ontario, Canada
Fort Payne, AL
Cleveland, OH
Jonesboro, AR
Holland, MI
Rockville, MD
436
261
195
88
95
$
$
7,294
5,132
5,136
2,061
7,547
27,170
For the year ended December 31, 2016, the Company earned approximately $540 of dividend income related to NMNLC, which is included in dividend income.
For the year ended December 31, 2016, New Mountain Capital reimbursed NMNLC approximately $189 in non-recurring organizational expenses incurred in connection
with the formation and organization of NMNLC. As of December 31, 2016, approximately $540 of dividend income related to NMNLC was included in interest and
dividend receivable.
127
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Unconsolidated Significant Subsidiaries
In accordance with Regulation S-X Rules 3-09 and 4-08(g), the Company evaluates its unconsolidated controlled portfolio companies as significant subsidiaries
under the respective rules. As of December 31, 2016, the following portfolio companies were considered significant unconsolidated subsidiaries under Regulation S-X
Rule 4-08(g). Based on the requirements under Regulation S-X Rule 4-08(g), the summarized consolidated financial information of these portfolio companies is shown
below:
NMFC Senior Loan Program II LLC
NMFC Senior Loan Program II LLC ("SLP II") was formed as a Delaware limited liability company on March 9, 2016 and commenced operations on April 12,
2016. SLP II is structured as a private joint venture investment fund between the Company and SkyKnight Income, LLC (“SkyKnight”) and operates under a limited
liability company agreement (the "SLP II Agreement"). The purpose of the joint venture is to invest primarily in senior secured loans issued by portfolio companies within
the Company's core industry verticals. These investments are typically broadly syndicated first lien loans. All investment decisions must be unanimously approved by the
board of managers of SLP II, which has equal representation from the Company and SkyKnight. SLP II has a three year investment period and will continue in existence
until April 12, 2021. The term may be extended for up to one year pursuant to certain terms of the SLP II Agreement.
SLP II is capitalized with equity contributions which are called from its members, on a pro-rata basis based on their equity commitments, as transactions are
completed. Any decision by SLP II to call down on capital commitments requires approval by the board of managers of SLP II. The Company and SkyKnight have
committed to provide $79,400 and $20,600 of equity to SLP II, respectively. As of December 31, 2016 the Company and SkyKnight have contributed $71,460 and
$18,540, respectively. The Company’s investment in SLP II is disclosed on the Company’s Consolidated Schedule of Investments as of December 31, 2016.
On April 12, 2016, SLP II closed its $275,000 revolving credit facility with Wells Fargo Bank, National Association which matures on April 12, 2021 and bears
interest at a rate of the London Interbank Offered Rate ("LIBOR") plus 1.75% per annum. As of December 31, 2016, SLP II had total investments with an aggregate fair
value of approximately $361,719 and debt outstanding under its credit facility of $249,960.
128
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following table is a listing of the individual loans in SLP II's portfolio as of December 31, 2016:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal
Amount or Par
Value
Cost
Fair
Value (2)
First lien:
ADG, LLC
Healthcare Services
5.75% (L + 4.75%)
9/28/2023
$
17,207
$
17,040
$
AssuredPartners, Inc.
Business Services
5.25% (L + 4.25%)
Beaver-Visitec International Holdings, Inc.
Healthcare Products
6.00% (L + 5.00%)
Coinstar, LLC
Cvent, Inc.
DigiCert Holdings, Inc.
Eiger Acquisition B.V. (Eiger Co-Borrower, LLC)
Consumer Services
5.25% (L + 4.25%)
Software
Software
Software
6.00% (L + 5.00%)
6.00% (L + 5.00%)
6.25% (L + 5.25%)
Emerald 2 Limited
Business Services
5.00% (L + 4.00%)
Engility Corporation (fka TASC, Inc.)
Federal Services
5.81% (Base + 4.72%)
Evo Payments International, LLC
Business Services
6.00% (L + 5.00%)
Explorer Holdings, Inc.
Globallogic Holdings Inc.
GOBP Holdings Inc.
Healthcare Services
6.00% (L + 5.00%)
Business Services
5.50% (L + 4.50%)
Retail
5.00% (L + 4.00%)
Hyperion Insurance Group Limited
Business Services
5.50% (L + 4.50%)
J.D. Power and Associates
Kronos Incorporated
Masergy Holdings, Inc.
McGraw-Hill Global Education Holdings, LLC
Ministry Brands, LLC
Business Services
5.25% (L + 4.25%)
Software
5.00% (L + 4.00%)
Business Services
5.50% (L + 4.50%)
Education
Software
5.00% (L + 4.00%)
6.00% (L + 5.00%)
Mister Car Wash Holdings, Inc.
Consumer Services
5.25% (L + 4.25%)
Navex Global, Inc.
Software
5.99% (L + 4.75%)
nThrive, Inc. (fka Precyse Acquisition Corp.)
Healthcare Services
6.50% (L + 5.50%)
Poseidon Intermediate, LLC
Quest Software US Holdings Inc.
Rocket Software, Inc.
SolarWinds Holdings, Inc.
TTM Technologies, Inc.
Software
Software
Software
Software
5.25% (L + 4.25%)
7.00% (L + 6.00%)
5.25% (L + 4.25%)
5.50% (L + 4.50%)
Business Products
5.25% (L + 4.25%)
Vencore, Inc. (fka SI Organization, Inc., The)
Federal Services
5.75% (L + 4.75%)
Vision Solutions, Inc.
Vivid Seats LLC
Software
7.50% (Base + 6.50%)
Business Services
6.75% (L + 5.75%)
WD Wolverine Holdings, LLC
Healthcare Services
6.50% (L + 5.50%)
Zywave, Inc.
Software
6.00% (L + 5.00%)
10/21/2022
8/21/2023
9/27/2023
11/29/2023
10/21/2021
2/18/2022
5/14/2021
8/14/2023
12/22/2023
5/2/2023
6/20/2022
10/21/2021
4/29/2022
9/7/2023
11/1/2023
12/15/2023
5/4/2022
12/2/2022
8/20/2021
11/19/2021
10/20/2022
8/15/2022
10/31/2022
10/14/2023
2/3/2023
5/31/2021
11/23/2019
6/16/2022
10/12/2022
10/17/2023
11/17/2022
11,862
14,962
4,987
10,000
14,900
10,507
1,277
13,860
17,500
4,975
10,000
14,955
14,401
9,975
10,000
7,500
9,950
7,846
8,312
14,933
9,950
14,962
10,000
14,962
14,688
13,548
10,801
9,938
4,000
10,200
17,500
11,847
14,819
4,963
9,901
14,814
10,350
1,206
13,793
17,413
4,929
9,900
14,816
14,179
9,927
9,951
7,463
9,905
7,807
8,250
14,718
9,813
14,962
9,853
14,817
14,697
13,444
10,780
9,845
3,922
9,900
17,414
17,121
12,058
14,963
5,054
10,125
14,881
10,402
1,174
14,080
17,602
5,028
10,013
14,985
14,476
10,075
10,105
7,563
9,971
7,807
8,354
14,858
10,083
15,055
10,153
15,129
14,852
13,599
10,942
9,919
3,985
9,894
17,413
$
360,458
$
357,438
$
361,719
_______________________________________________________________________________
(1)
All interest is payable in cash unless otherwise indicated. A majority of the variable rate debt investments bear interest at a rate that may be determined by
reference to the LIBOR (L), the Prime Rate (P) and the alternative base rate (Base). For each investment, the current interest rate provided reflects the rate in
effect as of December 31, 2016.
Represents the fair value in accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). The
Company's board of directors does not determine the fair value of the investments held by SLP II.
(2)
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Below is certain summarized financial information for SLP II as of December 31, 2016 and for the year ended December 31, 2016:
Selected Balance Sheet Information:
Investments at fair value (cost of $357,438)
Receivable from unsettled securities sold
Cash and other assets
Total assets
Credit facility
Deferred financing costs
Payable for unsettled securities purchased
Distribution payable
Other liabilities
Total liabilities
Members' capital
Total liabilities and members' capital
Selected Statement of Operations Information:
Interest income
Other income
Total investment income
Interest and other financing expenses
Other expenses
Total expenses
Net investment income
Net realized gains on investments
Net change in unrealized appreciation (depreciation) of investments
December 31, 2016
361,719
1,007
10,138
372,864
249,960
(2,565)
24,862
3,000
3,350
278,607
94,257
372,864
Year Ended
December 31, 2016(1)
7,463
572
8,035
3,558
650
4,208
3,827
599
4,281
8,707
$
$
$
$
$
$
$
Net increase in members' capital
_______________________________________________________________________________
(1)
For the year ended December 31, 2016, amounts reported relate to the period from April 12, 2016 (commencement of operations) to December 31, 2016.
For the year ended December 31, 2016, the Company earned approximately $3,533 of dividend income related to SLP II, which is included in dividend income.
As of December 31, 2016, approximately $2,382 of dividend income related to SLP II was included in interest and dividend receivable.
The Company has determined that SLP II is an investment company under ASC 946, however, in accordance with such guidance the Company will generally not
consolidate its investment in a company other than a wholly-owned investment company subsidiary. Furthermore, Accounting Standards Codification Topic 810,
Consolidation, concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate the joint
venture since neither has control. Accordingly, the Company does not consolidate SLP II.
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Table of Contents
UniTek Global Services, Inc.
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
UniTek Global Services, Inc. (“UniTek”) is a full service provider of technical services to customers in the wireless telecommunications, public safety, satellite
television and broadband cable industries in the U.S. and Canada. UniTek’s customers are primarily satellite television, broadband cable and other telecommunications
companies, their contractors, and municipalities and related agencies. UniTek’s customers utilize its services to build and maintain their infrastructure and networks and to
provide residential and commercial fulfillment services, which is critical to their ability to deliver voice, video and data services to end users.
Below is certain summarized financial information for UniTek:
December 31, 2016
December 31, 2015
$
$
$
$
94,499
114,116
208,615
47,105
113,781
160,886
47,729
$
$
$
$
78,202
125,241
203,443
36,167
123,361
159,528
43,915
Balance Sheet:
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Total equity
Summary of Operations:
Net sales
Cost of goods sold
Gross profit
Other expenses
Years Ended December 31,
2016
2015
2014
286,748
224,800
61,948
58,965
2,983
2,983
$
$
269,893
218,331
$
51,562
58,863
(7,301)
(7,301)
$
334,139
291,672
42,467
116,612
(74,145)
(74,145)
$
$
Net income (loss) from continuing operations before extraordinary items
Net income (loss)
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.
The Company may directly invest in the equity of private companies or, in some cases, equity investments could be made in connection with a debt investment.
Equity investments may or may not fluctuate in value resulting in recognized realized gains or losses upon disposition.
131
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Note 4. Fair Value
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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. 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 and unobservable. 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 and unobservable inputs.
The inputs into the determination of fair value require significant judgment or estimation by management and consideration of factors specific to each
investment. 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 December 31, 2016:
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
$
700,580
604,203
66,559
187,475
1,558,817
$
132
— $
—
—
28
28
$
$
169,979
280,026
41,906
—
530,601
324,177
24,653
187,447
491,911
$
1,066,878
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following table summarizes the levels in the fair value hierarchy that the Company's portfolio investments fall into as of December 31, 2015:
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
$
670,023
631,985
87,005
123,211
1,512,224
$
— $
—
—
316
316
$
$
329,133
449,227
33,546
15
811,921
$
340,890
182,758
53,459
122,880
699,987
The following table summarizes the changes in fair value of Level III portfolio investments for the year ended December 31, 2016, 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
December 31, 2016:
Fair value, December 31, 2015
Total gains or losses included in earnings:
Net realized gains (losses) on investments
Net change in unrealized appreciation
(depreciation) of investments
Purchases, including capitalized PIK and revolver
fundings(1)
Proceeds from sales and paydowns of investments
(1)
Transfers into Level III(2)
Transfers out of Level III(2)
Fair value, December 31, 2016
Unrealized appreciation (depreciation) for the
Total
First Lien
Second Lien
Subordinated
Equity and
other
$
699,987
$
340,890
$
182,758
$
53,459
$
122,880
2,259
9,491
411,500
(203,431)
156,122
(9,050)
(482)
113
16,016
157,164
(102,308)
119,321
—
(16,049)
140,089
(10,469)
36,785
(9,050)
119
1,802
4,273
(35,000)
—
—
$
1,066,878
$
530,601
$
324,177
$
24,653
$
2,509
7,722
109,974
(55,654)
16
—
187,447
period relating to those Level III assets that were
still held by the Company at the end of the
period:
$
_______________________________________________________________________________
(1)
(2)
7,657
$
Includes reorganizations and restructurings.
As of December 31, 2016, the portfolio investments were transferred into Level III from Level II and out of Level III into Level II at fair value as of the beginning
of the period in which the reclassifications occurred.
13,205
$
(16,049)
$
1,351
$
9,150
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following table summarizes the changes in fair value of Level III portfolio investments for the year ended December 31, 2015, 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
December 31, 2015:
Fair value, December 31, 2014
Total gains or losses included in earnings:
Net realized (losses) gains on investments
Net change in unrealized appreciation
(depreciation) of investments
Purchases, including capitalized PIK and revolver
fundings
Proceeds from sales and paydowns of investments
Transfers into Level III(1)(2)
Transfers out of Level III(1)
Fair value, December 31, 2015
Unrealized (depreciation) appreciation for the
Total
First Lien
Second Lien
Subordinated
Equity and
other
$
419,681
$
169,180
$
134,406
$
35,470
$
80,625
(12,730)
12,348
418,208
(205,103)
95,190
(27,607)
(10,895)
(14,542)
7,048
237,731
(84,346)
49,779
(27,607)
6,575
116,135
(105,227)
45,411
—
—
(4,797)
23,709
(923)
—
—
$
699,987
$
340,890
$
182,758
$
53,459
$
12,707
3,522
40,633
(14,607)
—
—
122,880
period relating to those Level III assets that were
still held by the Company at the end of the
period:
$
_______________________________________________________________________________
(999)
$
(4,332)
$
(7,384)
$
(4,797)
$
15,514
(1)
(2)
Includes reorganizations and restructurings.
As of December 31, 2015, 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.
Except as noted in the tables above, there were no other transfers in or out of Level I, II, or III during the years ended December 31, 2016 and December 31,
2015. Transfers into Level III occur as quotations obtained through pricing services are not deemed representative of fair value as of the balance sheet date and such assets
are internally valued. As quotations obtained through pricing services are substantiated through additional market sources, investments are transferred out of Level III. In
addition, transfers out of Level III and transfers into Level III occur based on the increase or decrease in the availability of certain observable inputs.
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. The Company typically determines the fair value of its performing debt investments utilizing an income approach. Additional consideration is given using
a market based approach, as well as reviewing the overall underlying portfolio company's performance and associated financial risks. The following outlines additional
details on the approaches considered:
134
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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.
For debt investments, the Company may employ the Market Based Approach (as described below) to assess the total enterprise value of the portfolio company,
in order to evaluate the enterprise value coverage of the Company’s debt investment. For equity investments or in cases where the Market Based Approach implies a lack
of enterprise value coverage for the debt investment, the Company may additionally employ a discounted cash flow analysis based on the free cash flows of the portfolio
company to assess the total enterprise value.
After enterprise value coverage is demonstrated for the Company’s debt investments through the method(s) above, the Income Based Approach (as described
below) may be employed to estimate the fair value of the investment.
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 and comparable transactions. 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, and 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 the enterprise value of the portfolio company.
Significant increases or decreases in the EBITDA multiple will result in an increase or decrease in enterprise value, which may result in an increase or decrease in the fair
value estimate of the investment. In applying the market based approach as of December 31, 2016 and December 31, 2015, the Company used the relevant EBITDA
multiple ranges set forth in the table below to determine the enterprise value of its portfolio companies. The Company believes this was a reasonable range in light of
current comparable company trading levels and the specific portfolio 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 December 31, 2016 and December 31, 2015, the Company used the discount ranges set forth in the table below to value investments in its portfolio
companies.
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The unobservable inputs used in the fair value measurement of the Company's Level III investments as of December 31, 2016 were as follows:
Fair Value as of December
31, 2016
Approach
Unobservable Input
Low
Type
First lien
$
417,464 Market & income approach
86,801 Market quote
26,336
Other
EBITDA multiple
Revenue multiple
Discount rate
Broker quote
N/A(1)
Second lien
191,419 Market & income approach
EBITDA multiple
Subordinated
24,653 Market & income approach
96,315 Market quote
36,443
Other
Equity and other
158,947 Market & income approach
Discount rate
Broker quote
N/A(1)
EBITDA multiple
Revenue multiple
Discount rate
EBITDA multiple
Revenue multiple
Discount rate
1,498
Black Scholes analysis
Expected life in years
2 Market quote
27,000
Other
$
1,066,878
Volatility
Discount rate
Broker quote
N/A(1)
Range
High
15.0x
8.0x
12.3%
N/A
N/A
16.0x
Weighted
Average
10.2x
3.0x
9.7%
N/A
N/A
11.7x
2.0x
0.5x
7.2%
N/A
N/A
5.3x
8.7%
13.0%
11.3%
N/A
N/A
4.5x
0.5x
8.7%
2.5x
0.5x
8.0%
8.8
32.2%
2.5%
N/A
N/A
N/A
N/A
8.5x
1.0x
15.8%
13.0x
1.0x
18.9%
9.3
43.8%
2.5%
N/A
N/A
N/A
N/A
7.1x
0.8x
13.6%
5.9x
0.8x
14.5%
9.1
36.4%
2.5%
N/A
N/A
_______________________________________________________________________________
(1)
Fair value was determined based on transaction pricing or recent acquisition or sale as the best measure of fair value with no material changes in operations of the
related portfolio company since the transaction date.
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The unobservable inputs used in the fair value measurement of the Company's Level III investments as of December 31, 2015 were as follows:
Fair Value as of December
31, 2015
Approach
Unobservable Input
Low
Type
First lien
$
292,507 Market & income approach
EBITDA multiple
30,719 Market quote
17,664
Other
Discount rate
Broker quote
N/A(1)
Second lien
88,977 Market & income approach
EBITDA multiple
41,544 Market quote
52,237
Other
Discount rate
Broker quote
N/A(1)
Subordinated
38,459 Market & income approach
EBITDA multiple
15,000
Other
Discount rate
N/A(1)
Equity and other
121,453 Market & income approach
EBITDA multiple
1,427
Black Scholes analysis
Expected life in years
Discount rate
$
699,987
Volatility
Discount rate
Range
High
15.5x
13.9%
N/A
N/A
16.0x
Weighted
Average
10.0x
11.0%
N/A
N/A
12.3x
4.5x
7.3%
N/A
N/A
6.5x
10.0%
14.2%
12.7%
N/A
N/A
4.5x
10.0%
N/A
2.5x
8.0%
9.8
27.0%
2.1%
N/A
N/A
9.0x
19.4%
N/A
12.0x
21.3%
10.3
30.3%
2.1%
N/A
N/A
7.6x
17.7%
N/A
6.3x
14.6%
10
28.9%
2.1%
_______________________________________________________________________________
(1)
Fair value was determined based on transaction pricing or recent acquisition or sale as the best measure of fair value with no material changes in operations of the
related portfolio company since the transaction date.
Based on a comparison to similar BDC credit facilities, the terms and conditions of the Holdings Credit Facility and the NMFC Credit Facility (as defined in
Note 7. Borrowings) are representative of market. The carrying values of the Holdings Credit Facility and NMFC Credit Facility approximate fair value as of
December 31, 2016, as the facilities are continually monitored and examined by both the borrower and the lender. The carrying value of the SBA-guaranteed debentures
approximate fair value as of December 31, 2016 based on a comparison of market interest rates for the Company's borrowings and similar entities. On September 30,
2016, additional Unsecured Notes (as defined in Note 7. Borrowings) were issued and, as such, the carrying value approximates fair value as of December 31, 2016. The
fair value of the Holdings Credit Facility, NMFC Credit Facility, SBA-guaranteed debentures and Unsecured Notes are considered Level III. The fair value of the
Convertible Notes (as defined in Note 7. Borrowings) as of December 31, 2016 was $159,034, which was based on quoted prices and considered Level II. See Note 7.
Borrowings, for details. The carrying value of the collateralized agreement approximates fair value as of December 31, 2016 and is considered Level III. 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.
137
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Note 5. Agreements
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
NMF Holdings entered into an investment advisory and management agreement, as amended and restated with the Investment Adviser on May 19, 2011. Until
May 8, 2014, under the investment advisory and management agreement, the Investment Adviser managed the day-to-day operations of, and provided investment
advisory services to, NMF Holdings. For providing these services, the Investment Adviser received 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 a new investment advisory and management agreement (the "Investment Management Agreement") with
the Investment Adviser which became effective on May 8, 2014 and was most recently re-approved by the Company's board of directors on February 8, 2017. 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.
Pursuant to the Investment Management Agreement, 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 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, less the 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 Company has not invested, and currently is not invested, in derivatives. To the extent the Company invests in
derivatives in the future, the Company will use the actual value of the derivatives, as reported on the Consolidated Statements of Assets and Liabilities, for purposes of
calculating its base management fee.
Since the IPO, the base management fee calculation has deducted the borrowings under the SLF Credit Facility. The SLF Credit Facility had historically
consisted of primarily lower yielding assets at higher advance rates. As part of an amendment to the Company's existing credit facilities with Wells Fargo Bank, National
Association, the SLF Credit Facility merged with the Predecessor Holdings Credit Facility and into the Holdings Credit Facility on December 18, 2014 (as defined in
Note 7, Borrowings). Post credit facility merger and to be consistent with the methodology since the IPO, the Investment Adviser will continue to waive management fees
on the leverage associated with those assets that share the same underlying yield characteristics with investments leveraged under the legacy SLF Credit Facility, which as
of December 31, 2016, December 31, 2015 and December 31, 2014 was approximately $297,323, $304,899 and $313,455, respectively. The Investment Adviser cannot
recoup management fees that the Investment Adviser has previously waived. For the years ended December 31, 2016, December 31, 2015 and December 31, 2014,
management fees waived were approximately $4,824, $5,219 and $686, respectively.
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, upfront, 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
stock (of which there are none as of December 31, 2016), 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.
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 of the incentive fee 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.
139
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following table summarizes the management fees and incentive fees incurred by the Company for the years ended December 31, 2016, December 31, 2015
and December 31, 2014.
Management fee
Management fee allocated from NMF Holdings
Less: management fee waiver
Total management fee
Incentive fee, excluding accrued capital gains incentive fees
Incentive fee, excluding accrued capital gains incentive fees allocated from NMF Holdings
Total incentive fee
Accrued capital gains incentive fees(1)
Accrued capital gains incentive fees allocated from NMF Holdings(1)
Total accrued capital gains incentive fees
_______________________________________________________________________________
(1)
$
$
$
Years Ended December 31,
2016
2015
2014
$
$
27,551
—
(4,824)
22,727
22,011
—
22,011
— $
—
—
$
$
25,858
—
(5,219)
20,639
20,591
—
20,591
— $
—
—
13,593
5,983
(686)
18,890
12,070
6,248
18,318
(8,573)
2,024
(6,549)
As of December 31, 2016, December 31, 2015 and December 31, 2014, no actual capital gains incentive fee was owed under the Investment Management
Agreement by the Company, as cumulative net Adjusted Realized Capital Gains did not exceed cumulative Adjusted Unrealized Capital Depreciation.
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 Consolidated Statement of Operations for the year ended December 31, 2016 is adjusted to reflect this step-up to fair market value.
Investment income
Interest income(1)
Dividend income(2)
Other income
Total investment income(3)
Total expenses pre-incentive fee(4)
Pre-Incentive Fee Net Investment Income
Incentive fee(5)
Post-Incentive Fee Net Investment Income
Net realized losses on investments(6)
Net change in unrealized appreciation (depreciation) of investments(6)
Net change in unrealized (depreciation) appreciation of securities purchased
under collateralized agreements to resell
Benefit for taxes
Net increase in net assets resulting from operations
_______________________________________________________________________________
(1)
(2)
Includes $4,270 in PIK interest from investments.
Includes $3,178 in PIK dividends from investments.
$
$
140
Year Ended
December 31, 2016
Stepped-up
Cost Basis
Adjustments
Adjusted
Year Ended
December 31, 2016
$
147,425
11,200
9,459
168,084
57,965
110,119
22,011
88,108
(16,717)
40,131
(486)
642
111,678
(65)
—
—
(65)
—
(65)
—
(65)
(151)
216
—
—
$
$
147,360
11,200
9,459
168,019
57,965
110,054
22,011
88,043
(16,868)
40,347
(486)
642
111,678
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
(3)
(4)
(5)
(6)
Includes income from non-controlled/non-affiliated investments, non-controlled/affiliated investments and controlled investments.
Includes expense waivers and reimbursements of $725 and management fee waivers of $4,824.
For the year ended December 31, 2016, the Company incurred total incentive fees of $22,011, of which none was related to the capital gains incentive fee accrual
on a hypothetical liquidation basis.
Includes net realized gains and losses on investments and net change in unrealized (deprecation) appreciation of investments from non-controlled/non-affiliated
investments, non-controlled/affiliated investments and controlled investments.
The following Consolidated Statement of Operations for the year ended December 31, 2015 is adjusted to reflect this step-up to fair market value.
Investment income
Interest income(1)
Dividend income(2)
Other income
Total investment income(3)
Total expenses pre-incentive fee(4)
Pre-Incentive Fee Net Investment Income
Incentive fee(5)
Post-Incentive Fee Net Investment Income
Net realized losses on investments(6)
Net change in unrealized (depreciation) appreciation of investments(6)
Net change in unrealized (depreciation) appreciation of securities purchased
under collateralized agreements to resell
Provision for taxes
Net increase in net assets resulting from operations
Year Ended
December 31, 2015
Stepped-up
Cost Basis
Adjustments
Adjusted
Year Ended
December 31, 2015
$
$
$
140,074
5,771
8,010
153,855
50,769
103,086
20,591
82,495
(12,789)
(35,272)
(296)
(1,183)
32,955
(131)
—
—
(131)
—
(131)
—
(131)
(78)
209
—
—
$
$
139,943
5,771
8,010
153,724
50,769
102,955
20,591
82,364
(12,867)
(35,063)
(296)
(1,183)
32,955
_______________________________________________________________________________
(1)
(2)
(3)
(4)
(5)
Includes $3,942 in PIK interest from investments.
Includes $2,559 in PIK dividends from investments
Includes income from non-controlled/non-affiliated investments, non-controlled/affiliated investments and controlled investments.
Includes expense waivers and reimbursements of $733 and management fee waivers of $5,219.
For the year ended December 31, 2015, the Company incurred total incentive fees of $20,591, of which none was related to the capital gains incentive fee accrual
on a hypothetical liquidation basis.
Includes net change in unrealized (depreciation) appreciation of investments from non-controlled/non-affiliated investments, non-controlled/affiliated investments
and controlled investments.
(6)
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following Consolidated Statement of Operations for the year ended December 31, 2014 is adjusted to reflect this step-up to fair market value.
Investment income
Interest income(1)
Dividend income
Other income
Investment income allocated from NMF Holdings
Interest income(1)
Dividend income
Other income
Total investment income(2)
Total expenses pre-incentive fee(3)
Pre-Incentive Fee Net Investment Income
Incentive fee(4)
Post-Incentive Fee Net Investment Income
Net realized gains (losses) on investments
Net realized gains on investment allocated from NMF Holdings
Net change in unrealized (depreciation) appreciation of investments(5)
Net change in unrealized appreciation (depreciation) of investments allocated from
NMF Holdings
Provision for taxes
Net increase in net assets resulting from operations
Year Ended
December 31, 2014
Stepped-up
Cost Basis
Adjustments
Adjusted
Year Ended
December 31, 2014
$
$
$
85,123
2,309
4,491
40,515
2,368
795
135,601
43,766
91,835
11,769
80,066
357
8,568
(43,863)
940
(493)
45,575
(193)
—
—
—
—
—
(193)
—
(193)
—
(193)
(456)
—
649
—
—
$
$
84,930
2,309
4,491
40,515
2,368
795
135,408
43,766
91,642
11,769
79,873
(99)
8,568
(43,214)
940
(493)
45,575
_______________________________________________________________________________
(1)
(2)
(3)
(4)
Includes $4,644 in PIK interest from investments.
Includes income from non-controlled/non-affiliated investments.
Includes expense waivers and reimbursements of $1,145 and management fee waivers of $686.
For the year ended December 31, 2014, the Company and the Predecessor Operating Company incurred total incentive fees of $11,769, of which $(6,549) is related
to a decrease of the capital gains incentive fee accrual on a hypothetical liquidation basis.
Includes net change in unrealized (depreciation) appreciation of investments from non-controlled/non-affiliated and non-controlled/affiliated investments.
(5)
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 consolidated 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 $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
142
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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. The Administrator cannot recoup any expenses that the Administrator has
previously waived. For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, approximately $1,641, $1,431 and $1,395, respectively, of
indirect administrative expenses were included in administrative expenses of which $725, $733 and $770, respectively, of indirect administrative expenses were waived
by the Administrator. As of December 31, 2016 and December 31, 2015, $0 and $374, respectively, of indirect administrative expenses were included in payable to
affiliates 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 years ended December 31,
2016, December 31, 2015 and December 31, 2014:
Administrative expenses
Administrative expenses allocated from NMF Holdings
Professional fees
Professional fees allocated from NMF Holdings
Total expense reimbursement
Years Ended December 31,
2016
2015
2014
$
$
725
—
—
—
725
$
$
733
—
—
—
733
$
$
380
390
—
375
1,145
As of December 31, 2016, December 31, 2015 and December 31, 2014, no expense waivers and reimbursements were receivable 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,
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
"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.
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 which includes 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.
143
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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".
The Company has adopted a formal code of ethics that governs the conduct of its 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, to
the Company's investment mandates. The Investment Adviser and its affiliates may determine that an investment is appropriate for the Company or 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. On September 12, 2016, the Company filed an exemptive application
with the SEC to permit the Company to co-invest with funds or entities managed by the Investment Adviser or its affiliates in certain negotiated transactions where co-
investing would otherwise be prohibited under the 1940 Act. Any such order, if granted by the SEC, will be subject to certain terms and conditions. Furthermore, there is
no assurance when, or if, this application for exemptive relief will be granted by the SEC.
Note 7. Borrowings
Holdings Credit Facility—On December 18, 2014 the Company entered into the Second Amended and Restated Loan and Security Agreement (the "Holdings
Credit Facility"), among the Company, as the Collateral Manager, NMF Holdings as the Borrower, Wells Fargo Securities, LLC as the Administrative Agent and Wells
Fargo Bank, National Association, as the Lender and Collateral Custodian, which is structured as a revolving credit facility and matures on December 18, 2019.
Immediately prior to amending the Holdings Credit Facility, NMF SLF merged with and into NMF Holdings. The Holdings Credit Facility effectively amended
and restated the Predecessor Holdings Credit Facility (as defined below), merged with the SLF Credit Facility (as defined below), and combined the amount of
borrowings previously available.
The maximum amount of revolving borrowings available under the Holdings Credit Facility is $495,000, which is the aggregate of the $280,000 previously
available under the Predecessor Holdings Credit Facility (as defined below) and the $215,000 previously available under the SLF Credit Facility (as defined below).
Under the Holdings Credit Facility, NMF Holdings is permitted to borrow up to 25.0%, 45.0% or 70.0% of the purchase price of pledged assets, subject to approval by
Wells Fargo Securities, LLC. The Holdings Credit Facility 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. In addition, the Holdings Credit Facility requires the Company to maintain a
minimum asset coverage ratio. The covenants are generally not tied to mark to market fluctuations in the prices of NMF Holdings investments, but rather to the
performance of the underlying portfolio companies.
Effective January 1, 2016, the Holdings Credit Facility bears interest at a rate of LIBOR plus 1.75% per annum for Broadly Syndicated Loans (as defined in the
Loan and Security Agreement) and LIBOR plus 2.50% per annum for all other investments. Previously, the Holdings Credit Facility bore interest at a rate of LIBOR plus
2.00% per annum for Broadly Syndicated Loans (as defined in the Loan and Security Agreement) and LIBOR plus 2.75% per annum for all other investments. The
Holdings Credit Facility also 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).
144
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Prior to December 18, 2014, the Loan and Security Agreement, as amended and restated, dated May 19, 2011 (the "Predecessor Holdings Credit Facility")
among NMF Holdings as the Borrower and Collateral Administrator, Wells Fargo Securities, LLC as the Administrative Agent, and Wells Fargo Bank, National
Association, as the Collateral Custodian, was structured as a revolving credit facility and would mature on October 27, 2016.
The maximum amount of revolving borrowings available under the Predecessor Holdings Credit Facility was $280,000. Until December 18, 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, respectively, 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 Predecessor Holdings Credit Facility was amended and restated on May 6, 2014 and as a result, it was non-recourse to the Company and was
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 Predecessor
Holdings Credit Facility were capitalized on the Company's Consolidated Statement of Assets and Liabilities and charged against income as other financing expenses over
the life of the Predecessor Holdings Credit Facility. The Predecessor Holdings Credit Facility contained certain customary affirmative and negative covenants and events
of default, including the occurrence of a change in control. In addition, the Predecessor Holdings Credit Facility required the Company to maintain a minimum asset
coverage ratio. However, the covenants were generally not tied to mark to market fluctuations in the prices of NMF Holdings' investments, but rather to the performance
of the underlying portfolio companies.
The Predecessor Holdings Credit Facility bore interest at a rate of LIBOR plus 2.75% per annum and charged 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, non-usage fees and amortization of financing costs incurred, together, on the Holdings Credit Facility and
the Predecessor Holdings Credit Facility for the years ended December 31, 2016, December 31, 2015 and December 31, 2014.
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
2016
2015
2014
Years Ended December 31,
$
$
$
$
9,546
772
1,615
2.8%
3.5%
341,055
$
$
$
$
10,512
500
1,612
2.6%
3.2%
394,945
$
$
$
$
7,147
243
893
2.9%
3.4%
244,598
As of December 31, 2016, December 31, 2015 and December 31, 2014, the outstanding balance on the Holdings Credit Facility was $333,513, $419,313 and
$468,108, respectively, and NMF Holdings was in compliance with the applicable covenants in 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, LLC as the Administrative Agent, and Wells Fargo Bank, National Association,
as the Collateral Custodian, was structured as a revolving credit facility and was set to mature on October 27, 2016. The maximum amount of revolving borrowings
available under the SLF Credit Facility was $215,000. The SLF Credit Facility was 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 were 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 contained certain customary
affirmative and negative covenants and events of default, including the occurrence of a change in control. The covenants were generally not tied to mark to market
fluctuations in the prices of NMF SLF's investments, but rather to the performance of the underlying portfolio companies. NMF SLF was not restricted from the purchase
or sale of loans with an affiliate. Therefore, specified loans could be moved as collateral between the Holdings Credit Facility and the SLF Credit Facility. The SLF Credit
Facility merged with the Holdings Credit Facility on December 18, 2014.
145
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Until December 18, 2014, the SLF Credit Facility permitted 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 was allowed to be derived from second lien loans, subject to approval by Wells Fargo Bank, National Association.
The SLF Credit Facility bore 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. A
non-usage fee was 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, non-usage fees and amortization of financing costs incurred on the SLF Credit Facility for the years ended
December 31, 2016, December 31, 2015 and December 31, 2014.
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
(1)
(2)
$
$
$
$
2016(1)
2015(1)
2014(2)
Years Ended December 31,
— $
— $
— $
—%
—%
— $
— $
— $
— $
—%
—%
— $
4,549
28
846
2.2%
2.6%
209,333
Not applicable, as the SLF Credit Facility merged with and into the Holdings Credit Facility on December 18, 2014.
For the year ended December 31, 2014, amounts reported relate to the period from January 1, 2014 to December 17, 2014 (date of merger).
As of December 31, 2014, the SLF Credit Facility had merged with the Holdings Credit Facility..
NMFC Credit Facility—The Senior Secured Revolving Credit Agreement, as amended, dated June 4, 2014 (together with the related guarantee and security
agreement, the "NMFC Credit Facility"), among the Company as the Borrower, Goldman Sachs Bank USA as the Administrative Agent and Collateral Agent, and
Goldman Sachs Bank USA, Morgan Stanley Bank, N.A. and Stifel Bank & Trust 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 from the NMFC Credit Facility may be used for
general corporate purposes, including the funding of portfolio investments.
As of December 31, 2016, the maximum amount of revolving borrowings available under the NMFC Credit Facility was $122,500. 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 generally bears 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% per annum (as defined in the Senior Secured Revolving Credit Agreement).
146
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the NMFC Credit Facility for the years
ended December 31, 2016, December 31, 2015 and December 31, 2014.
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
(1)
$
$
$
$
2016
2015
2014(1)
Years Ended December 31,
2,011
183
378
3.0%
3.8%
66,876
$
$
$
$
1,653
104
360
2.7%
3.5%
60,477
$
$
$
$
175
86
121
2.7%
3.4%
11,227
For the year ended December 31, 2014, amounts reported relate to the period from June 4, 2014 (commencement of the NMFC Credit Facility) to December 31,
2014.
As of December 31, 2016, December 31, 2015 and December 31, 2014, the outstanding balance on the NMFC Credit Facility was $10,000, $90,000 and $50,000,
respectively, and NMFC was in compliance with the applicable covenants in the NMFC Credit Facility on such dates.
Convertible Notes—On June 3, 2014, the Company closed a private offering of $115,000 aggregate principal amount of 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 (the "Securities Act"). As of the first anniversary, June 3, 2015, of the
Convertible Notes, the restrictions under Rule 144A under the Securities Act were removed, allowing the Convertible Notes to be eligible and freely tradable without
restrictions for resale pursuant to Rule 144(b)(1) under the Securities Act. On September 30, 2016, the Company closed a public offering of an additional $40,250
aggregate principal amount of the Convertible Notes. These additional Convertible Notes constitute a further issuance of, rank equally in right of payment with, and form
a single series with the $115,000 aggregate principal amount of Convertible Notes that the Company issued on June 3, 2014.
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, which commenced on
December 15, 2014. The Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder's option.
The following table summarizes certain key terms related to the convertible features of the Company’s Convertible Notes as of December 31, 2016.
December 31, 2016
Initial conversion premium
Initial conversion rate(1)
Initial conversion price
Conversion premium at December 31, 2016
Conversion rate at December 31, 2016(1)(2)
Conversion price at December 31, 2016(2)(3)
Last conversion price calculation date
_______________________________________________________________________________
(1)
(2)
(3)
$
$
12.5%
62.7746
15.93
11.7%
63.2794
15.80
June 3, 2016
147
Conversion rates denominated in shares of common stock per $1 principal amount of the Convertible Notes converted.
Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
The conversion price in effect at December 31, 2016 was calculated on the last anniversary of the issuance and will be calculated again on the next anniversary,
unless the exercise price shall have changed by more than 1.0% before the anniversary.
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 $14.05 per share. In no event will the total number of shares of common stock issuable upon conversion exceed 71.1893 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 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 the Company later
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 reflected in Note 12. Earnings Per Share, 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, 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.
The following table summarizes the interest expense and amortization of financing costs incurred on the Convertible Notes for the years ended December 31,
2016, December 31, 2015 and December 31, 2014.
Interest expense
Amortization of financing costs
Amortization of premium
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
(1)
$
$
$
$
2016
2015
2014(1)
Years Ended December 31,
6,259
859
(28)
5.7%
125,227
$
$
$
$
5,750
743
$
$
— $
5.6%
3,322
432
—
5.6%
115,000
$
115,000
For the year ended December 31, 2014, amounts reported relate to the period from June 3, 2014 (issuance of the Convertible Notes) to December 31, 2014.
As of December 31, 2016, December 31, 2015 and December 31, 2014, the outstanding balance on the Convertible Notes was $155,250, $115,000 and $115,000,
respectively, and NMFC was in compliance with the terms of the Indenture on such dates.
Unsecured Notes—On May 6, 2016, the Company issued $50,000 in aggregate principal amount of five-year unsecured notes that mature on May 15, 2021 (the
“Unsecured Notes”), pursuant to a note purchase agreement, dated May 4, 2016, to an institutional investor in a private placement. On September 30, 2016, the Company
entered into an amended and restated note purchase agreement (the "NPA") and issued an additional $40,000 in aggregate principal amount of Unsecured Notes to
institutional investors in a private placement. The NPA provides for future issuances of Unsecured Notes in separate series or tranches. The Unsecured Notes are equal in
priority with the Company’s other unsecured indebtedness, including the Company’s Convertible Notes.
The Unsecured Notes bear interest at an annual rate of 5.313%, payable semi-annually on May 15 and November 15 of each year, which commenced on
November 15, 2016. This interest rate is subject to increase in the event that: (i) subject to certain exceptions, the Unsecured Notes or the Company cease to have an
investment grade rating or (ii) the aggregate amount of the Company’s unsecured debt falls below $150,000. In each such event, the Company has the option to offer to
prepay the Unsecured Notes at par, in which case holders of the Unsecured Notes who accept the offer would not receive the increased
148
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
interest rate. In addition, the Company is obligated to offer to prepay the Unsecured Notes at par if the Investment Adviser, or an affiliate thereof, ceases to be the
Company’s investment adviser or if certain change in control events occur with respect to the Investment Adviser.
The NPA contains customary terms and conditions for unsecured notes issued in a private placement, including, without limitation, an option to offer to prepay
all or a portion of the Unsecured Notes at par (plus a make-whole amount, if applicable), affirmative and negative covenants such as information reporting, maintenance
of the Company’s status as a BDC under the 1940 Act and a RIC under the Code, minimum stockholders’ equity, minimum asset coverage ratio, and prohibitions on
certain fundamental changes at the Company or any subsidiary guarantor, as well as customary events of default with customary cure and notice, including, without
limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default under other indebtedness of the Company or certain significant
subsidiaries, certain judgments and orders, and certain events of bankruptcy.
The following table summarizes the interest expense and amortization of financing costs incurred on the Unsecured Notes for the years ended December 31,
2016, December 31, 2015 and December 31, 2014.
2016(1)
2015(2)
2014(2)
Years Ended December 31,
2,271
202
5.8%
65,500
$
$
$
— $
— $
—%
— $
—
—
—%
—
Interest expense
Amortization of financing costs
Effective interest rate
$
Average debt outstanding
_____________________________________________________________________________
(1)
(2)
$
$
For the year ended December 31, 2016, amounts reported relate to the period from May 6, 2016 (issuance of the Unsecured Notes) to December 31, 2016.
Not applicable, as the Unsecured Notes were issued on May 6, 2016.
As of December 31, 2016, the outstanding balance on the Unsecured Notes was $90,000 and the Company was in compliance with the terms of the NPA.
SBA-guaranteed debentures—On August 1, 2014, SBIC LP received an SBIC license from the SBA.
The SBIC license allows SBIC LP to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a capital commitment by the SBA and
other customary procedures. SBA-guaranteed debentures are non-recourse to the Company, interest only debentures with interest payable semi-annually and have a ten
year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The
interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with ten year maturities. The SBA, as a
creditor, will have a superior claim to the assets of SBIC LP over the Company's stockholders in the event SBIC LP is liquidated or the SBA exercises remedies upon an
event of default.
The maximum amount of borrowings available under current SBA regulations for a single licensee is $150,000 as long as the licensee has at least $75,000 in
regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing.
As of December 31, 2016 and December 31, 2015, SBIC LP had regulatory capital of approximately $75,000 and $72,402, respectively, and SBA-guaranteed
debentures outstanding of $121,745 and $117,745, respectively. The SBA-guaranteed debentures incur upfront fees of 3.425%, which consists of a 1.00% commitment
fee and a 2.425% issuance discount, which are amortized over the life of the SBA-guaranteed debentures.
149
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following table summarizes the Company's SBA-guaranteed debentures as of December 31, 2016.
Issuance Date
Fixed SBA-guaranteed debentures:
March 25, 2015
September 23, 2015
September 23, 2015
March 23, 2016
September 21, 2016
Total SBA-guaranteed debentures
Maturity Date
Debenture Amount
Interest Rate
SBA Annual Charge
March 1, 2025
September 1, 2025
September 1, 2025
March 1, 2026
September 1, 2026
$
$
37,500
37,500
28,795
13,950
4,000
121,745
2.517%
2.829%
2.829%
2.507%
2.051%
0.355%
0.355%
0.742%
0.742%
0.742%
Prior to pooling, the SBA-guaranteed debentures bear interest at an interim floating rate of LIBOR plus 0.30%. Once pooled, which occurs in March and
September each year, the SBA-guaranteed debentures bear interest at a fixed rate that is set to the current 10-year treasury rate plus a spread at each pooling date.
The following table summarizes the interest expense and amortization of financing costs incurred on the SBA-guaranteed debentures for the years ended
December 31, 2016, December 31, 2015 and December 31, 2014.
Interest expense
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
_______________________________________________________________________________
(1)
$
$
$
2016
2015
2014(1)
Years Ended December 31,
3,758
403
3.1%
3.5%
119,819
$
$
$
1,701
240
2.4%
2.7%
71,921
$
$
$
34
12
0.9%
1.3%
29,167
For the year ended December 31, 2014, amounts reported relate to the period from August 1, 2014 (receipt of the SBIC license) to December 31, 2014. The initial
SBA-guaranteed debenture borrowing occurred on November 17, 2014.
The SBIC program is designed to stimulate the flow of private investor capital into eligible small businesses, as defined by the SBA. Under SBA regulations,
SBIC LP is subject to regulatory requirements, including making investments in SBA-eligible businesses, investing at least 25.0% of its investment capital in eligible
smaller businesses, as defined under the 1958 Act, placing certain limitations on the financing terms of investments, regulating the types of financing, prohibiting
investments in small businesses with certain characteristics or in certain industries and requiring capitalization thresholds that limit distributions to the Company.
SBIC LP is subject to an annual periodic examination by an SBA examiner to determine SBIC LP's compliance with the relevant SBA regulations and an annual financial
audit of its financial statements that are prepared on a basis of accounting other than GAAP (such as ASC 820) by an independent auditor. As of December 31, 2016,
December 31, 2015 and December 31, 2014, SBIC LP was in compliance with SBA regulatory requirements.
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.
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Table of Contents
Note 8. Regulation
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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 and be subject to tax 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 will 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). In addition, the Company must offer to make available to all eligible
portfolio companies managerial assistance.
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 December 31, 2016, the Company had unfunded commitments on revolving credit facilities of $27,915, no outstanding bridge financing
commitments and other future funding commitments of $16,368. As of December 31, 2015, the Company had unfunded commitments on revolving credit facilities of
$17,576, no outstanding bridge financing commitments and other future funding commitments of $8,678. The unfunded commitments on revolving credit facilities and
delayed draws are disclosed on the Company's respective Consolidated Schedules of Investments.
The Company also has revolving borrowings available under the Holdings Credit Facility and the NMFC Credit Facility as of December 31, 2016 and
December 31, 2015. See Note 7. Borrowings, for details.
The Company may from time to time enter into financing commitment letters. As of December 31, 2016 and December 31, 2015, the Company had commitment
letters to purchase investments in the aggregate par amount of $14,818 and $0, respectively, which could require funding in the future.
As of December 31, 2016 and December 31, 2015, the Company had unfunded commitments related to an equity investment in SLP II of $7,940 and $0,
respectively, which may be funded at the Company's discretion.
Note 10. Distributions
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. During the years ended December 31, 2016, December 31, 2015 and December 31, 2014, the Company's
reclassifications of amounts for book purposes arising from permanent book/tax differences related to return of capital distributions were as follows:
Undistributed net investment income
Distributions in excess of net realized gains
Additional paid-in-capital
Years Ended December 31,
2016
2015
2014
$
$
(1,435)
(21,572)
23,007
$
141
—
(141)
(6,171)
6,397
(226)
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
For U.S. 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 tax character of distributions paid by the Company for the years ended December 31, 2016, December 31, 2015 and December 31,
2014 were estimated to be as follows:
Ordinary income (non-qualified)
Ordinary income (qualified)
Capital gains
Return of capital
Total
Years Ended December 31,
2016
2015
2014
79,415
—
—
9,349
88,764
$
$
80,967
—
—
35
81,002
$
$
73,968
664
2,754
226
77,612
$
$
As of December 31, 2016, December 31, 2015 and December 31, 2014, the costs of investments for the Company for tax purposes were $1,602,607, $1,587,189
and $1,474,075, respectively.
Tax cost
Gross unrealized appreciation on investments
Gross unrealized depreciation on investments
Total investments at fair value
_______________________________________________________________________________
(1)
Includes securities purchased under collateralized agreement to resell.
December 31, 2016(1)
December 31, 2015(1)
$
$
$
1,602,607
42,335
(56,907)
1,588,035
$
1,587,189
40,294
(85,555)
1,541,928
At December 31, 2016, December 31, 2015 and December 31, 2014, the components of distributable earnings on a tax basis differ from the amounts reflected per
the Company's Consolidated Statements of Assets and Liabilities by temporary book/tax differences primarily arising from differences between the tax and book basis of
the Company's investment in securities held directly as well as through the Predecessor Operating Company and undistributed income.
As of December 31, 2016, December 31, 2015 and December 31, 2014, the Company's components of accumulated earnings (deficit) on a tax basis were as
follows:
Accumulated capital gains (capital loss carryforwards)
Other temporary differences
Undistributed ordinary income
Unrealized (appreciation) depreciation
Total
_______________________________________________________________________________
(1)
Years Ended December 31,
2016
2015
2014
$
$
$
(39,517)
2,072
—
(26,093)
$
(19,081)
2,991
—
(57,424)
(63,538)
$
(73,514)
$
—
4,775
—
(30,383) (1)
(25,608)
Prior to the Restructuring, the Company's only investment was its investment in the Predecessor Operating Company. After the Restructuring, the Company
directly holds the Predecessor Operating Company's investments. As a result, included in unrealized (appreciation) depreciation is $(10,069) of timing differences
attributable to deferred offering costs, built-in gains and other book/tax differences impacting the tax basis of the Predecessor Operating Company's investments.
These differences were carried over to the Company, as the new operating company, from the Predecessor Operating Company.
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The Company is 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 net ordinary income earned for the calendar year and (2) 98.2% of its capital gain net income
for the one-year period ending October 31 in the calendar year. For the year ended December 31, 2016, the Company does not expect to incur any excise taxes. For the
years ended December 31, 2015 and December 31, 2014, the Company did not incur any excise taxes.
The following information is hereby provided with respect to distributions declared during the calendar years ended December 31, 2016, December 31, 2015 and
December 31, 2014:
(unaudited)
Distributions per share
Ordinary dividends
Long-term capital gains
Qualified dividend income
Dividends received deduction
Interest-related dividends(1)
Qualified short-term capital gains(1)
Return of capital
$
Years Ended December 31,
2016
2015
2014
$
1.36
89.46%
—%
—%
—%
89.78%
—%
10.54%
$
1.36
99.96%
—%
—%
—%
90.71%
—%
0.04%
1.48
96.16%
3.55%
0.89%
—%
89.11%
0.47%
0.29%
_______________________________________________________________________________
(1) Represents the portion of the taxable ordinary dividends eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations.
Dividends and distributions that were reinvested through the Company’s dividend reinvestment plan are treated, for tax purposes, as if they had been paid in
cash. Therefore, stockholders who participated in the dividend reinvestment plan should also refer to the information as provided in the table above.
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Table of Contents
Note 11. Net Assets
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The table below illustrates the effect of certain transactions on the net asset accounts of the Company:
Common Stock
Treasury
Stock
Paid in
Capital in
Shares
Par Amount
at Cost
Excess of Par
Accumulated
Undistributed
Net Investment
Income
Accumulated
Undistributed
Net Realized
Gains (Losses)
Net
Unrealized
Appreciation
(Depreciation)
Total
Net Assets
Issuances of common stock
6,007,497
57,997,890
$
580
$
— $
817,129
$
2,530
$
14,131
$
(32,200)
$
802,170
Balance at December 31,
2013
45,224,755
$
Issuances of common stock
12,773,135
Deferred offering costs
allocated from New
Mountain Finance Holdings,
L.L.C.
Deferred offering costs
Distributions declared
Net increase in net assets
resulting from operations
Tax reclassifications related
to return of capital
distributions (See Note 10)
Balance at December 31,
2014
Deferred offering costs
Distributions declared
Net increase (decrease) in
net assets resulting from
operations
Tax reclassifications related
to return of capital
distributions (See Note 10)
Balance at December 31,
2015
Repurchases of common
stock
Reissuance of common
stock
Deferred offering costs
Distributions declared
Net increase (decrease) in
net assets resulting from
operations
Tax reclassifications related
to return of capital
distributions (See Note 10)
Balance at December 31,
2016
—
—
—
—
—
—
—
—
—
(248,499)
210,926
—
—
—
—
$
— $
633,383
$
— $
5,056
$
11,216
$
452
128
—
—
—
—
—
—
—
—
—
—
—
184,698
(250)
(476)
—
—
(226)
—
—
—
(71,365)
80,066
—
—
—
(6,247)
8,925
—
—
—
—
650,107
184,826
(250)
(476)
(77,612)
(43,416)
45,575
(6,171)
6,397
—
—
60
—
—
—
—
—
—
—
—
—
83,010
(285)
—
—
—
—
(81,002)
—
—
—
—
—
—
83,070
(285)
(81,002)
82,495
(12,789)
(36,751)
32,955
(141)
141
—
—
—
58
—
—
—
—
—
—
—
(2,948)
2,488
—
—
—
—
79,005
—
465
(328)
—
—
—
—
—
—
(88,764)
—
—
—
—
—
—
—
—
—
—
79,063
(2,948)
2,953
(328)
(88,764)
88,108
(16,717)
40,287
111,678
23,007
(1,435)
(21,572)
—
—
Issuances of common stock
5,750,000
64,005,387
$
640
$
— $
899,713
$
4,164
$
1,342
$
(68,951)
$
836,908
69,717,814
$
698
$
(460)
$
1,001,862
$
2,073
$
(36,947)
$
(28,664)
$
938,562
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Table of Contents
Note 12. Earnings Per Share
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
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
years ended December 31, 2016, December 31, 2015 and December 31, 2014:
Earnings per share—basic
Numerator for basic earnings per share:
Denominator for basic weighted average share:
Basic earnings per share:
Earnings per share—diluted(1)
Numerator for increase in net assets per share
Adjustment for interest on Convertible Notes and incentive fees, net
Numerator for diluted earnings per share:
Denominator for basic weighted average share
Adjustment for dilutive effect of Convertible Notes
Denominator for diluted weighted average share
Years Ended December 31,
2016
2015
2014
$
$
$
$
$
$
$
$
$
111,678
64,918,191
1.72
111,678
5,007
116,685
64,918,191
7,945,196
72,863,387
$
$
$
$
32,955
59,715,290
0.55
32,955
4,600
37,555
59,715,290
7,252,799
66,968,089
1.60
$
0.55
$
45,575
51,846,164
0.88
45,575
2,658
48,233
51,846,164
4,311,671
56,157,835
0.86
Diluted earnings per share
_______________________________________________________________________________
(1)
In applying the if-converted method, conversion is not assumed for purposes of computing diluted earnings per share if the effect would be anti-dilutive. For the
year ended December 31, 2015, there was anti-dilution. For the years ended December 31, 2016 and December 31, 2014, there was no anti-dilution.
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Table of Contents
Note 13. Financial Highlights
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following information sets forth the financial highlights for the Company for the years ended December 31, 2016, December 31, 2015, December 31, 2014,
December 31, 2013 and December 31, 2012.
Per share data(1):
Net asset value at the beginning of the period
$
13.08
$
13.83
$
14.38
$
14.06
$
13.60
2016
2015
2014
2013
2012
Years Ended December 31,
Net investment income
Net realized and unrealized gains (losses)(2)
Net increase (decrease) in net assets resulting from operations allocated from NMF Holdings:
Net investment income(3)
Net realized and unrealized gains (losses)(2)(3)
Total net increase
Distributions declared to stockholders from net investment income
Distributions declared to stockholders from net realized gains
Net asset value at the end of the period
Per share market value at the end of the period
Total return based on market value(4)
Total return based on net asset value(5)
Shares outstanding at end of period
Average weighted shares outstanding for the period
Average net assets for the period
Ratio to average net assets(6):
Net investment income
Total expenses, before waivers/reimbursements
Total expenses, net of waivers/reimbursements
1.36
0.38
—
—
1.74
(1.36)
—
13.46
14.10
19.68%
13.98%
$
$
1.38
(0.77)
—
—
0.61
(1.36)
—
13.08
13.02
(4.00)%
4.32 %
$
$
1.10
(0.80)
0.44
0.19
0.93
(1.36)
(0.12)
13.83
14.94
9.66%
6.56%
$
$
—
—
1.45
0.35
1.80
(1.45)
(0.03)
14.38
15.04
11.62%
13.27%
$
$
—
—
1.33
0.84
2.17
(1.28)
(0.43)
14.06
14.90
24.84%
16.61%
$
$
69,717,814
64,918,191
64,005,387
59,715,290
57,997,890
51,846,164
45,224,755
35,092,722
24,326,251
14,860,838
$
863,193
$
832,805
$
749,732
$
502,822
$
196,312
10.21%
9.91%
9.27%
9.91 %
9.28 %
8.57 %
10.68%
7.65%
7.41%
10.10%
8.53%
8.13%
9.53%
9.61%
8.55%
_______________________________________________________________________________
(1)
(2)
Per share data is based on weighted average shares outstanding for the respective period (except for distributions declared to stockholders which is based on actual rate per share).
Includes the accretive effect of common stock issuances per share, which for the years ended December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013 and December 31, 2012
were $0.02, $0.06, $0.05, $0.04 and $0.03, respectively.
For the years ended December 31, 2014, December 31, 2013 and December 31, 2012, 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.
Total return is calculated assuming a purchase of common stock at the opening of the first day of the period and a sale on the closing of the last business day of the respective period ends. 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.
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.
Ratio to average net assets for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 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 year ended December 31, 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. For the years ended December 31, 2013 and December 31, 2012, the Company is reflecting its proportionate share of
the Predecessor Operating Company's net investment income and expenses.
(3)
(4)
(5)
(6)
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
The following information sets forth the financial highlights for the Company for the years ended December 31, 2016, December 31, 2015 and December 31,
2014 and NMF Holdings for the years ended December 31, 2013 and December 31, 2012.
NMFC
Years Ended December 31,
NMF Holdings
Years Ended December 31,
2016
2015
2014
2013
2012
Average debt outstanding—Holdings Credit Facility(1)
$
341,055
$
394,945
$
243,693
$
184,124
$
Average debt outstanding—SLF Credit Facility(2)
Average debt outstanding—Convertible Notes(3)
Average debt outstanding—SBA-guaranteed debentures(4)
Average debt outstanding—Unsecured Notes(5)
Average debt outstanding—NMFC Credit Facility(6)
Asset coverage ratio(7)
—
125,227
119,819
65,500
66,876
259.34%
Portfolio turnover(8)
_______________________________________________________________________________
(1)
36.07%
—
115,000
71,921
—
60,477
234.05%
33.93%
208,377
115,000
29,167
—
11,227
226.70%
29.51%
214,317
—
—
—
—
257.73%
40.52%
133,600
181,395
—
—
—
—
235.31%
52.02%
For the year ended December 31, 2014, average debt outstanding represents the 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 year ended December 31, 2014 at the Holdings Credit Facility was $244.598.
For the year ended December 31, 2014, average debt outstanding represents the Company's average debt outstanding as well as the Company's proportionate share of the Predecessor Operating Company's
average debt outstanding for the period January 1, 2014 to December 17, 2014 (date of SLF Credit Facility merger with and into the Holdings Credit Facility). The average debt outstanding for the period
January 1, 2014 to December 17, 2014 at the SLF Credit Facility was $209.333.
For the year ended December 31, 2014, average debt outstanding represents the period from June 3, 2014 (issuance of the Convertible Notes) to December 31, 2014.
For the year ended December 31, 2014, average debt outstanding represents the period from November 17, 2014 (date of initial SBA-guaranteed debenture borrowing) to December 31, 2014.
For the year ended December 31, 2016, average debt outstanding represents the period from May 6, 2016 (issuance of the Unsecured Notes) to December 31, 2016.
For the year ended December 31, 2014, average debt outstanding represents the period from June 4, 2014 (commencement of the NMFC Credit Facility) to December 31, 2014.
On November 5, 2014, the Company received exemptive relief from the SEC allowing the Company to modify the asset coverage requirement to exclude the SBA-guaranteed debentures from this
calculation.
For the year ended December 31, 2014, portfolio turnover represents the investment activity of the Predecessor Operating Company and the Company.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Note 14. Selected Quarterly Financial Data (unaudited)
The below selected quarterly financial data is for the Company.
(in thousands except for per share data)
Quarter Ended
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
December 31, 2015
September 30, 2015
June 30, 2015
March 31, 2015
December 31, 2014
September 30, 2014
June 30, 2014
March 31, 2014
Total Investment Income
Net Investment Income
Total Net Realized Gains (Losses)
and Net Changes in Unrealized
Appreciation (Depreciation) of
Investments(1)
Net Increase (Decrease)
in Net Assets Resulting
from Operations
Total
Per Share
Total
Per Share
Total
Per Share
Total
Per Share
$
$
$
$
$
$
43,784
41,834
41,490
40,976
41,967
37,447
37,905
36,536
36,748
34,706
33,708
30,439
$
$
$
0.64
0.66
0.65
0.64
0.66
0.64
0.65
0.63
0.65
0.67
0.65
0.65
$
$
$
22,980
21,729
21,832
21,567
22,521
20,659
20,253
19,062
25,919
20,800
17,289
16,058
$
$
$
0.34
0.34
0.34
0.34
0.35
0.35
0.35
0.33
0.46
0.40
0.34
0.34
$
$
$
10,875
3,350
22,861
(13,516)
(42,548)
(10,855)
11
3,852
(34,865)
(13,389)
6,373
7,390
$
$
$
0.16
0.05
0.36
(0.21)
(0.66)
(0.18)
—
0.07
(0.62)
(0.26)
0.12
0.16
$
$
$
33,855
25,079
44,693
8,051
(20,027)
9,804
20,264
22,914
(8,946)
7,411
23,662
23,448
0.50
0.39
0.70
0.13
(0.31)
0.17
0.35
0.40
(0.16)
0.14
0.46
0.50
_______________________________________________________________________________
(1) Includes securities purchased under collateralized agreements to resell, benefit (provision) for taxes and the accretive effect of common stock issuances per share, if
applicable.
Note 15. Recent Accounting Standards Updates
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern Subtopic 205-40—
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an
entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the
first annual period ending after December 15, 2016. Earlier adoption is permitted. The Company adopted ASU 2014-15 and the adoption did not have an impact on the
Company's consolidated financial statements and disclosures as of December 31, 2016.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Consolidation Topic 810—Amendments to the Consolidation Analysis (“ASU
2015-02”), which modifies the consolidation analysis in determining if limited partnerships or similar type entities fall under the variable interest model or voting interest
model, particularly those that have fee arrangements and related party relationships. ASU 2015-02 was effective for all public entities for interim and annual reporting
periods beginning after December 15, 2015. On January 1, 2016, the Company adopted ASU 2015-02. The adoption did not have an impact on the Company's
consolidated financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest—Imputation of Interest Subtopic 835-30—Simplifying the Presentation of
Debt Issuance Costs (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs
on the statement of assets and liabilities as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest
expense. The new standard was effective for all public entities for interim and annual reporting periods beginning after December 15, 2015. On January 1, 2016, the
Company adopted ASU 2015-03. Upon adoption, the Company revised its presentation of deferred financing costs from an asset to a liability, which is a direct deduction
to its debt on the Consolidated
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2016
(in thousands, except share data)
Statements of Assets and Liabilities. In addition, the Company retrospectively revised its presentation of $13,992 of deferred financing costs that were previously
presented as an asset as of December 31, 2015, which resulted in a decrease to total assets and total liabilities as of December 31, 2015.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall Subtopic 825-10—Recognition and Measurement
of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of
financial assets and liabilities. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. The new guidance must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity
investments that exist as of the date of adoption of ASU 2016-01. The Company is in the process of evaluating the impact that this guidance will have on the Company’s
consolidated financial statements and disclosures.
Note 16. Subsequent Events
On January 12, 2017, the SBA issued a "green light" letter inviting the Company to continue its application process to obtain a second license to form and
operate a second SBIC subsidiary. If approved, the additional SBIC license would provide the Company with an incremental source of attractive long-term capital.
Receipt of a green light letter from the SBA does not assure an applicant that the SBA will ultimately issue an SBIC license and the Company has received no assurance
or indication from the SBA that it will receive an additional SBIC license, or of the timeframe in which it would receive an additional license, should one ultimately be
granted.
On February 23, 2017, the Company's board of directors declared a first quarter 2017 distribution of $0.34 per share payable on March 31, 2017 to holders of
record as of March 17, 2017.
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Table of Contents
The terms "we", "us", "our" and the "Company" refers to New Mountain Finance Corporation and its consolidated subsidiaries.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2016 (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) Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the
effectiveness of internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal
control over financial reporting includes those policies and procedures that (i) pertain to assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 based upon the criteria in the
2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management's assessment,
management determined that our internal control over financial reporting was effective as of December 31, 2016.
(c) Attestation Report of the Registered Public Accounting Firm.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on New Mountain Finance Corporation's internal
control over financial reporting, which is set forth on the following page.
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Table of Contents
Deloitte & Touche LLP
30 Rockefeller Plaza
New York, NY 10112
USA
Tel: + 1 212 492 4000
Fax: + 1 212 489 1687
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
New Mountain Finance Corporation
We have audited the internal control over financial reporting of New Mountain Finance Corporation and subsidiaries (the "Company") as of December 31, 2016, based on
criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial
officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of
and for the year ended December 31, 2016 of the Company and our report dated February 28, 2017 expressed an unqualified opinion on those consolidated financial
statements.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 28, 2017
161
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Changes in Internal Control Over Financial Reporting
Management has not identified any change in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
162
Table of Contents
The terms "we", "us", "our" and the "Company" refers to New Mountain Finance Corporation and its consolidated subsidiaries.
PART III
We will file a definitive Proxy Statement for our 2017 Annual Meeting of Stockholders with the United States Securities and Exchange Commission, pursuant to
Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General
Instruction G(3) to Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference from the definitive Proxy Statement relating to our 2017 Annual Meeting of
Stockholders, to be filed with the United States Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from the definitive Proxy Statement relating to our 2017 Annual Meeting of
Stockholders, to be filed with the United States Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from the definitive Proxy Statement relating to our 2017 Annual Meeting of
Stockholders, to be filed with the United States Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from the definitive Proxy Statement relating to our 2017 Annual Meeting of
Stockholders, to be filed with the United States Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from the definitive Proxy Statement relating to our 2017 Annual Meeting of
Stockholders, to be filed with the United States Securities and Exchange Commission within 120 days following the end of our fiscal year.
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Table of Contents
Item 15. Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of this Report
The following financial statements are set forth in Item 8:
New Mountain Finance Corporation
PART IV
Consolidated Statements of Assets and Liabilities as of December 31, 2016 and December 31, 2015
Consolidated Statements of Operations for the years ended December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, December 31, 2015 and December 31, 2014
Consolidated Schedule of Investments as of December 31, 2016
Consolidated Schedule of Investments as of December 31, 2015
Notes to the Consolidated Financial Statements of New Mountain Finance Corporation
89
90
91
92
93
104
115
164
Table of Contents
(b) 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
Number
Description
3.1(a)
3.1(b)
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Amended and Restated Certificate of Incorporation of New Mountain Finance Corporation(2)
Certificate of Change of Registered Agent and/or Registered Office of New Mountain Finance Corporation(3)
Amended and Restated Bylaws of New Mountain Finance Corporation(2)
Form of Stock Certificate of New Mountain Finance Corporation(1)
Indenture by and between New Mountain Finance Corporation, as Issuer, and U.S. Bank National Association, as Trustee, dated June 3, 2014(7)
Form of Global Note 5.00% Convertible Note Due 2019 (included as part of Exhibit 4.2)(7)
Second Amended and Restated Loan and Security Agreement, dated as of December 18, 2014, by and among New Mountain Finance Corporation,
as the collateral manager, New Mountain Finance Holdings, L.L.C., as the borrower, Wells Fargo Securities, LLC, as administrative agent, and
Wells Fargo, National Association, as lender and custodian(9)
Form of Variable Funding Note of New Mountain Finance Holdings, L.L.C., as the Borrower(1)
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)
Form of Senior Secured Revolving Credit Agreement, by and between New Mountain Finance Corporation, as Borrower, and Goldman Sachs Bank
USA, as Administrative Agent and Syndication Agent, dated June 4, 2014(8)
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(8)
Amendment No. 1, dated December 29, 2014, to the Senior Secured Revolving Credit Agreement dated June 4, 2014, by and among New Mountain
Finance Corporation, as Borrower, and Goldman Bank USA, as Administrative Agent and Syndication Agent(10)
Amendment No. 2, dated June 26, 2015, to the Senior Secured Revolving Credit Agreement dated June 4, 2014, by and among New Mountain
Finance Corporation, as Borrower, and Goldman Bank USA, as Administrative Agent and Syndication Agent(12)
Commitment Increase Agreement, dated March 23, 2016, to the Senior Secured Revolving Credit Agreement dated June 4, 2014, by and among New
Mountain Finance Corporation, as Borrower, and Goldman Sachs Bank USA, as Administrative Agent and Issuing Bank(13)
Commitment Increase Agreement, dated May 4, 2016, to the Senior Secured Revolving Credit Agreement dated June 4, 2014, by and among New
Mountain Finance Corporation, as Borrower, and Goldman Sachs Bank USA, as Administrative Agent and Issuing Bank(14)
Investment Advisory and Management Agreement by and between New Mountain Finance Corporation and New Mountain Finance Advisers
BDC, LLC(6)
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(5)
Second Amended and Restated Administration Agreement(11)
Form of Trademark License Agreement(1)
Amendment No. 1 to Trademark License Agreement(4)
Form of Indemnification Agreement by and between New Mountain Finance Corporation and each director(1)
165
Table of Contents
Exhibit
Number
10.17
10.18
10.19
11.1
14.1
21.1
Description
Dividend Reinvestment Plan(2)
Limited Liability Company Agreement of NMFC Senior Loan Program II LLC, dated March 9, 2016(14)
Form of Amended and Restated Note Purchase Agreement relating to 5.313% Notes due 2021, dated September 30, 2016, by and between New
Mountain Finance Corporation and the purchasers party thereto(15)
Computation of Per Share Earnings for New Mountain Finance Corporation (included in the notes to the financial statements contained in this report)
Code of Ethics(1)
Subsidiaries of New Mountain Finance Corporation:
New Mountain Finance Holdings, L.L.C. (Delaware)
NMF Ancora Holdings, Inc. (Delaware)
NMF QID NGL Holdings, Inc. (Delaware)
NMF YP Holdings, Inc. (Delaware)
New Mountain Finance Servicing, L.L.C. (Delaware)
New Mountain Finance SBIC G.P., L.L.C. (Delaware)
New Mountain Finance SBIC, L.P. (Delaware)
31.1
31.2
32.1
32.2
99.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
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 registration statement on Form N-2 Post-Effective Amendment No. 2 (File Nos. 333-
189706 and 333-189707) filed on April 11, 2014.
(6)
Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on May 8, 2014.
(7)
Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on June 4, 2014.
(8)
Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on June 10, 2014.
(9)
Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on December 23, 2014.
(10) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on January 5, 2015.
(11) Previously filed in connection with New Mountain Finance Corporation's quarterly report on Form 10-Q filed on May 5, 2015.
(12) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on June 30, 2015.
166
Table of Contents
(13) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on March 29, 2016.
(14) Previously filed in connection with New Mountain Finance Corporation's quarterly report on Form 10-Q filed on May 4, 2016.
(15) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on October 3, 2016.
Financial Statement Schedules
No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned
financial statements.
167
Table of Contents
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 February 28, 2017.
SIGNATURES
NEW MOUNTAIN FINANCE CORPORATION
By:
/s/ ROBERT A. HAMWEE
Robert A. Hamwee
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
Chief Executive Officer (Principal Executive Officer), and Director
February 28, 2017
Chief Financial Officer (Principal Financial and Accounting Officer) and
Treasurer
February 28, 2017
Chairman of the Board of Directors
February 28, 2017
Executive Vice President, Chief Administrative Officer and Director
February 28, 2017
By:
By:
By:
By:
By:
By:
By:
By:
/s/ ROBERT A. HAMWEE
Robert A. Hamwee
/s/ SHIRAZ Y. KAJEE
Shiraz Y. Kajee
/s/ STEVEN B. KLINSKY
Steven B. Klinsky
/s/ ADAM B. WEINSTEIN
Adam B. Weinstein
/s/ ALFRED F. HURLEY, JR.
Alfred F. Hurley, Jr.
/s/ DAVID MALPASS
David Malpass
/s/ DAVID OGENS
David Ogens
/s/ KURT J. WOLFGRUBER
Kurt J. Wolfgruber
Director
Director
Director
Director
(Back To Top)
Section 2: EX-31.1 (EXHIBIT 31.1)
168
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
EXHIBIT 31.1
I, Robert A. Hamwee, Chief Executive Officer of New Mountain Finance Corporation, certify that:
1.
I have reviewed this annual report on Form 10-K of New Mountain Finance Corporation;
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated this 28th day of February 2017
/s/ ROBERT A. HAMWEE
Robert A. Hamwee
(Back To Top)
Section 3: EX-31.2 (EXHIBIT 31.2)
EXHIBIT 31.2
I, Shiraz Y. Kajee, Chief Financial Officer of New Mountain Finance Corporation, certify that:
1.
I have reviewed this annual report on Form 10-K of New Mountain Finance Corporation;
CERTIFICATION OF CHIEF FINANCIAL OFFICER
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated this 28th day of February 2017
/s/ SHIRAZ Y. KAJEE
Shiraz Y. Kajee
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Section 4: EX-32.1 (EXHIBIT 32.1)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K for the period ended December 31, 2016 (the "Report") of New Mountain Finance Corporation (the "Registrant"), as filed with the
United States Securities and Exchange Commission on the date hereof, I, Robert A. Hamwee, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ ROBERT A. HAMWEE
Name:
Date:
Robert A. Hamwee
February 28, 2017
(Back To Top)
Section 5: EX-32.2 (EXHIBIT 32.2)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K for the period ended December 31, 2016 (the "Report") of New Mountain Finance Corporation (the "Registrant"), as filed with the
United States Securities and Exchange Commission on the date hereof, I, Shiraz Y. Kajee, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ SHIRAZ Y. KAJEE
Name:
Date:
Shiraz Y. Kajee
February 28, 2017
(Back To Top)
Section 6: EX-99.1 (EXHIBIT 99.1)
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TABLE OF CONTENTS
SUPPLEMENTAL FINANCIAL INFORMATION
New Mountain Finance Holdings, L.L.C.
Consolidated Statements of Operations from April 1, 2014 to May 7, 2014 and from January 1, 2014 to May 7, 2014 (unaudited) and for the three
months and six months ended June 30, 2013 (unaudited)
Consolidated Statements of Cash Flows from January 1, 2014 to May 7, 2014 (unaudited) and for the six months ended June 30, 2013 (unaudited)
AUDITED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
New Mountain Finance Holdings, L.L.C.
Consolidated Statements of Assets, Liabilities and Members' Capital as of December 31, 2013 and December 31, 2012
Consolidated Statements of Operations for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
Consolidated Statements of Changes in Members' Capital for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2013, December 31, 2012 and December 31, 2011
Consolidated Schedule of Investments as of December 31, 2013
Consolidated Schedule of Investments as of December 31, 2012
New Mountain Finance Corporation
Statements of Assets and Liabilities as of December 31, 2013 and December 31, 2012
Statements of Operations for the years ended December 31, 2013, December 31, 2012 and from May 19, 2011 (commencement of operations) to
December 31, 2011
Statements of Changes in Net Assets for the years ended December 31, 2013, December 31, 2012 and from May 19, 2011 (commencement of
operations) to December 31, 2011
Statements of Cash Flows for the years ended December 31, 2013, December 31, 2012 and from May 19, 2011 (commencement of operations) to
December 31, 2011
New Mountain Finance AIV Holdings Corporation
Statements of Assets and Liabilities as of December 31, 2013 and December 31, 2012
Statements of Operations for the years ended December 31, 2013, December 31, 2012 and from May 19, 2011 (commencement of operations) to
December 31, 2011
Statements of Changes in Net Assets for the years ended December 31, 2013, December 31, 2012 and from May 19, 2011 (commencement of
operations) to December 31, 2011
Statements of Cash Flows for the years ended December 31, 2013, December 31, 2012 and from May 19, 2011 (commencement of operations) to
December 31, 2011
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C., the Financial Statements of New Mountain
Finance Corporation and the Financial Statements of New Mountain Finance AIV Holdings Corporation
1
EXHIBIT 99.1
PAGE
2
3
4
5
6
7
8
9
16
21
22
23
24
25
26
27
28
29
New Mountain Finance Holdings, L.L.C
Consolidated Statements of Operations
(in thousands)
(unaudited)
From April 1, 2014 to
May 7, 2014
Three months ended
June 30, 2013
From January 1, 2014 to
May 7, 2014
Six months ended June 30,
2013
Investment income
Interest income
Dividend income
Other income
Total investment income
Expenses
Incentive fee
Capital gains incentive fee
Total incentive fees
Management fee
Interest and other financing expenses
Professional fees
Administrative expenses
Other general and administrative expenses
Total expenses
Less: expenses waived and reimbursed (see Note 5)
Net expenses
Net investment income
Net realized gains on investments
Net change in unrealized (depreciation) appreciation of investments
$
$
12,847
279
113
13,239
1,882
523
2,405
1,879
1,408
393
176
166
6,427
—
6,427
6,812
5,860
(3,742)
27,321
6,436
1,399
35,156
5,407
(1,701)
3,706
3,727
3,118
563
939
396
12,449
(836)
11,613
23,543
3,312
(12,031)
Net increase in members' capital resulting from operations
$
8,930
$
14,824
$
2
$
$
40,986
2,374
797
44,157
6,325
2,050
8,375
6,055
4,821
1,255
772
556
21,834
(774)
21,060
23,097
8,640
1,072
32,809
$
52,364
6,433
1,677
60,474
8,865
981
9,846
7,295
6,189
1,135
1,698
806
26,969
(1,665)
25,304
35,170
4,356
(141)
39,385
New Mountain Finance Holdings, L.L.C
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Cash flows from operating activities
Net increase in members' capital resulting from operations
Adjustments to reconcile net (increase) decrease in members' capital resulting from operations to net cash (used in) provided by operating
activities:
From January 1, 2014 to
May 7, 2014
Six months ended June 30,
2013
$
32,809
$
39,385
Net realized gains on investments
Net change in unrealized (appreciation) depreciation of investments
Amortization of purchase discount
Amortization of deferred financing costs
Non-cash investment income
(Increase) decrease in operating assets:
Purchase of investments
Proceeds from sales and paydowns of investments
Cash received for purchase of undrawn portion of revolving credit or delayed draw facilities
Cash paid for purchase of drawn portion of revolving credit or delayed draw facilities
Cash paid on drawn revolvers
Cash repayments on drawn revolvers
Interest and dividend receivable
Receivable from unsettled securities sold
Receivable from affiliate
Other assets
Increase (decrease) in operating liabilities:
Capital gains incentive fee payable
Incentive fee payable
Management fee payable
Payable for unsettled securities purchased
Interest payable
Payable to affiliate
Other liabilities
Net cash flows used in operating activities
Cash flows from financing activities
Net proceeds from shares sold
Dividends paid
Offering costs paid
Proceeds from Holdings Credit Facility
Repayment of Holdings Credit Facility
Proceeds from SLF Credit Facility
Repayment of SLF Credit Facility
Deferred financing costs paid
Net cash flows provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosure of cash flow information
Cash interest paid
Non-cash financing activities:
Value of members' capital issued in connection with dividend reinvestment plan
Accrual for offering costs
Accrual for deferred financing costs
$
$
$
3
(8,640)
(1,072)
(997)
591
(1,264)
(188,042)
122,821
126
(516)
(380)
570
(1,006)
—
75
(660)
937
2,221
2,199
5,716
(721)
153
113
(4,356)
141
(1,923)
735
(2,177)
(262,254)
201,388
—
—
—
—
(4,862)
9,962
(114)
(715)
981
2,017
505
9,900
45
46
166
(34,967)
(11,130)
58,644
(15,247)
(150)
114,482
(137,100)
332
—
(18)
20,943
(14,024)
14,981
957
4,749
1,038
617
125
$
$
$
57,020
(36,992)
(542)
171,818
(169,320)
3,238
(10,400)
(498)
14,324
3,194
12,752
15,946
5,256
2,496
1,276
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Boards of Directors and investors of
New Mountain Finance Holdings, L.L.C.,
New Mountain Finance Corporation and
New Mountain Finance AIV Holdings Corporation
New York, New York
We have audited the accompanying consolidated statement of assets, liabilities and members' capital of New Mountain Finance Holdings, L.L.C., including the
consolidated schedules of investments as of December 31, 2013 and 2012, and the related consolidated statements of operations, consolidated statements of changes in
members' capital, and cash flows for the three years in the period ended December 31, 2013 and the financial highlights for each of the five years in the period ended
December 31, 2013. Also, we have audited the statements of assets and liabilities of New Mountain Finance Corporation and New Mountain Finance AIV Holdings
Corporation as of December 31, 2013 and 2012, and the related statements of operations, changes in net assets, cash flows and the financial highlights for the period from
May 19, 2011(commencement of operations) to December 31, 2011 and for the years ended December 31, 2013 and 2012. These financial statements are the
responsibility of the management of New Mountain Finance Holdings, L.L.C., New Mountain Finance Corporation and New Mountain Finance AIV Holdings
Corporation. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. New Mountain Finance Holdings, L.L.C.
and New Mountain Finance AIV Holdings Corporation are not required to have, nor were we engaged to perform, an audit of their internal control over financial
reporting. Our audits of New Mountain Finance Holdings, L.L.C. and New Mountain Finance AIV Holdings Corporation included consideration of their internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of their internal control over financial reporting. Accordingly we express no such opinion for New Mountain Finance Holdings, L.L.C. and New Mountain
Finance AIV Holdings Corporation. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
Our procedures included confirmation of investments as of December 31, 2013 and 2012, by correspondence with the custodian, loan agent or borrower; where replies
were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 16, on February 3, 2014, New Mountain Finance AIV Holdings sold its remaining units in New Mountain Finance Holdings, L.L.C. (the
"Operating Company") and no longer owns any units of the Operating Company.
In our opinion, such financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of New
Mountain Finance Holdings, L.L.C. as of December 31, 2013 and 2012, and the consolidated results of its operations, its consolidated changes in members' capital, and its
consolidated cash flows for each of the three years in the period ended December 31, 2013 and the financial highlights for the each of the five years in the period ended
December 31,2013; and the financial positions of New Mountain Finance Corporation and New Mountain Finance AIV Holdings Corporation as of December 31, 2013
and 2012 and the results of their operations, changes in their net assets, their cash flows, and the financial highlights for the period from May 19, 2011(commencement of
operations) to December 31, 2011 and for the years ended December 31, 2013 and 2012, in conformity with accounting principles generally accepted in the United States
of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 5, 2014
4
New Mountain Finance Holdings, L.L.C.
Consolidated Statements of Assets, Liabilities and Members' Capital
(in thousands, except units and per unit data)
Assets
Investments at fair value (cost of $1,094,080 and $976,243, respectively)
Cash and cash equivalents
Interest and dividend receivable
Deferred credit facility costs (net of accumulated amortization of $3,562 and $2,016, respectively)
Receivable from affiliate
Receivable from unsettled securities sold
Other assets
Total assets
Liabilities
Holdings Credit Facility
SLF Credit Facility
Capital gains incentive fee payable
Incentive fee payable
Management fee payable
Payable for unsettled securities purchased
Interest payable
Payable to affiliate
Dividends payable
Other liabilities
Total liabilities
Members' Capital
Total liabilities and members' capital
Outstanding common membership units
Capital per unit
December 31, 2013
December 31, 2012
$
$
1,115,651
14,981
10,531
4,727
459
—
1,492
989,820
12,752
6,340
5,490
534
9,962
666
$
1,147,841
$
1,025,564
221,849
214,668
7,636
4,104
3,856
3,690
814
80
—
2,628
459,325
688,516
206,938
214,262
4,407
3,390
3,222
9,700
712
—
11,192
1,802
455,625
569,939
$
$
1,147,841
47,896,693
14.38
$
$
1,025,564
40,548,189
14.06
The accompanying notes are an integral part of these consolidated financial statements.
5
New Mountain Finance Holdings, L.L.C.
Consolidated Statements of Operations
(in thousands)
Investment income
Interest income
Dividend income
Other income
Total investment income
Expenses
Incentive fee
Capital gains incentive fee
Total incentive fees
Management fee
Interest and other credit facility expenses
Administrative expenses
Professional fees
Other general and administrative expenses
Total expenses
Less: expenses waived and reimbursed (see Note 5)
Net expenses
Net investment income
Net realized gains on investments
Net change in unrealized appreciation (depreciation) of investments
Net increase in members' capital resulting from operations
Years ended December 31,
2013
2012
2011
$
$
$
107,027
5,049
2,836
114,912
16,502
3,229
19,731
14,905
12,470
3,429
2,349
1,584
54,468
(3,233)
51,235
63,677
7,253
7,994
78,924
$
83,646
812
1,328
85,786
11,537
4,407
15,944
11,109
10,085
2,426
2,091
1,374
43,029
(2,460)
40,569
45,217
18,851
9,928
73,996
$
$
55,809
—
714
56,523
3,522
—
3,522
4,938
7,086
1,615
2,037
986
20,184
(2,186)
17,998
38,525
16,252
(23,100)
31,677
The accompanying notes are an integral part of these consolidated financial statements.
6
New Mountain Finance Holdings, L.L.C.
Consolidated Statements of Changes in Members' Capital
(in thousands)
Increase (decrease) in members' capital resulting from operations:
Net investment income
Net realized gains on investments
Net change in unrealized appreciation (depreciation) of investments
Net increase in members' capital resulting from operations
Contributions
Distributions
Dividends declared
Offering costs
Reinvestment of dividends
Net increase in members' capital
Members' capital at the beginning of the period
Members' capital at the end of the period
Year ended December 31,
2013
2012
2011
$
$
63,677
7,253
7,994
78,924
100,040
—
(65,140)
(331)
5,084
118,577
569,939
$
45,217
18,851
9,928
73,996
133,428
—
(59,378)
(564)
1,955
149,437
420,502
$
688,516
$
569,939
$
38,525
16,252
(23,100)
31,677
195,295
(10,249)
(26,591)
(11,557)
—
178,575
241,927
420,502
The accompanying notes are an integral part of these consolidated financial statements.
7
New Mountain Finance Holdings, L.L.C.
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
2013
2012
2011
$
78,924
$
73,996
$
31,677
Cash flows from operating activities
Net increase in members' capital resulting from operations
Adjustments to reconcile net (increase) decrease in members' capital resulting from operations to
net cash (used in) provided by operating activities:
Net realized gains on investments
Net change in unrealized (appreciation) depreciation of investments
Amortization of purchase discount
Amortization of deferred credit facility costs
Non-cash investment income
(Increase) decrease in operating assets:
Purchase of investments
Proceeds from sales and paydowns of investments
Cash received for purchase of undrawn portion of revolving credit or delayed draw facilities
Cash paid for drawn revolver
Cash repayments on drawn revolvers
Interest and dividend receivable
Receivable from affiliate
Receivable from unsettled securities sold
Other assets
Increase (decrease) in operating liabilities:
Capital gains incentive fee payable
Incentive fee payable
Management fee payable
Payable for unsettled securities purchased
Interest payable
Payable to affiliate
Other liabilities
Net cash flows used in operating activities
Cash flows from financing activities
Contributions
Distributions
Dividends paid
Offering costs paid
Proceeds from Holdings Credit Facility
Repayment of Holdings Credit Facility
Proceeds from SLF Credit Facility
Repayment of SLF Credit Facility
Deferred credit facility costs paid
Net cash flows provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosure of cash flow information
Cash interest paid
Non-cash operating activities:
Non-cash activity on investments
Non-cash financing activities:
Dividends declared and payable
Value of members' capital issued in connection with dividend reinvestment plan
Accrual for offering costs
Accrual for deferred credit facility costs
$
$
$
$
(7,253)
(7,994)
(3,365)
1,546
(4,473)
(529,695)
426,561
388
—
—
(4,191)
75
9,962
(225)
3,229
714
634
(6,010)
102
80
639
(18,851)
(9,928)
(5,996)
1,160
(2,187)
(673,355)
423,874
137
(12,705)
12,705
967
(165)
(9,962)
(50)
4,407
1,073
1,021
2,095
(1,035)
—
151
(16,252)
23,100
(5,862)
786
(1,538)
(494,694)
231,962
1,363
(535)
—
(4,299)
(369)
—
(351)
—
2,317
2,200
(86,857)
934
(394)
534
(40,352)
(212,648)
(316,278)
100,040
—
(71,248)
(720)
457,978
(443,067)
23,306
(22,900)
(808)
42,581
2,229
12,752
14,981
10,323
1,986
$
$
$
— $
5,084
768
21
133,428
—
(46,231)
(268)
523,099
(445,199)
112,993
(64,659)
(3,082)
210,081
(2,567)
15,319
12,752
9,433
$
$
— $
$
11,192
1,955
556
46
195,295
(10,249)
(26,591)
(11,557)
336,508
(267,168)
172,060
(63,068)
(4,377)
320,853
4,575
10,744
15,319
4,358
—
—
—
—
192
The accompanying notes are an integral part of these consolidated financial statements.
8
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments
December 31, 2013
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
Funded Debt Investments—Bermuda
Stratus Technologies Bermuda Holdings Ltd.(4)**
Stratus Technologies Bermuda Ltd. / Stratus
Technologies, Inc.
Information Technology
First lien(2)(7)
12.00%
3/29/2015
Total Funded Debt Investments—Bermuda
Funded Debt Investments—Cayman Islands
Pinnacle Holdco S.à r.l. / Pinnacle (US) Acquisition
Co Limited**
Software
Second lien(2)
10.50% (Base Rate + 9.25%)
7/30/2020
First lien(2)
First lien(3)
9.75%
9.00% (Base Rate + 7.75%)
4/1/2021
3/22/2019
Total Funded Debt Investments—Cayman Islands
Funded Debt Investments—United States
McGraw-Hill Global Education Holdings, LLC
Education
Deltek, Inc.
Software
Global Knowledge Training LLC
$
$
$
$
$
6,497
6,497
30,000
30,000
$
$
$
$
6,335
6,335
29,472
29,472
$
$
$
$
24,500
$
24,348
$
17,850
42,350
17,367
41,715
6,529
6,529
30,362
30,362
27,195
18,225
45,420
0.95%
0.95%
4.41%
4.41%
6.60%
Second lien(2)
10.00% (Base Rate + 8.75%)
10/10/2019
41,000
40,977
41,820
6.07%
Education
Second lien(2)
11.00% (Base Rate + 9.75%)
10/21/2018
41,450
41,070
41,450
6.02%
UniTek Global Services, Inc.
Business Services
First lien(2)
First lien(2)
First lien(2)
15.00% (Base Rate + 9.50% + 4.00%
PIK)*
15.00% (Base Rate + 9.50% + 4.00%
PIK)*
15.00% (Base Rate + 9.50% + 4.00%
PIK)*
Edmentum, Inc.(fka Plato, Inc.)
Education
First lien(3)
5.50% (Base Rate + 4.50%)
Second lien(2)
11.25% (Base Rate + 9.75%)
4/15/2018
4/15/2018
4/15/2018
5/17/2018
5/17/2019
26,382
6,387
5,309
38,078
6,433
31,150
37,583
25,508
6,176
5,133
36,817
6,240
30,685
36,925
26,382
6,387
5,309
38,078
6,465
31,578
38,043
5.53%
5.52%
SRA International, Inc.
Federal Services
Kronos Incorporated
Software
Rocket Software, Inc.
Software
First lien(2)
6.50% (Base Rate + 5.25%)
7/20/2018
34,750
33,784
34,475
5.01%
Second lien(2)
9.75% (Base Rate + 8.50%)
4/30/2020
31,341
31,055
32,542
4.73%
Second lien(2)
10.25% (Base Rate + 8.75%)
2/8/2019
30,875
30,731
31,029
4.51%
Novell, Inc. (fka Attachmate Corporation, NetIQ
Corporation)
Software
First lien(3)
7.25% (Base Rate + 5.75%)
Second lien(2)
11.00% (Base Rate + 9.50%)
11/22/2017
11/22/2018
6,951
23,353
30,304
6,847
22,780
29,627
7,080
22,876
29,956
4.35%
The accompanying notes are an integral part of these consolidated financial statements.
9
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair value
Percent of
Members'
Capital
JHCI Acquisition, Inc.
Distribution & Logistics
CompassLearning, Inc.(12)
Education
Transtar Holding Company
Distribution & Logistics
KeyPoint Government Solutions, Inc.
Federal Services
Meritas Schools Holdings, LLC
Education
First lien(3)
7.00% (Base Rate + 5.75%)
7/11/2019
$
19,536
$
19,262
$
Second lien(3)
11.00% (Base Rate + 9.75%)
7/11/2020
10,000
29,536
9,705
28,967
19,548
9,898
29,446
4.28%
First lien(2)
8.00% (Base Rate + 6.75%)
11/26/2018
30,000
29,261
29,250
4.25%
Second lien(2)
9.75% (Base Rate + 8.50%)
10/9/2019
28,300
27,842
27,168
3.95%
First lien(3)
First lien(2)
7.25% (Base Rate + 6.00%)
7.25% (Base Rate + 6.00%)
11/13/2017
11/13/2017
First lien(3)
First lien(2)
7.00% (Base Rate + 5.75%)
7.00% (Base Rate + 5.75%)
6/25/2019
6/25/2019
16,784
10,116
26,900
19,950
5,920
25,870
16,448
9,953
26,401
19,763
5,865
25,628
16,616
10,015
26,631
20,087
5,961
26,048
3.87%
3.78%
Sierra Hamilton LLC / Sierra Hamilton Finance, Inc.
Energy
First lien(2)
12.25%
12/15/2018
25,000
25,000
25,000
3.63%
Permian Tank & Manufacturing, Inc.
Energy
Aderant North America, Inc.
Software
YP Holdings LLC(8)
YP LLC
Media
McGraw-Hill School Education Holdings, LLC
Education
Aspen Dental Management, Inc.
First lien(2)
10.50%
1/15/2018
24,500
24,757
24,255
3.52%
Second lien(2)
10.00% (Base Rate + 8.75%)
6/20/2019
22,500
22,201
23,203
3.37%
First lien(2)
8.04% (Base Rate + 6.71%)
6/4/2018
22,400
21,892
22,722
3.30%
First lien(3)
First lien(2)
6.25% (Base Rate + 5.00%)
6.25% (Base Rate + 5.00%)
12/18/2019
12/18/2019
13,000
9,000
22,000
12,870
8,910
21,780
12,870
8,910
21,780
3.16%
Healthcare Services
First lien(3)
7.00% (Base Rate + 5.50%)
10/6/2016
21,077
20,820
20,813
3.02%
LM U.S. Member LLC (and LM U.S. Corp
Acquisition Inc.)
Business Services
Second lien(3)
9.50% (Base Rate + 8.25%)
10/26/2020
20,000
19,731
20,308
2.95%
Envision Acquisition Company, LLC
Healthcare Services
ARSloane Acquisition, LLC
Business Services
eResearchTechnology, Inc.
Healthcare Services
Distribution International, Inc.
Second lien(2)
9.75% (Base Rate + 8.75%)
11/4/2021
20,000
19,605
20,075
2.91%
First lien(3)
7.50% (Base Rate + 6.25%)
10/1/2019
19,950
19,754
19,992
2.90%
First lien(3)
6.00% (Base Rate + 4.75%)
5/2/2018
19,750
19,047
19,874
2.89%
Distribution & Logistics
First lien(2)
7.50% (Base Rate + 6.50%)
7/16/2019
19,900
19,527
19,813
2.88%
The accompanying notes are an integral part of these consolidated financial statements.
10
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
First American Payment Systems, L.P.
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
Business Services
Second lien(3)
10.75% (Base Rate + 9.50%)
4/12/2019
$
20,000
$
19,654
$
19,800
2.88%
Merrill Communications LLC
Business Services
First lien(3)
7.25% (Base Rate + 6.25%)
3/8/2018
19,425
19,246
19,759
2.87%
Insight Pharmaceuticals LLC
Healthcare Products
Second lien(3)
13.25% (Base Rate + 11.75%)
8/25/2017
19,310
18,766
19,021
2.76%
St. George's University Scholastic Services LLC
Education
First lien(3)
8.50% (Base Rate + 7.00%)
12/20/2017
17,379
17,082
17,530
2.55%
Sotera Defense Solutions, Inc. (Global Defense
Technology & Systems, Inc.)
Federal Services
First lien(3)
7.50% (Base Rate + 6.00%)
4/21/2017
18,316
18,127
16,118
2.34%
Confie Seguros Holding II Co.
Consumer Services
Second lien(3)
10.25% (Base Rate + 9.00%)
5/8/2019
14,886
14,762
15,034
2.18%
OpenLink International, Inc.
Software
Smile Brands Group Inc.
Healthcare Services
Brock Holdings III, Inc.
Industrial Services
Vision Solutions, Inc.
Software
Packaging Coordinators, Inc.(10)
First lien(3)
7.75% (Base Rate + 6.25%)
10/30/2017
14,700
14,496
14,774
2.15%
First lien(3)
7.50% (Base Rate + 6.25%)
8/16/2019
14,464
14,261
14,307
2.08%
Second lien(2)
10.00% (Base Rate + 8.25%)
3/16/2018
14,000
13,858
14,263
2.07%
Second lien(2)
9.50% (Base Rate + 8.00%)
7/23/2017
14,000
13,957
14,140
2.05%
Healthcare Products
Second lien(2)
9.50% (Base Rate + 8.25%)
11/10/2020
14,000
13,868
14,088
2.05%
Lonestar Intermediate Super Holdings, LLC
Business Services
Subordinated(2)
11.00% (Base Rate + 9.50%)
9/2/2019
12,000
11,701
12,419
1.80%
Van Wagner Communications, LLC
Media
Vertafore, Inc.
Software
TransFirst Holdings, Inc.
Business Services
MailSouth, Inc.
Media
Vitera Healthcare Solutions, LLC
First lien(2)
6.25% (Base Rate + 5.00%)
8/3/2018
11,761
11,583
11,997
1.74%
Second lien(2)
9.75% (Base Rate + 8.25%)
10/29/2017
10,000
9,937
10,198
1.48%
Second lien(3)
11.00% (Base Rate + 9.75%)
6/27/2018
10,000
9,741
10,138
1.47%
First lien(3)
6.76% (Base Rate + 4.96%)
12/14/2016
9,410
9,333
9,269
1.35%
Software
First lien(3)
6.00% (Base Rate + 5.00%)
Second lien(2)
9.25% (Base Rate + 8.25%)
11/4/2020
11/4/2021
2,000
7,000
9,000
1,980
6,897
8,877
2,000
7,070
9,070
1.32%
Harley Marine Services, Inc.
Distribution & Logistics
Second lien(2)
10.50% (Base Rate + 9.25%)
12/20/2019
9,000
8,820
8,820
1.28%
Consona Holdings, Inc.
Software
Physio-Control International, Inc.
First lien(3)
7.25% (Base Rate + 6.00%)
8/6/2018
8,394
8,326
8,457
1.23%
Healthcare Products
First lien(2)
9.88%
1/15/2019
6,651
6,651
7,482
1.09%
Virtual Radiologic Corporation
Healthcare Information Technology
First lien(3)
7.25% (Base Rate + 5.50%)
12/22/2016
13,563
13,454
7,324
1.06%
The accompanying notes are an integral part of these consolidated financial statements.
11
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Alion Science and Technology Corporation
Federal Services
Immucor, Inc.
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
First lien(2)(7)
12.00% (10.00% + 2.00% PIK)*
11/1/2014
$
6,447
$
6,360
$
6,570
0.95%
Healthcare Services
Subordinated(2)(7)
11.13%
8/15/2019
5,000
4,950
5,650
0.82%
Learning Care Group (US), Inc.
Education
Education Management LLC**
Subordinated(2)
Subordinated(2)
15.00% PIK*
15.00% PIK*
5/8/2020
5/8/2020
4,371
800
5,171
4,253
746
4,999
4,371
800
5,171
0.75%
Education
First lien(3)
8.25% (Base Rate + 7.00%)
3/30/2018
5,003
4,888
5,028
0.73%
GCA Services Group, Inc.
Business Services
Second lien(2)
9.25% (Base Rate + 8.00%)
11/1/2020
4,000
3,964
4,064
0.59%
Sophia Holding Finance LP / Sophia Holding
Finance Inc.
Software
Subordinated(2)
9.63%
12/1/2018
3,500
3,502
3,623
0.53%
ATI Acquisition Company (fka Ability
Acquisition, Inc.)(11)
Education
Total Funded Debt Investments—United States
Total Funded Debt Investments
Equity—Bermuda
Stratus Technologies Bermuda Holdings Ltd.(4)
**
Information Technology
Total Shares—Bermuda
Equity—United States
Crowley Holdings Preferred, LLC
First lien(2)
First lien(2)
17.25% (Base Rate + 10.00% + 4.00% PIK)
(5)*
17.25% (Base Rate + 10.00% + 4.00% PIK)
(5)*
6/30/2012—
Past Due
6/30/2012—
Past Due
Ordinary shares(2)
Preferred shares(2)
—
—
Distribution & Logistics
Preferred shares(2)
12.00% (10.00% + 2.00% PIK)*
Black Elk Energy Offshore Operations, LLC
Energy
Preferred shares(2)
17.00%
Global Knowledge Training LLC
Education
Ordinary shares(2)
Preferred shares(2)
Packaging Coordinators, Inc.(10)
Packaging Coordinators Holdings, LLC
Healthcare Products
Ordinary shares(2)
—
—
—
1,665
103
1,768
1,434
94
1,528
$
$
1,016,562
1,053,059
$
$
1,001,605
1,037,412
156,247
$
35,558
$
65
15
80
80
233
103
336
1,013,641
1,050,532
46
10
56
56
$
$
$
$
0.05%
147.22%
152.58%
0.01%
0.01%
35,000
$
35,000
$
35,000
5.08%
20,000,000
20,000
20,000
2.91%
2
2,423
—
—
—
3
3,006
3,009
0.44%
19,427
1,000
1,181
0.17%
—
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
12
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
Ancora Acquisition LLC(11)
Education
Preferred shares(2)
Total Shares—United States
Total Shares
Warrants—United States
Learning Care Group (US), Inc.
Education
YP Holdings LLC(8)
YP Equity Investors LLC
Media
UniTek Global Services, Inc.
Business Services
Storapod Holding Company, Inc.
Consumer Services
Alion Science and Technology Corporation
Federal Services
Ancora Acquisition LLC(11)
Education
Total Warrants—United States
Total Funded Investments
Unfunded Debt Investments—United States
Aspen Dental Management, Inc.
Warrants(2)
Warrants(2)
Warrants(2)
Warrants(2)
Warrants(2)
Warrants(2)
Warrants(2)
Healthcare Services
First lien(2)(9)—Undrawn
Advantage Sales & Marketing Inc.
Business Services
First lien(2)(9)—Undrawn
Total Unfunded Debt Investments
—
—
—
—
—
—
—
—
—
—
Total Investments
_______________________________________________________________________________
—
372
$
$
$
83
56,083
56,163
$
$
$
83
59,273
59,329
844
$
194
$
3,589
61
255
503
2,136
2,639
0.01 %
8.61 %
8.62 %
0.38 %
5
—
1,944
0.28 %
1,014,451
1,449
1,694
0.25 %
360,129
6,000
20
156
293
—
2,153
1,095,728
$
$
594
94
—
$
$
6,965
1,116,826
0.09 %
0.01 %
—
1.01 %
162.21 %
—
—
—
—
—
—
—
4/6/2016
12/17/2015
$
$
5,000
$
(388)
$
(388)
(0.06)%
10,500
15,500
(1,260)
(1,648)
1,094,080
$
$
(787)
(1,175)
1,115,651
$
$
(0.11)%
(0.17)%
162.04 %
(1) New Mountain Finance Holdings, L.L.C. (the "Operating Company") generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.
(2)
(3)
Investment is pledged as collateral for the Holdings Credit Facility, a revolving credit facility among the Operating Company 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. See Note 7, Borrowing Facilities, for details.
Investment is pledged as collateral for the SLF Credit Facility, a revolving credit facility among New Mountain Finance SPV Funding, L.L.C. as the Borrower, the Operating Company as the Collateral
Administrator, Wells Fargo Securities, L.L.C. as the Administrative Agent, and Wells Fargo Bank, National Association, as the Collateral Custodian. See Note 7, Borrowing Facilities, for details.
(4) The Operating Company holds investments in two related entities of Stratus Technologies Bermuda Holdings, Ltd. ("Stratus Holdings"). The Operating Company directly holds ordinary and preferred
equity in Stratus Holdings and has a credit investment in the joint issuers of Stratus Technologies Bermuda Ltd. ("Stratus Bermuda") and Stratus Technologies, Inc. ("Stratus U.S."), collectively, the
"Stratus Notes". Stratus U.S. is a wholly-owned subsidiary of Stratus Bermuda, which in turn is a wholly-owned subsidiary of Stratus Holdings. Stratus Holdings is the parent guarantor of the credit
investment of the Stratus Notes.
(5)
Investment is on non-accrual status.
(6) The Operating Company holds 1,014,451 warrants in UniTek Global Services, Inc., which represents a 4.46% equity ownership on a fully diluted basis.
13
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands, except shares)
(7) Securities are registered under the Securities Act.
(8) The Operating Company holds investments in two related entities of YP Holdings LLC. The Operating Company directly holds warrants to purchase a 4.96% membership interest of YP Equity
Investors, LLC (which at closing represented an indirect 1.0% equity interest in YP Holdings LLC) and holds an investment in the Term Loan B loans issued by YP LLC, a subsidiary of YP
Holdings LLC.
(9) Par Value amounts represent the drawn or undrawn (as indicated in type of investment) portion of revolving credit facilities. Cost amounts represent the cash received at settlement date net the impact of
paydowns and cash paid for drawn revolvers.
(10) The Operating Company holds investments in Packaging Coordinators, Inc. and one related entity of Packaging Coordinators, Inc. The Operating Company has a credit investment in Packaging
Coordinators, Inc. and holds ordinary equity in Packaging Coordinators Holdings, LLC, a wholly-owned subsidiary of Packaging Coordinators, Inc.
(11) The Operating Company holds investments in ATI Acquisition Company and Ancora Acquisition LLC. The Operating Company has credit investments in ATI Acquisition Company and preferred
equity and warrants to purchase units of common membership interests of Ancora Acquisition LLC. The Operating Company received its investments in Ancora Acquisition LLC as a result of its
investments in ATI Acquisition Company.
(12) The Operating Company holds an investment in CompassLearning, Inc. that is structured as a first lien last out term loan.
*
All or a portion of interest contains payments-in-kind ("PIK").
**
Indicates assets that the Operating Company deems to be "non-qualifying assets" under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least
70.00% of the Operating Company's total assets at the time of acquisition of any additional non-qualifying assets.
The accompanying notes are an integral part of these consolidated financial statements.
14
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands)
Investment Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Industry Type
Software
Education
Business Services
Distribution & Logistics
Federal Services
Healthcare Services
Energy
Media
Healthcare Products
Consumer Services
Industrial Services
Healthcare Information Technology
Information Technology
Total investments
Interest Rate Type
Floating rates
Fixed rates
Total investments
The accompanying notes are an integral part of these consolidated financial statements.
15
December 31, 2013
Percent of Total Investments at
Fair Value
49.62%
42.03%
2.41%
5.94%
100.00%
December 31, 2013
Percent of Total Investments at
Fair Value
22.33%
21.13%
13.04%
10.78%
7.52%
7.20%
6.21%
4.12%
3.74%
1.40%
1.28%
0.66%
0.59%
100.00%
December 31, 2013
Percent of Total Investments at
Fair Value
85.08%
14.92%
100.00%
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments
December 31, 2012
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
Funded Debt Investments—Bermuda
Stratus Technologies Bermuda Holdings Ltd.(4)**
Stratus Technologies Bermuda Ltd. / Stratus
Technologies, Inc.
Information Technology
First lien(2)(7)
12.00%
3/29/2015
Total Funded Debt Investments—Bermuda
Funded Debt Investments—Cayman Islands
Pinnacle Holdco S.à r.l. / Pinnacle (US) Acquisition
Co Limited**
Software
First lien(3)
6.50% (Base Rate + 5.25%)
Second lien(2)
10.50% (Base Rate + 9.25%)
7/30/2019
7/30/2020
Total Funded Debt Investments—Cayman Islands
Funded Debt Investments—United Kingdom
Magic Newco, LLC**
Software
Total Funded Debt Investments—United Kingdom
Funded Debt Investments—United States
Edmentum, Inc.(fka Plato, Inc.)
First lien(3)
7.25% (Base Rate + 6.00%)
12/12/2018
Education
First lien(3)
7.50% (Base Rate + 6.00%)
Second lien(2)
11.25% (Base Rate + 9.75%)
Novell, Inc. (fka Attachmate Corporation, NetIQ
Corporation)
Software
First lien(3)
7.25% (Base Rate + 5.75%)
Second lien(2)
11.00% (Base Rate + 9.50%)
5/17/2018
5/17/2019
11/22/2017
11/22/2018
$
$
$
$
$
$
$
6,664
6,664
$
$
6,396
6,396
$
$
6,631
6,631
1.16%
1.16%
2,992
$
2,971
$
30,000
32,992
29,420
32,391
32,992
$
32,391
$
2,999
30,488
33,487
33,487
14,963
14,963
$
$
14,543
14,543
$
$
15,105
15,105
11,700
$
11,378
$
29,150
40,850
7,700
24,000
31,700
28,604
39,982
7,560
23,326
30,886
11,744
28,567
40,311
7,785
23,560
31,345
5.88%
5.88%
2.65%
2.65%
7.07%
5.50%
Rocket Software, Inc.
Software
Pharmaceutical Research Associates, Inc.
Second lien(2)
10.25% (Base Rate + 8.75%)
2/8/2019
30,875
30,711
30,933
5.43%
Healthcare Services
Second lien(2)
10.50% (Base Rate + 9.25%)
6/10/2019
30,000
29,402
30,319
5.32%
UniTek Global Services, Inc.
Business Services
KeyPoint Government Solutions, Inc.
Federal Services
Global Knowledge Training LLC
First lien(2)
First lien(2)
First lien(2)
9.00% (Base Rate + 7.50%)
9.00% (Base Rate + 7.50%)
9.00% (Base Rate + 7.50%)
First lien(3)
First lien(2)
7.25% (Base Rate + 6.00%)
7.25% (Base Rate + 6.00%)
First lien(3)
First lien(3)
6.5% (Base Rate +4.99%)
7.25% (Base Rate + 4.00%)
Second lien(2)
11.50% (Base Rate + 9.75%)
Managed Health Care Associates, Inc.
Healthcare Services
First lien(2)
3.47% (Base Rate + 3.25%)
Second lien(2)
6.72% (Base Rate + 6.50%)
Transtar Holding Company
4/16/2018
4/16/2018
4/16/2018
11/13/2017
11/13/2017
4/21/2017
4/21/2017
10/21/2018
8/1/2014
2/1/2015
19,650
5,970
4,963
30,583
20,000
10,000
30,000
4,776
1,174
24,250
30,200
14,756
15,000
29,756
19,202
5,798
4,781
29,781
19,608
9,703
29,311
4,718
1,159
23,814
29,691
13,240
12,790
26,030
19,331
5,873
4,882
30,086
19,900
9,950
29,850
4,705
1,156
23,755
29,616
14,276
14,475
28,751
5.28%
5.24%
5.20%
5.05%
Distribution & Logistics(10)
Second lien(2)
9.75% (Base Rate + 8.50%)
10/9/2019
28,300
27,787
28,654
5.03%
Meritas Schools Holdings, LLC
Education
First lien(3)
7.50% (Base Rate + 6.00%)
Second lien(2)
11.50% (Base Rate + 10.00%)
Kronos Incorporated
7/29/2017
1/29/2018
8,150
20,000
28,150
8,084
19,747
27,831
8,171
20,000
28,171
4.94%
Second lien(2)
9.75% (Base Rate + 8.5%)
4/30/2020
25,000
24,753
25,125
4.41%
The accompanying notes are an integral part of these consolidated financial statements.
16
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2012
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
St. George's University Scholastic Services LLC
Education
SRA International, Inc.
Federal Services
Aderant North America, Inc.
First lien(2)
8.50% (Base Rate + 7.00%)
12/20/2017
$
25,000
$
24,501
$
24,500
4.30%
First lien(3)
First lien(2)
6.50% (Base Rate + 5.25%)
6.50% (Base Rate + 5.25%)
7/20/2018
7/20/2018
20,436
4,315
24,751
19,741
4,225
23,966
19,542
4,126
23,668
4.15%
Software
Second lien(2)
11.00% (Base Rate + 7.75%)
6/20/2019
22,500
22,163
23,062
4.05%
LM U.S. Member LLC (and LM U.S. Corp
Acquisition Inc.)
Business Services
Second lien(2)
9.50% (Base Rate + 8.25%)
10/26/2020
20,000
19,704
20,150
3.54%
Learning Care Group (US), Inc.
Education
First lien(2)
12.00%
Subordinated(2)
15.00% PIK*
4/27/2016
6/30/2016
17,369
3,782
21,151
17,174
3,639
20,813
16,696
3,434
20,130
3.53%
Six3 Systems, Inc.
Federal Services
First American Payment Systems, L.P.
First lien(2)
7.00% (Base Rate + 5.75%)
10/4/2019
20,000
19,805
20,025
3.51%
Business Services
Second lien(2)
10.75% (Base Rate + 9.50%)
4/12/2019
20,000
19,609
19,900
3.49%
eResearchTechnology, Inc.
Healthcare Services
First lien(3)
8.00% (Base Rate + 6.50%)
5/2/2018
19,950
19,202
19,850
3.48%
Insight Pharmaceuticals LLC
Healthcare Products
Transplace Texas, L.P.
Second lien(2)
13.25% (Base Rate + 11.75%)
8/25/2017
19,310
18,659
19,503
3.42%
Distribution & Logistics(10)
Second lien(2)
11.00% (Base Rate + 9.00%)
4/12/2017
20,000
19,586
19,500
3.42%
PODS, Inc.(6)
Consumer Services
PODS Funding Corp. II
First lien(3)
7.25% (Base Rate + 6.00%)
Storapod Holding Company, Inc.
Subordinated(2)
21.00% PIK*
11/29/2016
11/29/2017
14,007
5,296
19,303
13,668
5,156
18,824
13,972
5,113
19,085
3.35%
Smile Brands Group Inc.
Healthcare Services
Ascensus, Inc.
Business Services
Sotera Defense Solutions, Inc. (Global Defense
Technology & Systems, Inc.)
First lien(3)
7.00% (Base Rate + 5.25%)
12/21/2017
19,859
19,598
18,767
3.29%
First lien(2)
First lien(3)
8.00% (Base Rate + 6.75%)
8.00% (Base Rate + 6.75%)
12/21/2018
12/21/2018
8,500
8,500
17,000
8,330
8,330
16,660
8,330
8,330
16,660
2.92%
Federal Services
First lien(3)
7.50% (Base Rate + 6.00%)
4/21/2017
15,758
15,644
15,600
2.74%
IG Investments Holdings, LLC
Business Services
Second lien(2)
10.25% (Base Rate + 9.00%)
10/31/2020
15,000
14,852
14,925
2.62%
OpenLink International, Inc.
Software
First lien(3)
7.75% (Base Rate + 6.25%)
10/30/2017
14,850
14,600
14,850
2.61%
Landslide Holdings, Inc. (Crimson Acquisition Corp.)
Software
First lien(3)
7.00% (Base Rate + 5.75%)
6/19/2018
14,625
14,353
14,671
2.57%
KPLT Holdings, Inc. (Centerplate, Inc., et al.)
Consumer Services
Subordinated(2)
11.75% (10.25% + 1.50% PIK)*
4/16/2019
14,637
14,351
14,344
2.52%
Sabre Inc.
Software
Brock Holdings III, Inc.
Industrial Services
Triple Point Technology, Inc.
First lien(3)
7.25% (Base Rate + 6.00%)
12/29/2017
13,965
13,918
14,186
2.49%
Second lien(2)
10.00% (Base Rate + 8.25%)
3/16/2018
14,000
13,825
14,105
2.48%
Software
First lien(3)
6.25% (Base Rate + 5.00%)
10/27/2017
12,968
12,549
13,021
2.28%
Lonestar Intermediate Super Holdings, LLC
Business Services
Subordinated(2)
11.00% (Base Rate + 9.50%)
9/2/2019
12,000
11,666
12,765
2.24%
Aspen Dental Management, Inc
Healthcare Services
First lien(3)
7.00% (Base Rate + 5.50%)
10/6/2016
12,870
12,652
12,210
2.14%
The accompanying notes are an integral part of these consolidated financial statements.
17
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2012
(in thousands, except shares)
Portfolio Company, Location and Industry(1)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
Van Wagner Communications, LLC
Media
Supervalu Inc.**
Retail
Vision Solutions, Inc.
Software
Merrill Communications LLC
First lien(2)
8.25% (Base Rate + 7.00%)
8/3/2018
$
12,000
$
11,772
$
12,160
2.13%
First lien(2)
8.00% (Base Rate + 6.75%)
8/30/2018
11,940
11,597
12,146
2.13%
Second lien(2)
9.50% (Base Rate + 8.00%)
7/23/2017
12,000
11,913
11,700
2.05%
Business Services
First lien(2)
10.75% (Base Rate + 7.50%)
3/10/2013
11,422
11,421
11,279
1.98%
MailSouth, Inc.
Media
Immucor, Inc.
First lien(3)
6.75% (Base Rate + 5.00%)
12/14/2016
11,136
11,018
11,025
1.94%
Healthcare Services
First lien(3)
5.75% (Base Rate + 4.50%)
Subordinated(2)(7)
11.13%
8/19/2018
8/15/2019
4,938
5,000
9,938
4,772
4,943
9,715
5,006
5,650
10,656
1.87%
Virtual Radiologic Corporation
Healthcare Information Technology
First lien(3)
7.75% (Base Rate + 4.50%)
12/22/2016
14,702
14,550
10,291
1.81%
Permian Tank & Manufacturing, Inc.
Energy
Vertafore, Inc.
Software
Merge Healthcare Inc.**
Healthcare Services
TransFirst Holdings, Inc.
Business Services
Consona Holdings, Inc.
Software
Confie Seguros Holding II Co.
First lien(3)
9.00% (Base Rate + 7.25%)
3/15/2017
10,072
9,852
10,072
1.77%
Second lien(2)
9.75% (Base Rate + 8.25%)
10/29/2017
10,000
9,924
10,050
1.76%
First lien(2)(7)
11.75%
5/1/2015
9,000
8,916
9,709
1.70%
Second lien(2)
11.00% (Base Rate + 9.75%)
6/27/2018
10,000
9,700
9,700
1.70%
First lien(3)
7.25% (Base Rate + 6.00%)
8/6/2018
8,479
8,398
8,511
1.49%
Consumer Services
Second lien(2)
10.25% (Base Rate + 9.00%)
5/8/2019
8,000
7,842
8,040
1.41%
Physio-Control International, Inc.
Healthcare Products
First lien(2)
9.88%
1/15/2019
7,000
7,000
7,717
1.35%
Surgery Center Holdings, Inc.
Healthcare Services
First lien(3)
6.50% (Base Rate + 5.00%)
2/6/2017
6,834
6,809
6,800
1.19%
Research Pharmaceutical Services, Inc.
Healthcare Services
First lien(3)
6.75% (Base Rate + 5.25%)
2/18/2017
7,125
7,046
6,662
1.17%
Alion Science and Technology Corporation
Federal Services
GCA Services Group, Inc.
Business Services
Education Management LLC**
First lien(2)(7)
12.00% (10.00% + 2.00% PIK)*
11/1/2014
6,320
6,131
6,093
1.07%
Second lien(2)
9.25% (Base Rate + 8.00%)
11/1/2020
5,000
4,951
4,900
0.86%
Education
First lien(3)
8.25% (Base Rate + 7.00%)
3/30/2018
5,058
4,921
4,232
0.74%
Brickman Group Holdings, Inc.
Business Services
Subordinated(2)
9.13%
11/1/2018
3,650
3,342
3,842
0.68%
Ozburn-Hessey Holding Company LLC
Distribution & Logistics(10)
Second lien(2)
11.50% (Base Rate + 9.50%)
10/10/2016
4,000
3,947
3,680
0.65%
YP Holdings LLC(8)
YP Intermediate Holdings Corp. / YP Intermediate
Holdings II LLC
Media
Mach Gen, LLC
Power Generation
ATI Acquisition Company (fka Ability
Acquisition, Inc.)
Education
Second lien(2)
15.00% (12.00% + 3.00% PIK)*
5/18/2017
3,559
3,326
3,586
0.63%
Second lien(2)
7.82% PIK (Base Rate + 7.50%)*
2/22/2015
3,676
3,474
2,396
0.42%
First lien(2)
First lien(2)
First lien(2)
12.25% (Base Rate + 5.00% + 4.00%
PIK)(5)*
17.25% (Base Rate + 10.00% + 4.00%
PIK)(5)*
17.25% (Base Rate + 10.00% + 4.00%
PIK)(5)*
12/30/2014
6/30/2012—Past
Due
6/30/2012—Past
Due
Airvana Network Solutions Inc.
Software
First lien(2)
10.00% (Base Rate + 8.00%)
3/25/2015
Total Funded Debt Investments—United States
Total Funded Debt Investments
4,432
1,665
103
6,200
4,306
1,517
94
5,917
648
942,670
997,289
$
$
640
921,787
975,117
$
$
—
649
103
752
650
$
$
925,287
980,510
0.13%
0.11%
162.35%
172.04%
The accompanying notes are an integral part of these consolidated financial statements.
18
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2012
(in thousands, except shares)
Type of Investment
Interest Rate
Maturity Date
Principal
Amount, Par
Value or
Shares
Cost
Fair Value
Percent of
Members'
Capital
Portfolio Company, Location and Industry
(1)
Equity—Bermuda
Stratus Technologies Bermuda Holdings Ltd.(4)
**
Information Technology
Total Shares—Bermuda
Equity—United States
Global Knowledge Training LLC
Education
Total Shares—United States
Total Shares
Warrants—United States
YP Holdings LLC(8)
YP Equity Investors LLC
Media
Alion Science and Technology Corporation
Federal Services
PODS, Inc.(6)
Storapod Holding Company, Inc.
Ordinary shares(2)
Preferred shares(2)
Ordinary shares(2)
Preferred shares(2)
Warrants(2)
Warrants(2)
Consumer Services
Warrants(2)
Learning Care Group (US), Inc.
Education
Warrants(2)
Total Warrants—United States
Total Funded Investments
Unfunded Debt Investments—United States
Advantage Sales & Marketing Inc.
Business Services
First lien(2)(9)—Undrawn
Total Unfunded Debt Investments
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
144,270
$
32,830
$
65
15
80
80
$
$
2
$
2
$
2,423
1,195
1,197
1,197
1,277
$
$
$
$
65
15
80
80
2
2,423
2,425
2,425
2,505
0.01 %
0.01 %
0.43 %
0.43 %
0.44 %
5
$
466
$
7,230
1.27 %
6,000
293
192
0.03 %
360,129
156
156
0.03 %
844
194
1,109
977,503
(1,260)
(1,260)
976,243
$
$
$
$
$
14
7,592
990,607
(787)
(787)
989,820
$
$
$
$
$
— %
1.33 %
173.81 %
(0.14)%
(0.14)%
173.67 %
Total Investments
_______________________________________________________________________________
12/17/2015
$
$
10,500
10,500
(1) New Mountain Finance Holdings, L.L.C. (the "Operating Company") generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.
(2) The Holdings Credit Facility is collateralized by the indicated investments.
(3) The SLF Credit Facility is collateralized by the indicated investments.
(4) The Operating Company holds investments in two related entities of Stratus Technologies Bermuda Holdings, Ltd. ("Stratus Holdings"). The Operating Company directly holds ordinary and preferred
equity in Stratus Holdings and has a credit investment in the joint issuers of Stratus Technologies Bermuda Ltd. ("Stratus Bermuda") and Stratus Technologies, Inc. ("Stratus U.S."), collectively, the
"Stratus Notes". Stratus U.S. is a wholly-owned subsidiary of Stratus Bermuda, which in turn is a wholly-owned subsidiary of Stratus Holdings. Stratus Holdings is the parent guarantor of the credit
investment of the Stratus Notes.
(5)
Investment is on non-accrual status.
(6) The Operating Company holds investments in two related entities of PODS, Inc. The Operating Company directly holds warrants in Storapod Holding Company, Inc. ("Storapod") and has a credit
investment in Storapod through Storapod WCF II Limited ("Storapod WCF II"). Storapod WCF II is a special purpose entity used to enter into a Shari'ah-compliant financing arrangement with
Storapod. Additionally, the Operating Company has a credit investment in PODS Funding Corp. II ("PODS II"). PODS, Inc. is a wholly-owned subsidiary of PODS Holding, Inc., which in turn is a
majority-owned subsidiary of Storapod. PODS II is a special purpose entity used to enter into a Shari'ah-compliant financing arrangement with PODS, Inc. and its subsidiary, PODS Enterprises, Inc.
(7) Securities are registered under the Securities Act.
(8) The Operating Company holds investments in two related entities of YP Holdings LLC. The Operating Company directly holds warrants to purchase a 4.96% membership interest of YP Equity
Investors, LLC (which at closing represented an indirect 1.0% equity interest in YP Holdings LLC) and holds an investment in the Term Loan B loans issued by YP Intermediate Holdings Corp. and YP
Intermediate Holdings II LLC (together "YP Intermediate"), a subsidiary of YP Holdings LLC.
(9) Par Value amounts represent the drawn or undrawn (as indicated in type of investment) portion of revolving credit facilities. Cost amounts represent the cash received at settlement date net the impact of
paydowns and cash paid for drawn revolvers.
(10) Industries were disclosed separately in previously issued financial statements.
*
All or a portion of interest contains payments-in-kind ("PIK").
**
Indicates assets that the Operating Company deems to be "non-qualifying assets" under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least
70.00% of the Operating Company's total assets at the time of acquisition of any additional non-qualifying assets.
The accompanying notes are an integral part of these consolidated financial statements.
19
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2012
(in thousands)
Investment Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Industry Type
Software
Education
Healthcare Services
Business Services
Federal Services
Distribution & Logistics(1)
Consumer Services
Media
Healthcare Products
Industrial Services
Retail
Healthcare Information Technology
Energy
Information Technology
Power Generation
Total investments
_______________________________________________________________________________
(1)
Industries were disclosed separately in previously issued financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
20
December 31, 2012
Percent of Total Investments at
Fair Value
49.86%
44.56%
4.56%
1.02%
100.00%
December 31, 2012
Percent of Total Investments at
Fair Value
24.92%
15.17%
14.52%
14.49%
9.64%
5.23%
4.21%
3.44%
2.75%
1.42%
1.23%
1.04%
1.02%
0.68%
0.24%
100.00%
New Mountain Finance Corporation
Statements of Assets and Liabilities
(in thousands, except shares and per share data)
Assets
Investment in New Mountain Finance Holdings, L.L.C., at fair value (cost of $633,835 and $335,730,
respectively)
Distribution receivable from New Mountain Finance Holdings, L.L.C.
Total assets
Liabilities
Dividends payable
Total liabilities
Net assets
Preferred stock, par value $0.01 per share, 2,000,000 shares authorized, none issued
Common stock, par value $0.01 per share 100,000,000 shares authorized, and 45,224,755 and 24,326,251
shares issued and outstanding, respectively
Paid in capital in excess of par
Accumulated undistributed net realized gains
Net unrealized appreciation
Total net assets
Total liabilities and net assets
Number of shares outstanding
Net asset value per share
December 31, 2013
December 31, 2012
$
$
$
$
$
650,107
—
650,107
$
$
—
—
—
452
633,383
5,056
11,216
650,107
650,107
45,224,755
14.38
$
$
$
341,926
3,405
345,331
3,405
3,405
—
243
335,487
952
5,244
341,926
345,331
24,326,251
14.06
The accompanying notes are an integral part of these financial statements.
21
New Mountain Finance Corporation
Statements of Operations
(in thousands, except shares and per share data)
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Interest income
Dividend income
Other income
Total expenses
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Net realized and unrealized gain (loss) allocated from New Mountain Finance Holdings,
L.L.C.
Net realized gains on investment
Net change in unrealized appreciation (depreciation) of investments
Net realized and unrealized gain (loss) allocated from New Mountain Finance Holdings,
L.L.C.
Total net increase in net assets resulting from operations allocated from New Mountain
Finance Holdings, L.L.C.
Net change in unrealized (depreciation) appreciation of investment in New Mountain Finance
Holdings, L.L.C.
Net increase in net assets resulting from operations
Basic earnings per share
Weighted average shares of common stock outstanding—basic (See Note 12)
Diluted earnings per share
Weighted average shares of common stock outstanding—diluted (See Note 12)
Years ended December 31,
2013
2012
From May 19, 2011
(commencement of
operations) to
December 31, 2011
84,925
3,567
2,384
(40,355)
50,521
5,427
6,016
11,443
61,964
(44)
61,920
1.76
35,092,722
1.79
44,021,920
$
$
$
$
36,439
455
617
(17,719)
19,792
7,593
4,494
12,087
31,879
(95)
31,784
2.14
14,860,838
2.18
34,011,738
$
$
$
$
13,437
—
232
(5,324)
8,345
1,141
(5,376)
(4,235)
4,110
6,221
10,331
0.97
10,697,691
0.38
30,919,629
$
$
$
$
The accompanying notes are an integral part of these financial statements.
22
New Mountain Finance Corporation
Statements of Changes in Net Assets
(in thousands)
Years ended December 31,
2013
2012
From May 19, 2011
(commencement of
operations) to
December 31, 2011
Increase (decrease) in net assets resulting from operations:
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Net realized gains on investments allocated from New Mountain Finance Holdings, L.L.C.
Net change in unrealized appreciation (depreciation) of investments allocated from New
Mountain Finance Holdings, L.L.C.
Net change in unrealized (depreciation) appreciation of investment in New Mountain Finance
Holdings, L.L.C.
Net increase in net assets resulting from operations
Capital transactions
Net proceeds from shares sold
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C.
Value of shares issued for exchanged units
Dividends declared
Reinvestment of dividends
Total net increase in net assets resulting from capital transactions
Net increase in net assets
Net assets at the beginning of the period
Net assets at the end of the period
$
$
50,521
5,427
$
19,792
7,593
6,016
(44)
61,920
100,040
(281)
193,262
(51,844)
5,084
246,261
308,181
341,926
4,494
(95)
31,784
133,428
(323)
56,314
(26,719)
1,955
164,655
196,439
145,487
$
650,107
$
341,926
$
8,345
1,141
(5,376)
6,221
10,331
129,865
(3,998)
18,489
(9,200)
—
135,156
145,487
—
145,487
The accompanying notes are an integral part of these financial statements.
23
New Mountain Finance Corporation
Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net increase in net assets resulting from operations
Adjustments to reconcile net (increase) decrease in net assets resulting from operations to net cash
(used in) provided by operating activities:
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Net realized and unrealized (gains) losses allocated from New Mountain Finance Holdings,
L.L.C.
Net change in unrealized depreciation (appreciation) in New Mountain Finance Holdings,
L.L.C.
(Increase) decrease in operating assets:
Purchase of investment
Distributions from New Mountain Finance Holdings, L.L.C.
Net cash flows used in by operating activities
Cash flows from financing activities:
Net proceeds from shares sold
Dividends declared
Net cash flows provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Non-cash operating activities:
Distribution receivable from New Mountain Finance Holdings, L.L.C.
Non-cash financing activities:
Dividends declared and payable
New Mountain Guardian Partners, L.P. exchange of New Mountain Finance Holdings, L.L.C.
units for shares
New Mountain Finance AIV Holdings Corporation exchange of New Mountain Finance
Holdings, L.L.C. units for shares
Value of shares issued in connection with dividend reinvestment plan
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C.
Years ended December 31,
2013
2012
From May 19, 2011
(commencement of
operations) to
December 31, 2011
$
61,920
$
31,784
$
10,331
(50,521)
(11,443)
44
(100,040)
50,165
(49,875)
100,040
(50,165)
49,875
(19,792)
(12,087)
95
(133,428)
23,314
(110,114)
133,428
(23,314)
110,114
$
$
$
—
—
— $
—
—
— $
— $
3,405
— $
(3,405)
$
$
—
193,262
5,084
(281)
—
56,314
1,955
(323)
(8,345)
4,235
(6,221)
(129,865)
9,200
(120,665)
129,865
(9,200)
120,665
—
—
—
—
—
18,489
—
—
(3,998)
The accompanying notes are an integral part of these financial statements.
24
New Mountain Finance AIV Holdings Corporation
Statements of Assets and Liabilities
(in thousands, except shares)
Assets
Investment in New Mountain Finance Holdings, L.L.C., at fair value (cost of $61,993 and $244,015, respectively)
Distributions receivable from New Mountain Finance Holdings, L.L.C.
Total assets
Liabilities
Dividends payable
Total liabilities
Net assets
Common stock, par value $0.01 per share 100 shares issued and outstanding
Paid in capital in excess of par
Distributions in excess of net realized gains
Net unrealized appreciation (depreciation)
Total net assets
Total liabilities and net assets
_______________________________________________________________________________
(1) As of December 31, 2013 and December 31, 2012, the par value of the total common stock was $1.
December 31, 2013
December 31, 2012
$
$
$
38,409
—
38,409
$
$
—
—
—
61,993
(26,812)
3,228
38,409
38,409
$
228,013
7,786
235,799
7,786
7,786
—
244,015
(6,676)
(9,326)
228,013
235,799
The accompanying notes are an integral part of these financial statements.
25
New Mountain Finance AIV Holdings Corporation
Statements of Operations
(in thousands)
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Interest income
Dividend income
Other income
Total expenses
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Net realized and unrealized gain (loss) allocated from New Mountain Finance Holdings,
L.L.C.
Net realized gains on investments
Net change in unrealized appreciation (depreciation) of investments
Net realized and unrealized gain (loss) allocated from New Mountain Finance Holdings,
L.L.C.
Total net increase in net assets resulting from operations allocated from New Mountain
Finance Holdings, L.L.C.
Net realized (losses) gains on investment in New Mountain Finance Holdings, L.L.C.
Net change in unrealized appreciation (depreciation) on investment in New Mountain Finance
Holdings, L.L.C.
Net increase in net assets resulting from operations
Years ended December 31,
2013
2012
From May 19, 2011
(commencement of
operations) to
December 31, 2011
$
$
$
22,102
1,482
452
(10,881)
13,155
1,826
1,978
3,804
16,959
(14,925)
10,576
12,610
$
$
47,207
357
712
(22,850)
25,426
11,259
5,433
16,692
42,118
381
1,616
44,115
$
25,399
—
439
(10,063)
15,775
2,158
(10,163)
(8,005)
7,770
—
(6,212)
1,558
The accompanying notes are an integral part of these financial statements.
26
New Mountain Finance AIV Holdings Corporation
Statements of Changes in Net Assets
(in thousands)
Years ended December 31,
2013
2012
From May 19, 2011
(commencement of
operations) to
December 31, 2011
Increase (decrease) in net assets resulting from operations:
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Net realized gains on investments allocated from New Mountain Finance Holdings, L.L.C.
Net change in unrealized appreciation (depreciation) of investments allocated from New
Mountain Finance Holdings, L.L.C.
Net realized (losses) gains on investment in New Mountain Finance Holdings, L.L.C.
Net change in unrealized appreciation (depreciation) on investment in New Mountain Finance
Holdings, L.L.C.
Net increase in net assets resulting from operations
Capital transactions
Distribution to New Mountain Guardian AIV, L.P.
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C.
Contributions from exchanged shares
Dividends declared
Total net (decrease) increase in net assets resulting from capital transactions
Net (decrease) increase in net assets
Net assets at the beginning of the period
$
$
13,155
1,826
$
25,426
11,259
1,978
(14,925)
10,576
12,610
(188,868)
(50)
—
(13,296)
(202,214)
(189,604)
228,013
5,433
381
1,616
44,115
(58,216)
(241)
—
(32,660)
(91,117)
(47,002)
275,015
Net assets at the end of the period
$
38,409
$
228,013
$
15,775
2,158
(10,163)
—
(6,212)
1,558
—
(7,559)
298,407
(17,391)
273,457
275,015
—
275,015
The accompanying notes are an integral part of these financial statements.
27
New Mountain Finance AIV Holdings Corporation
Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net increase in net assets resulting from operations
Adjustments to reconcile net (increase) decrease in net assets resulting from operations to net cash
(used in) provided by operating activities:
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Net realized and unrealized (gains) losses allocated from New Mountain Finance Holdings,
L.L.C.
Net realized losses (gains) on investment in New Mountain Finance Holdings, L.L.C.
Net change in unrealized (appreciation) depreciation in New Mountain Finance Holdings, L.L.C.
(Increase) decrease in operating assets:
Distributions from New Mountain Finance Holdings, L.L.C.
Net cash flows provided by operating activities
Cash flows from financing activities:
Net proceeds from shares sold
Distribution to New Mountain Guardian AIV, L.P.
Dividends declared
Net cash flows used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Non-cash operating activities:
Distribution receivable from New Mountain Finance Holdings, L.L.C.
Non-cash financing activities:
Dividends declared and payable
New Mountain Guardian AIV, L.P. contribution of New Mountain Finance Holdings, L.L.C units
for shares of New Mountain Finance AIV Holdings, L.L.C.
Deferred offering costs allocated from New Mountain Finance Holdings, L.L.C.
Years ended December 31,
2013
2012
From May 19, 2011
(commencement of
operations) to
December 31, 2011
$
12,610
$
44,115
$
1,558
(13,155)
(3,804)
14,925
(10,576)
21,082
21,082
188,868
(188,868)
(21,082)
(21,082)
(25,426)
(16,692)
(381)
(1,616)
24,874
24,874
58,216
(58,216)
(24,874)
(24,874)
—
—
— $
—
—
— $
— $
7,786
— $
(7,786)
$
$
$
$
$
(15,775)
8,005
—
6,212
17,391
17,391
—
—
(17,391)
(17,391)
—
—
—
—
—
—
(50)
—
(241)
298,407
(7,559)
The accompanying notes are an integral part of these financial statements.
28
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The information in these combined notes to the financial statements relates to each of the three separate registrants: New Mountain Finance Holdings, L.L.C., New
Mountain Finance Corporation and New Mountain Finance AIV Holdings Corporation (collectively, the "Companies"). Information that relates to an individual
registrant will be specifically referenced by the respective company. None of the Companies makes any representation as to the information related solely to the other
registrants other than itself.
Note 1. Formation and Business Purpose
New Mountain Finance Holdings, L.L.C. (the "Operating Company" or the "Master Fund") is a Delaware limited liability company. The Operating Company is
externally managed and has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act").
As such, the Operating Company is obligated to comply with certain regulatory requirements. The Operating Company intends to be treated as a partnership for federal
income tax purposes for so long as it has at least two members.
The Operating Company is externally managed by New Mountain Finance Advisers BDC, L.L.C. (the "Investment Adviser"). New Mountain Finance
Administration, L.L.C. (the "Administrator") provides the administrative services necessary for operations. The Investment Adviser and Administrator are wholly-owned
subsidiaries of New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates). 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 December 31, 2013, which includes total assets held by the Operating Company. New Mountain Capital focuses on investing in defensive growth
companies across its private equity, public equity, and credit investment vehicles. The Operating Company, 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".
New Mountain Finance Corporation ("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 treated as a BDC under 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").
New Mountain Finance AIV Holdings Corporation ("AIV Holdings") is a Delaware corporation that was originally incorporated on March 11, 2011. Guardian AIV,
a Delaware limited partnership, is AIV Holdings' sole stockholder. AIV Holdings is a closed-end, non-diversified management investment company that has elected to be
treated as a BDC under the 1940 Act. As such, AIV Holdings is obligated to comply with certain regulatory requirements. AIV Holdings has elected to be treated, and
intends to comply 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, the Operating Company owns all of the operations of the Predecessor Entities, including all of the
assets and liabilities related to such operations.
NMFC and AIV Holdings are holding companies with no direct operations of their own, and their sole asset is their ownership in the Operating Company. NMFC
and AIV Holdings each entered into a joinder agreement with respect to the Limited Liability Company Agreement, as amended and restated, of the Operating Company,
pursuant to which NMFC and AIV Holdings were admitted as members of the Operating Company. NMFC acquired from the Operating Company, with the
29
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
gross proceeds of the IPO and the Concurrent Private Placement, common membership units ("units") of the Operating Company (the number of units are 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 the Operating Company 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 the Operating
Company prior to the IPO and, as a result of the transactions completed in connection with the IPO, obtained units in the Operating Company. Guardian AIV contributed
its units in the Operating Company to its newly formed subsidiary, AIV Holdings, in exchange for common stock of AIV Holdings. AIV Holdings has the right to
exchange all or any portion of its units in the Operating Company for shares of NMFC's common stock on a one-for-one basis at any time.
Since NMFC's IPO, and through December 31, 2013, NMFC raised approximately $233,468 in net proceeds from additional offerings of common stock and issued
shares of its common stock valued at approximately $249,576 on behalf of AIV Holdings for exchanged units. NMFC acquired from the Operating Company units of the
Operating Company equal to the number of shares of NMFC's common stock sold in the additional offerings. As of December 31, 2013, NMFC and AIV Holdings owned
approximately 94.4% and 5.6%, respectively, of the units of the Operating Company.
The current 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 is that any distributions made to NMFC's
stockholders that are attributable to such gains generally will not be treated as taxable dividends but rather as return of capital.
The diagram below depicts the Companies' organizational structure as of December 31, 2013.
_______________________________________________________________________________
*
**
Includes partners of New Mountain Guardian Partners, L.P.
These common membership units are exchangeable into shares of NMFC common stock on a one-for-one basis.
***
New Mountain Finance SPV Funding, L.L.C. ("NMF SLF").
30
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The Operating 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 Operating 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.
Note 2. Summary of Significant Accounting Policies
Basis of accounting—The Companies' financial statements have been prepared in conformity with accounting principles generally accepted in the United States of
America ("GAAP"). The Operating Company consolidates its wholly-owned subsidiary, NMF SLF. NMFC and AIV Holdings do not consolidate the Operating
Company. NMFC and AIV Holdings apply 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 Operating Company. NMFC and AIV Holdings observe that it is 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 provides stockholders of NMFC and AIV Holdings with a clearer depiction of their investment in the master fund.
The Companies' 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 Operating 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 Operating Company's historical
operating expenses are not comparable to its operating expenses after the completion of the IPO.
The Companies' financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-K and Article 6 of
Regulation S-X. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial
statements have been included.
Investments—The Operating 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 Operating Company's
Consolidated Statements of Assets, Liabilities and Members' Capital at fair value, with changes in unrealized gains and losses resulting from changes in fair value
reflected in the Operating Company's Consolidated Statements of Operations as "Net change in unrealized appreciation (depreciation) of investments" and realizations on
portfolio investments reflected in the Operating Company's Consolidated Statements of Operations as "Net realized gains (losses) on investments".
The Operating Company values its assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, the Operating 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 Operating Company's quarterly valuation procedures are set forth in more detail below:
(1)
(2)
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.
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
31
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
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 Operating Company looks at the number of quotes readily available and performs the following:
i.
ii.
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.
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.
b.
c.
d.
Each portfolio company or investment is initially valued by the investment professionals of the Investment Adviser responsible for the credit
monitoring;
Preliminary valuation conclusions will then be documented and discussed with the Operating Company's senior management;
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 Operating Company does not have a readily available
market quotation will be reviewed by an independent valuation firm engaged by the Companies' board of directors; and
When deemed appropriate by the Operating 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 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 Operating Company's investments may fluctuate from period to period
and the fluctuations could be material.
NMFC and AIV Holdings are holding companies with no direct operations of their own, and their sole asset is their ownership in the Operating Company. NMFC's
and AIV Holdings' investments in the Operating Company are carried at fair value and represent the respective pro-rata interest in the net assets of the Operating
Company as of the applicable reporting date. NMFC and AIV Holdings value 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.
32
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Cash and cash equivalents—Cash and cash equivalents include cash and short-term, highly liquid investments. The Companies define 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.
Revenue recognition
The Operating 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 Operating 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, 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 generally 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 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 Operating 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 Operating Company for providing such commitments.
NMFC's and AIV Holdings' revenue recognition policies are as follows:
Revenue, expenses, and capital gains (losses): At each quarterly valuation date, the Operating Company's investment income, expenses, net realized gains
(losses), and net increase (decrease) in unrealized appreciation (depreciation) are allocated to NMFC and AIV Holdings based on their pro-rata interest in the net
assets of the Operating Company. This is recorded on NMFC's and AIV Holdings' Statements of Operations. Realized gains and losses are recorded upon sales of
NMFC's and AIV Holdings' investments in the 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 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 Operating Company. As a result, NMFC experienced immediate unrealized appreciation on its investment. Concurrently, AIV Holdings
experienced immediate unrealized depreciation on its investment in the Operating Company equal to the difference between NMFC's IPO price of $13.75 per
unit and the actual net asset value per unit.
All expenses, including those of NMFC and AIV Holdings, are paid and recorded by the Operating Company. Expenses are allocated to NMFC and AIV
Holdings based on pro-rata ownership interest. In addition, the Operating
33
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Company paid all of the offering costs related to the IPO and subsequent offerings. NMFC and AIV Holdings have recorded their portion of the offering costs as
a direct reduction to net assets and the cost of their investment in the Operating Company.
With respect to the expenses incident to any registration of shares of NMFC's common stock issued in exchange for AIV Holdings' units of the Operating
Company, AIV Holdings is directly responsible for the expenses of any demand registration (including underwriters' discounts or commissions) and their pro-
rata share of any "piggyback" registration expenses.
Interest and other credit facility expenses—Interest and other credit facility fees are recorded on an accrual basis by the Operating Company. See Note 7,
Borrowing Facilities, for details.
Deferred credit facility costs—The deferred credit facility costs of the Operating Company consist of capitalized expenses related to the origination and amending
of the Operating Company's existing credit facilities. The Operating Company amortizes these costs into expense using the straight-line method over the stated life of the
related credit facility. See Note 7, Borrowing Facilities, for details.
Income taxes—The Operating Company is treated as a partnership for federal income tax purposes and as such is generally not subject to federal or state and local
income taxes except with respect to state source income received from underlying investments. The partners are individually responsible for reporting income or loss
based on their respective share of the revenues and expenses. The Operating Company files United States ("U.S.") federal, state, and local income tax returns.
NMFC and AIV Holdings have elected to be treated, and intend to comply with the requirements to qualify annually, as RICs under subchapter M of the Code. As
RICs, NMFC and AIV Holdings are not subject to federal income tax on the portion of taxable income and gains timely distributed to stockholders; therefore, no
provision for income taxes has been recorded.
To continue to qualify as RICs, NMFC and AIV Holdings are required to meet certain income and asset diversification tests in addition to distributing at least 90.0%
of their respective 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 NMFC and AIV Holdings are reported as ordinary income, return of capital, long term capital
gains or a combination thereof.
NMFC and AIV Holdings will be subject to a 4.0% nondeductible federal excise tax on certain undistributed income unless NMFC and AIV Holdings distribute, in
a timely manner as required by the Code, an amount at least equal to the sum of (1) 98.0% of their respective net ordinary income earned for the calendar year and
(2) 98.2% of their respective capital gain net income for the one-year period ending October 31 in the calendar year.
The Companies have 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 their analyses, the Companies have 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 unit holders of the Operating Company and common stockholders of NMFC and AIV Holdings are recorded on the record
date as set by the respective board of directors. In order for NMFC and AIV Holdings to pay a dividend or other distribution to holders of their common stock, it must be
accompanied by a prior distribution by the Operating Company to all of its unit holders. The Operating Company intends to make distributions to its unit holders that will
be sufficient to enable NMFC and AIV Holdings to pay quarterly distributions to their stockholders and to maintain their status as RICs. NMFC and AIV Holdings intend
to distribute approximately all of their portion of the Operating Company's adjusted
34
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
net investment income (see Note 5, Agreements) on a quarterly basis and substantially all of their portion of the Operating Company's taxable income on an annual basis,
except that NMFC may retain certain net capital gains for reinvestment.
Under certain circumstances, the distributions that the Operating Company makes to its members may not be sufficient for AIV Holdings to satisfy the annual
distribution requirement necessary for AIV Holdings to continue to qualify as a RIC. In that case, it is expected that Guardian AIV would consent to be treated as if it
received distributions from AIV Holdings sufficient to satisfy the annual distribution requirement. Guardian AIV would be required to include the consent dividend in its
taxable income as a dividend from AIV Holdings, which would result in phantom (i.e., non-cash) taxable income to Guardian AIV. AIV Holdings intends to make
quarterly distributions to Guardian AIV, its sole stockholder, out of assets legally available for distribution each quarter.
The Operating Company and NMFC are required to take certain actions in order to maintain, at all times, a one-to-one ratio between the number of units held by
NMFC and the number of shares of NMFC's common stock outstanding. NMFC 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. Cash distributions reinvested in additional shares of NMFC's common stock will be
automatically reinvested by NMFC into additional units of the Operating Company. In addition, AIV Holdings does not intend to reinvest any distributions received from
the Operating Company in additional units of the Operating Company.
NMFC 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, NMFC 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 NMFC'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 NMFC
uses newly issued shares to implement the plan, NMFC will receive, on a one-for-one basis, additional units of the Operating Company in exchange for cash distributions
that are reinvested in shares of NMFC's common stock under the dividend reinvestment plan.
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, NMFC
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 NMFC'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 NMFC's stockholders have been
tabulated.
Foreign securities—The accounting records of the Operating 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
Operating 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 Operating 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 Operating Company and cannot be predicted.
Use of estimates—The preparation of the Companies' 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 Companies' 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.
35
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
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 quarter ended September 30, 2013, the Operating Company changed an accounting estimate related to the classification of
dividend income for a distribution recorded in the prior quarter from one of the Operating Company's warrant investments. Based on tax projections received during the
quarter ended September 30, 2013, the Operating Company reduced the warrant cost basis by $466 and corresponding dividend income previously recorded by $1,799,
and recorded a realized gain of $1,333 to agree to the tax treatment on the investment. This resulted in a reclass of $360 from incentive fee to capital gains incentive fee.
Based on updated tax projections received during the quarter ended December 31, 2013, the Operating Company increased dividend income previously recorded by $224
and reduced the realized gain previously recorded by $224 to agree to the tax treatment on the investment. This resulted in a reclass of $45 from capital gains incentive fee
to incentive fee.
Note 3. Investments
At December 31, 2013 the Operating Company's investments consisted of the following:
Investment Cost and Fair Value by Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Investment Cost and Fair Value by Industry
Software
Education
Business Services
Distribution & Logistics
Federal Services
Healthcare Services
Energy
Media
Healthcare Products
Consumer Services
Industrial Services
Healthcare Information Technology
Information Technology
Total investments
36
$
$
$
Cost
Fair Value
$
550,534
460,078
25,152
58,316
553,549
468,945
26,863
66,294
1,094,080
$
1,115,651
Cost
Fair Value
$
243,158
225,214
140,797
120,156
84,965
78,295
69,757
42,808
40,285
14,918
13,858
13,454
6,415
249,174
235,787
145,465
120,247
83,888
80,331
69,255
45,932
41,772
15,628
14,263
7,324
6,585
$
1,094,080
$
1,115,651
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
At December 31, 2012 the Operating Company's investments consisted of the following:
Investment Cost and Fair Value by Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Investment Cost and Fair Value by Industry
Software
Education
Healthcare Services
Business Services
Federal Services
Distribution & Logistics(1)
Consumer Services
Media
Healthcare Products
Industrial Services
Retail
Healthcare Information Technology
Energy
Information Technology
Power Generation
Total investments
Cost
Fair Value
$
496,931
433,829
43,097
2,386
976,243
$
493,502
441,073
45,148
10,097
989,820
Cost
Fair Value
$
$
$
$
241,742
155,047
139,370
140,426
95,150
51,320
41,173
26,582
25,659
13,825
11,597
14,550
9,852
6,476
3,474
246,696
150,151
143,724
143,420
95,428
51,834
41,625
34,001
27,220
14,105
12,146
10,291
10,072
6,711
2,396
989,820
$
976,243
$
_______________________________________________________________________________
(1) Industries were disclosed separately in previously issued financial statements.
During the quarter ended December 31, 2013, the Operating Company sold its first lien position in ATI Acquisition Company, resulting in a realized loss of $4,306.
Prior to the sale, this investment had a cost basis of $4,306, a zero fair value and total unearned interest income of $611 for the year ended. As of December 31, 2013, the
Operating 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 year then ended and uncertainty about its ability to pay such amounts in the future. During the third quarter of 2013, the 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
December 31, 2013, the Operating Company's investment in ATI Acquisition Company and Ancora Acquisition LLC had an aggregate cost basis of $1,611, an aggregate
fair value of $419 and total unearned interest income of $316 for the year then ended. As of December 31, 2012, the Operating Company's original first lien position in
ATI Acquisition Company was put on non-accrual status, with a cost basis of $4,306, a fair value of zero and total unearned interest income of $653 for the year then
ended. The Operating Company's two super priority first lien debt investments in ATI Acquisition Company had a combined cost basis of $1,611 and a combined fair
value of $752 as of December 31, 2012. During the third quarter of 2012, the Operating Company
37
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
placed the super priority first lien positions on non-accrual status as well, resulting in total unearned interest income of $310 for the year ended December 31, 2012. As of
December 31, 2012, the Operating Company's total investment in ATI Acquisition Company had an aggregate cost basis of $5,917 and an aggregate fair value of $752.
As of December 31, 2013 and December 31, 2012, unrealized gains (losses) include a fee that the Operating Company would receive upon maturity of the two super
priority first lien debt investments.
As of December 31, 2013, the Operating Company had unfunded commitments on revolving credit facilities and bridge facilities of $15,500 and $0, respectively.
The 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 Operating Company's Consolidated Schedule of Investments as of December 31, 2013.
As of December 31, 2012, the Operating Company had unfunded commitments on revolving credit facilities and bridge facilities of $10,500 and $0, respectively.
The Operating Company did not have any unfunded commitments in the form of a delayed draw or other future funding commitments as of December 31, 2012. The
unfunded commitments on revolving credit facilities are disclosed on the Operating Company's Consolidated Schedule of Investments as of December 31, 2012.
Investment risk factors—First and second lien debt that the Operating Company invests in is entirely, or almost entirely, rated below investment grade or may be
unrated. These loans 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 defaults could reduce the net asset value and income distributions of the Operating Company. 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 loans. 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 Operating 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 Operating Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in
situations where the Operating 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.
38
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
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 Operating Company's portfolio investments fall into as of December 31, 2013:
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
$
553,549
468,945
26,863
66,294
1,115,651
$
— $
—
—
1,694
1,694
$
$
525,138
413,407
21,692
—
28,411
55,538
5,171
64,600
960,237
$
153,720
The following table summarizes the levels in the fair value hierarchy that the Operating Company's portfolio investments fall into as of December 31, 2012:
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
$
493,502
441,073
45,148
10,097
989,820
$
39
— $
—
—
—
— $
$
450,617
397,818
22,257
—
42,885
43,255
22,891
10,097
870,692
$
119,128
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The following table summarizes the changes in fair value of Level III portfolio investments for the year ended December 31, 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 Operating
Company at December 31, 2013:
Fair value, December 31, 2012
Total gains or losses included in
earnings:
Total
First Lien
Second Lien
Subordinated
Equity and
other(3)
$
119,128
$
42,885
$
43,255
$
22,891
$
10,097
Net realized (losses) gains on
investments
Net change in unrealized appreciation
(depreciation)
Purchases, including capitalized PIK
and revolver fundings
Proceeds from sales and paydowns of
investments
Transfers into Level III
Transfers out of Level III
Fair value, December 31, 2013
Unrealized appreciation (depreciation)
for the period relating to those Level III
assets that were still held by the
Operating Company at the end of the
period:
$
$
(1,623)
5,251
120,147
(85,910)
6,574
(9,847)
153,720
$
(3,986)
4,319
28,874
(41,417)
6,574 (1)
(8,838) (1)
28,411
821
$
(333)
$
$
_______________________________________________________________________________
380
843
31,060
(20,000)
—
—
380
506
2,620
(21,226)
—
—
55,538
$
5,171
$
1,603
(417)
57,593
(3,267)
—
(1,009) (2)
64,600
722
$
409
$
23
(1) As of December 31, 2013, the portfolio investments were transferred into Level III from Level II and out of Level III into Level II at fair value as of the
beginning of the quarter in which the reclassifications occurred.
(2) As of December 31, 2013, the portfolio investments were transferred out of Level III into Level I at fair value as of the beginning of the quarter in which the
reclassifications occurred.
(3) During the year ended December 31, 2013, the Operating Company received dividends of $5,049 from its equity and other investments, which were
recorded as dividend income. Estimates related to the tax characterization of these distributions were provided as of December 31, 2013.
40
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The following table summarizes the changes in fair value of Level III portfolio investments for the year ended December 31, 2012, 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 Operating
Company at December 31, 2012:
Fair value, December 31, 2011
Total gains or losses included in earnings:
$
Net realized gains (losses) on investments
Net change in unrealized (depreciation)
appreciation
Purchases, including capitalized PIK and
revolver fundings
Proceeds from sales and paydowns of
investments
Transfers into Level III(1)
Transfers out of Level III(1)
Fair value, December 31, 2012
Unrealized appreciation (depreciation) for
the period relating to those Level III assets
that were still held by the Operating
Company at the end of the period:
$
$
Total
First Lien
Second Lien
Subordinated
90,967
$
33,141
$
48,405
$
6,571
$
4,950
(185)
75,647
(36,555)
20,347
(36,043)
4,927
(7,918)
49,205
(30,328)
19,881
(26,023)
23
(173)
10,020
(5,000)
—
(10,020)
—
(75)
16,395
—
—
—
119,128
$
42,885
$
43,255
$
22,891
$
Equity and
other
2,850
—
7,981
27
(1,227) )
466
—
10,097
(2)
3,689
$
(4,216)
$
(1)
$
(75)
$
7,981
_______________________________________________________________________________
(1) As of December 31, 2012, the portfolio investments were transferred into Level III from Level II and out of Level III into Level II at fair value as of the
beginning of the quarter in which the reclassifications occurred.
(2) This Level III transfer relates to the Operating Company's investment in warrants of YP Equity Investors LLC, which was valued with YP Holdings LLC's
second lien debt as of June 30, 2012.
Except as noted in the tables above, there were no other transfers in or out of Level I, II, or III during the years ended December 31, 2013 and December 31, 2012.
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 Operating 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 Operating 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 Operating Company evaluates the overall
performance and financial stability of the portfolio company. Post investment, the Operating 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 Operating 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
Operating
41
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
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 Operating Company will consider the pricing indicated by the external event to corroborate the private valuation.
Market Based Approach: The Operating Company typically estimates the total enterprise value of each portfolio company by utilizing market value cash flow
(EBITDA) multiples of publicly traded comparable companies. The Operating 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 Operating Company generally applies 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. In applying
the market based approach as of December 31, 2013, the Operating Company used the relevant EBITDA ranges set forth in the table below to determine the enterprise
value of investments in six of its portfolio companies. The Operating Company believes this was a reasonable range in light of current comparable company trading levels
and the specific companies involved.
Income Based Approach: The Operating Company also typically uses 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. In applying the income based approach as of December 31, 2013, the Operating Company used the discount ranges set forth in the table below to value
investments in eight of its portfolio companies.
Fair Value
Approach
Unobservable Input
Low
Range
High
Weighted
Average
Type
First lien
$
Second lien
Subordinated
Equity and other
28,411 Market approach
Income approach
55,538 Market approach
Income approach
5,171 Market approach
Income approach
64,600 Market approach
Income approach
EBITDA multiple
Discount rate
EBITDA multiple
Discount rate
EBITDA multiple
Discount rate
EBITDA multiple
Discount rate
$
153,720
Black Scholes analysis
Expected life in years
Volatility
Discount rate
7.0x
9.2%
5.0x
10.1%
7.0x
13.0%
1.3x
8.0%
2.0
21.0%
0.3%
10.0x
10.2%
7.5x
11.7%
9.0x
15.0%
7.5x
20.0%
4.0
36.6%
3.0%
8.5x
9.7%
6.2x
11.1%
8.0x
14.0%
4.7x
13.6%
2.6
27.9%
0.8%
Based on a comparison to similar BDC credit facilities, the terms and conditions of the Holdings Credit Facility and the SLF Credit Facility (as defined in Note 7,
Borrowing Facilities) are representative of market. The carrying values of the Holdings Credit Facility and SLF Credit Facility approximate fair value as of December 31,
2013, as both facilities are continually monitored and examined by both the borrower and the lender. Both facilities were amended and restated during the year ended
December 31, 2012 to lower the applicable interest rate spread by 0.25% and to increase the maximum amount of revolving borrowings available under the respective
facilities. Additionally 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. See Note 7, Borrowing Facilities, for details. The fair value of other financial assets and liabilities approximates their carrying value
based on the short term nature of these items. The fair value disclosures discussed in this paragraph are considered Level III.
42
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Fair value risk factors—The Operating Company seeks investment opportunities that offer the possibility of attaining substantial capital appreciation. Certain
events particular to each industry in which the Operating 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 Operating Company's investments and/or on the fair value of the Operating Company's
investments. The Operating Company's investments are subject to the risk of non-payment of scheduled interest or principal, resulting in a reduction in income to the
Operating Company and thus the income of NMFC and AIV Holdings, 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 Operating Company and cannot be predicted. Furthermore, the
ability to liquidate investments and realize value is subject to uncertainties.
Note 5. Agreements
On May 19, 2011, NMFC entered into a joinder agreement with respect to the Limited Liability Company Agreement, as amended and restated, of the Operating
Company pursuant to which NMFC was admitted as a member of the Operating Company and agreed to acquire from the Operating Company a number of units of the
Operating Company equal to the number of shares of common stock outstanding of NMFC. Additionally on May 19, 2011, in connection with the contribution by
Guardian AIV of its units to AIV Holdings, AIV Holdings entered into a joinder agreement with respect to the Limited Liability Company Agreement, as amended and
restated, of the Operating Company pursuant to which AIV Holdings was also admitted as a member of the Operating Company.
The Operating Company entered into an investment advisory and management agreement, as amended and restated (the "Investment Management Agreement")
with the Investment Adviser. Under the Investment Management Agreement, the Investment Adviser manages the day-to-day operations of, and provides investment
advisory services to, the Operating Company. For providing these services, the Investment Adviser receives a fee from the Operating 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 Operating Company's gross assets less (i) the borrowings under the SLF Credit Facility (as
defined in Note 7, Borrowing Facilities) 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 Operating Company's gross assets, 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 Operating 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 Operating Company receives from portfolio companies) accrued during the
calendar quarter, minus the Operating 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 December 31, 2013), 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 Operating 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 Operating Company's existing investments to fair market value at the IPO date. Since the total value
of the 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 or mature in the future. The Operating 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
43
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Operating 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 Operating 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 Operating 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 Operating 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 Operating 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 Operating 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 Operating 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 Operating Company's Pre-Incentive Fee Adjusted Net Investment Income as if a hurdle rate did not apply when the Operating Company's Pre-
Incentive Fee Adjusted Net Investment Income exceeds 2.5% in any calendar quarter.
20.0% of the amount of the Operating 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 Operating 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 Operating 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 Operating Company has revised its presentation of incentive fees on the Consolidated Statements of Assets, Liabilities and Members' Capital and the
Consolidated Statements of Operations to disclose the two parts of the incentive fee incurred by the Operating Company for net investment income related incentive fees
and capital gains related incentive fees.
44
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The following table summarizes the management fees and incentive fees incurred by the Operating Company for the years ended December 31, 2013, December 31,
2012 and December 31, 2011.
Management fee
Incentive fee, excluding accrued capital gains incentive fees
Accrued capital gains incentive fees(2)
_______________________________________________________________________________
Years ended December 31,
2013
2012
2011(1)
$
$
14,905
16,502
3,229
$
11,109
11,537
4,407
4,938
3,522
—
(1) For the period from May 19, 2011 (effective date of the Investment Management Agreement) to December 31, 2011.
(2) As of December 31, 2013, approximately $1,113 of capital gains incentive fees was owed under the Investment Management Agreement, as cumulative net
Adjusted Realized Capital Gains exceeded cumulative Adjusted Unrealized Capital Depreciation. As of December 31, 2012 and December 31, 2011, 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. As of December 31, 2013, December 31, 2012 and December 31, 2011, no payments have
been made relating to the capital gains incentive fee.
The Operating 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 Statement of Operations for the year ended December 31, 2013 is adjusted to reflect this step-up to fair market value.
Year ended
December 31,
2013
Stepped-up
Cost Basis
Adjustments
Adjusted
year ended
December 31,
2013
$
$
$
(4)
107,027
5,049
2,836
114,912
31,504
83,408
19,731
63,677
7,253
7,994
78,924
(896)
—
—
(896)
—
(896)
—
(896)
(3,158)
4,054
$
$
106,131
5,049
2,836
114,016
31,504
82,512
19,731
62,781
4,095
12,048
78,924
Investment income
Interest income(1)
Dividend income
Other income
Total investment income
Total net expenses pre-incentive fee(2)
Pre-Incentive Fee Net Investment Income
Incentive fee(3)
Post-Incentive Fee Net Investment Income
Net realized gains (losses) on investments
Net change in unrealized appreciation of investments
Net increase in members' capital resulting from operations
_______________________________________________________________________________
(1) Includes $3,428 in payment-in-kind interest from investments.
(2) Includes expense waivers and reimbursements of $3,233.
45
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
(3) For the year ended December 31, 2013, the Operating Company incurred total incentive fees of $19,731, of which $3,229 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 following Statement of Operations for the year ended December 31, 2012 is adjusted to reflect this step-up to fair market value.
Investment income
Interest income
Dividend income
Other income
Total investment income
Total expenses pre-incentive fee(1)
Pre-Incentive Fee Net Investment Income
Incentive fee(2)
Post-Incentive Fee Net Investment Income
Net realized gains (losses) on investments
Net change in unrealized appreciation of investments
Net increase in members' capital resulting from operations
_______________________________________________________________________________
(1) Includes expense waivers and reimbursements of $2,460.
Year ended
December 31,
2012
Stepped-up
Cost Basis
Adjustments
Adjusted
year ended
December 31,
2012
$
$
$
83,646
812
1,328
85,786
24,625
61,161
15,944
45,217
18,851
9,928
73,996
(3,476)
—
—
(3,476)
—
(3,476)
—
(3,476)
(6,958)
10,434
$
$
80,170
812
1,328
82,310
24,625
57,685
15,944
41,741
11,893
20,362
73,996
(2) For the year ended December 31, 2012, the Operating Company incurred total incentive fees of $15,944, of which $4,407 related to capital gains incentive
fees on a hypothetical liquidation basis.
46
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The following Statement of Operations for the Operating Company for the period May 19, 2011 (effective date of the Investment Management Agreement) to
December 31, 2011 is adjusted to reflect this step-up to fair market value.
Investment income
Interest income
Other income
Total investment income
Total expenses pre-incentive fee(1)
Pre-Incentive Fee Net Investment Income
Incentive fee(2)
Post-Incentive Fee Net Investment Income
Net realized gains (losses) on investments
Net change in unrealized (depreciation) appreciation of investments
Net increase in members' capital resulting from operations
_______________________________________________________________________________
(1) Includes expense waivers and reimbursements of $2,186.
Period from
May 19, 2011
to December 31,
2011
Stepped-up
Cost Basis
Adjustments
Adjusted
period from
May 19, 2011
to December 31,
2011
$
$
$
38,836
670
39,506
11,863
27,643
3,522
24,121
3,298
(15,538)
11,881
(2,019)
—
(2,019)
—
(2,019)
—
(2,019)
(2,422)
4,441
$
$
36,817
670
37,487
11,863
25,624
3,522
22,102
876
(11,097)
11,881
(2) For the year ended December 31, 2011, the Operating Company had no incentive fees related to capital gains incentive fees on a hypothetical liquidation
basis.
The Companies have entered into an Administration Agreement with the Administrator under which the Administrator provides administrative services. The
Administrator performs, or oversees the performance of, the Companies' financial records, prepares reports filed with the Securities and Exchange Commission, generally
monitors the payment of the Companies' expenses, and watches the performance of administrative and professional services rendered by others. The Operating Company
will reimburse the Administrator for the Companies' allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to the
Companies under the Administration Agreement. Pursuant to the Administration Agreement and further restricted by the Operating Company, expenses payable to the
Administrator by the Operating Company as well as other direct and indirect expenses (excluding interest, other credit facility expenses, trading expenses and
management and incentive fees) have 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 Operating Company has revised its presentation of expenses and expense waivers and reimbursements for the years ended December 31, 2012 and
December 31, 2011. Expenses were previously presented net of waivers and reimbursements, which had been included parenthetically. The revised presentation shows
total gross expenses with a separate reduction for expense waivers and reimbursements.
47
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The Operating Company incurred the following expenses in excess of the expense cap for the years ended December 31, 2013, December 31, 2012 and
December 31, 2011:
Professional fees
Administrative expenses
Other general and administrative expenses
Total expense waivers and reimbursements
Years ended December 31,
2013
2012
2011
$
$
1,773
1,460
—
3,233
$
$
1,070
1,390
—
2,460
$
$
1,315
871
—
2,186
As of December 31, 2013 and December 31, 2012, $459 and $534, respectively, of the expense waivers and reimbursements was receivable from an affiliate.
The Companies, 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 Companies, 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
Companies, 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 Operating Company. Other than with respect to this limited license, the Companies, 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 AIV Holdings, Steven B. Klinsky (the Chairman of the Companies' board of directors), an entity related
to Steven B. Klinsky and the Investment Adviser. Subject to several exceptions, AIV Holdings and the Investment Adviser have 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 AIV Holdings, the Investment Adviser and any of their transferees. The rights under the Registration Rights Agreement
can be conditionally exercised by AIV Holdings or the Investment Adviser, meaning that prior to the effectiveness of the registration statement related to the shares, AIV
Holdings or the Investment Adviser can withdraw their request to have the shares registered. AIV Holdings and the Investment Adviser may each assign their 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 AIV Holdings
and Steven B. Klinsky were registered on a shelf registration statement on Form N-2.
AIV Holdings and 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, AIV Holdings and 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, including AIV Holdings, 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. AIV Holdings, the Investment Adviser and Steven B. Klinsky (and a related entity) have priority over NMFC in any registration that is an
underwritten offering.
AIV Holdings, 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 AIV Holdings, the Investment Adviser
and Steven B. Klinsky (and a related entity)
48
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
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. AIV Holdings, 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 Companies have entered into a number of business relationships with affiliated or related parties. NMFC and AIV Holdings own all the outstanding units of the
Operating Company. As of December 31, 2013, NMFC and AIV Holdings own approximately 94.4% and 5.6%, respectively, of the units of the Operating Company.
The Operating 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 Companies have entered into an Administration Agreement with the Administrator, a wholly-owned subsidiary of New Mountain Capital. The Administrator
arranges office space for the Companies and provides office equipment and administrative services necessary to conduct their respective day-to-day operations pursuant to
the Administration Agreement. The Operating Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by it in
performing its obligations to the Companies under the Administration Agreement including rent, the fees and expenses associated with performing administrative, finance
and compliance functions, and the compensation of the Companies' chief financial officer and chief compliance officer and their respective staffs. Pursuant to the
Administration Agreement and further restricted by the Operating Company, expenses payable to the Administrator by the Operating Company as well as other direct and
indirect expenses (excluding interest, other credit facility expenses, trading expenses and management and incentive fees) have 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 will expire on March 31, 2014.
Thereafter, the Administrator may, in its own discretion, submit to the Operating Company for reimbursement some or all of the expenses that the Administrator has
incurred on behalf of the Operating Company during any quarterly period. As a result, the amount of expenses for which the Operating 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 Operating Company for reimbursement in the future. However, it is expected that the Administrator will continue to support part of
the expense burden of the Operating Company in the near future.
The Companies, 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 Companies, the Investment Adviser and the Administrator, a non-exclusive,
royalty-free license to use the name "New Mountain" and "New Mountain Finance".
The Companies have 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 Operating Company' investment mandates. The Investment Adviser and its affiliates may determine that an investment is appropriate for the Operating 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 the Operating 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 Securities and Exchange Commission 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.
49
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Note 7. Borrowing Facilities
Holdings Credit Facility—The Loan and Security Agreement, as amended and restated, dated May 19, 2011 (the "Holdings Credit Facility") among the Operating
Company 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, as amended on May 8, 2012. The Operating Company 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 amended on October 28, 2013. As of December 31,
2013, the Operating Company 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 is collateralized by all of the investments of the Operating Company on an investment by investment basis. All fees
associated with the origination or upsizing of the Holdings Credit Facility are capitalized on the Operating Company's Consolidated Statement of Assets, Liabilities, and
Members' Capital and charged against income as other credit facility 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
Operating 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
Operating Company's 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, as amended on May 8, 2012, and
charges a non-usage fee, based on the unused facility amount multiplied by the Non-Usage Fee Rate (as defined in the credit agreement).
The following table summarizes the interest expense and non-usage fees incurred by the Operating Company on the Holdings Credit Facility for the years ended
December 31, 2013, December 31, 2012 and December 31, 2011.
Interest expense
Non-usage fee
Weighted average interest rate
Average debt outstanding
Years ended December 31,
2013
2012
2011
$
$
$
5,487
367
2.9%
184,124
$
$
$
4,172
281
3.1%
133,600
$
$
$
2,043
608
3.2%
61,561
The outstanding balance of Holdings Credit Facility as of December 31, 2013, December 31, 2012 and December 31, 2011 was $221,849, $206,938 and $129,038,
respectively, and the Operating Company 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, the Operating Company 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, as amended on May 8, 2012. The maximum amount
of revolving borrowings available under the SLF Credit Facility is $215,000, as amended on December 18, 2012. The loan is non-recourse to the Operating Company and
secured by all assets owned by the borrower on an investment by investment basis. All fees associated with the origination or upsizing of the SLF Credit Facility are
capitalized on the Consolidated Statement of Assets, Liabilities, and Members' Capital and charged against income as other credit facility 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 our investments, but rather to the performance of the underlying portfolio
companies. Due to an amendment to the SLF Credit Facility on October 27, 2011, NMF SLF is no longer 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.
50
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
As of December 31, 2013, 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, as amended on March 11, 2013.
The SLF Credit Facility bears interest at a rate of LIBOR plus 2.00% per annum for first lien loans and 2.75% 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 credit agreement).
The following table summarizes the interest expense and non-usage fees incurred by the Operating Company on the SLF Credit Facility for the years ended
December 31, 2013, December 31, 2012 and December 31, 2011.
Interest expense
Non-usage fee
Weighted average interest rate
Average debt outstanding
Years ended December 31,
2013
2012
2011
4,891
3
2.3%
214,317
$
$
$
4,274
22
2.3%
181,395
$
$
$
3,369
94
2.5%
133,825
$
$
$
The outstanding balance as of December 31, 2013, December 31, 2012 and December 31, 2011 was $214,668, $214,262 and $165,928, respectively, and NMF SLF
was not aware of any instances of non-compliance related to the SLF Credit Facility on such dates.
Leverage risk factors—The Operating Company utilizes and may utilize leverage to the maximum extent permitted by the law for investment and other general
business purposes. The Operating Company's lenders will have fixed dollar claims on certain assets that are superior to the claims of the Operating Company's unit
holders, and therefore NMFC's common stockholders, and the Operating 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 Operating
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 Operating Company's net asset value. Similarly, leverage may cause a sharper decline in the Operating Company's
income than if the Operating Company had not borrowed. Such a decline could negatively affect the Operating Company's ability to make dividend payments to its unit
holders. Leverage is generally considered a speculative investment technique. The Operating 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
NMFC and AIV Holdings have elected to be treated, and intend to comply with the requirements to continue to qualify annually, as RICs under Subchapter M of the
Code. In order to continue to qualify as RICs, among other things, NMFC and AIV Holdings are required to timely distribute to their stockholders at least 90.0% of
investment company taxable income, as defined by the Code, for each year. NMFC and AIV Holdings, among other things, intend to make and continue to make the
requisite distributions to their stockholders, which will generally relieve NMFC and AIV Holdings from U.S. federal, state, and local income taxes (excluding excise taxes
which may be imposed under the Code). However, under certain circumstances, the distributions that the Operating Company makes to its members may not be sufficient
for AIV Holdings to satisfy the annual distribution requirement necessary for AIV Holdings to continue to qualify as a RIC. In that case, it is expected that Guardian AIV
would consent to be treated as if it received distributions from AIV Holdings sufficient to satisfy the annual distribution requirement. Guardian AIV would be required to
include the consent dividend in its taxable income as dividend from AIV Holdings, which would result in phantom (i.e., non-cash) taxable income to Guardian AIV.
Additionally as BDCs, the Companies 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).
51
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands)
Note 9. Commitments and Contingencies
In the normal course of business, the Companies may enter into contracts that contain a variety of representations and warranties and which provide general
indemnifications. The Operating Company may also enter into future funding commitments such as revolving credit facilities, bridge financing commitments, or delayed
draw commitments. As of December 31, 2013, the Operating Company had unfunded commitments on revolving credit facilities of $15,500, and no outstanding bridge
financing commitments or other future funding commitments. The unfunded commitments on revolving credit facilities are disclosed on the Operating Company's
Consolidated Schedule of Investments. As of December 31, 2012, the Operating Company had unfunded commitments on revolving credit facilities of $10,500 and no
outstanding bridge financing commitments or other future funding commitments, all of which are disclosed on the Operating Company's Consolidated Schedule of
Investments.
The Operating Company also has revolving borrowings available under the Holdings Credit Facility and the SLF Credit Facility as of December 31, 2013. See
Note 7, Borrowing Facilities, for details.
The Operating Company may from time to time enter into financing commitment letters. As of December 31, 2013 and December 31, 2012, the Operating Company
did not enter into any commitment letters to purchase debt investments, which could require funding in the future.
Note 10. Distributions
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. During the years ended December 31, 2013, December 31, 2012 and December 31, 2011, NMFC did not have any
reclassifications of amounts for book purposes arising from permanent book/tax differences. During the years ended December 31, 2013, December 31, 2012 and
December 31, 2011, AIV Holdings had reclassifications of amounts for book purposes arising from permanent book/tax differences related to return of capital
distributions and consent dividends, respectively.
Undistributed net
investment income
Distributions in excess of
net realized gains
Additional paid-in-capital
December 31, 2013
December 31, 2012
December 31, 2011
NMFC
AIV
Holdings
NMFC
AIV
Holdings
NMFC
AIV
Holdings
$
— $
— $
— $
— $
— $
—
—
—
(21,821)
21,821
—
—
(9,707)
9,707
—
—
(1,536)
1,536
For federal income tax purposes, distributions paid to stockholders of NMFC and AIV Holdings are reported as ordinary income, return of capital, long term capital
gains or a combination thereof. The tax character of distributions paid by NMFC and AIV Holdings for the years ended December 31, 2013, December 31, 2012 and
December 31, 2011 were estimated to be as follows:
2013
Years ended December 31,
2012
2011
NMFC
AIV Holdings
NMFC
AIV Holdings
NMFC
AIV Holdings
Ordinary income(non-
qualified)
Ordinary income (qualified)
Capital gains
Return of capital
Total
$
$
44,778
2,742
4,324
—
51,844
$
$
$
19,972
716
—
181,476
202,164
$
26,218
—
501
—
26,719
$
$
40,692
—
2,056
48,128
90,876
$
$
8,944
—
256
—
9,200
$
$
14,694
—
2,697
—
17,391
As of December 31, 2013, the costs of investments for NMFC and AIV Holdings for tax purposes were $642,704 and $68,547, respectively. As of December 31,
2012, the costs of investments for NMFC and AIV Holdings for tax purposes were
52
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
$343,248 and $245,659, respectively. As of December 31, 2013, NMFC and AIV Holdings had capital loss carryforwards of approximately zero and $15,772,
respectively.
At December 31, 2013, December 31, 2012 and December 31, 2011, the components of distributable earnings on a tax basis differ from the amounts reflected per
NMFC's and AIV Holdings' respective Statements of Assets and Liabilities by temporary book/tax differences primarily arising from differences between the tax and
book basis of NMFC's and AIV Holdings' respective investment in the Operating Company and undistributed income.
As of December 31, 2013, December 31, 2012 and December 31, 2011, the components of accumulated earnings / (deficit) on a tax basis were as follows:
Accumulated capital gains /
(losses)
Other temporary
differences
Undistributed ordinary
income
Unrealized (appreciation) /
depreciation
Components of
distributable earnings
$
$
2013
Years ended December 31,
2012
2011
NMFC
AIV Holdings
NMFC
AIV Holdings
NMFC
AIV Holdings
— $
(15,772)
$
— $
— $
— $
10,070
3,856
2,346
(4,982)
—
(2,830)
7,942
528
(5,032)
—
(2,274)
(10,970)
—
66
823
16,272
$
(23,584)
$
6,196
$
(16,002)
$
889
$
—
—
1,778
(886)
892
NMFC and AIV Holdings are subject to a 4.0% nondeductible federal excise tax on certain undistributed income unless NMFC and AIV Holdings distribute, in a
timely manner as required by the Code, an amount at least equal to the sum of (1) 98.0% of their respective net ordinary income earned for the calendar year and
(2) 98.2% of their respective capital gain net income for the one-year period ending October 31 in the calendar year. For the year ended December 31, 2012, both NMFC
and AIV Holdings had no accrued estimated excise taxes. For the year ended December 31, 2013, NMFC and AIV Holdings accrued estimated excise taxes of $2.3 and
zero, respectively.
53
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Note 11. Stockholders' Equity
The table below illustrates the effect of certain transactions on the capital accounts of NMFC:
Common Stock
Shares
Par Amount
Paid in Capital
in Excess
of Par
Undistributed
Net Investment
Income
Accumulated
Undistributed Net
Realized Gains
Net Unrealized
Appreciation
(Depreciation)
Total
Stockholders'
Equity
Balance at December 31, 2010
— $
— $
— $
— $
— $
— $
Issuances of common stock in the IPO(1)
7,272,727
Issuances of common stock in private placement
(2)
Issuances of common stock to New Mountain
Guardian(3)
Deferred offering costs allocated from New
Mountain Finance Holdings, L.L.C.
Dividends declared
Net increase in stockholders' equity resulting
from operations
Balance at December 31, 2011
Issuances of common stock
Deferred offering costs allocated from New
Mountain Finance Holdings, L.L.C.
Dividends declared
Net increase in stockholders' equity resulting
from operations
Balance at December 31, 2012
Issuances of common stock
Deferred offering costs allocated from New
Mountain Finance Holdings, L.L.C.
Dividends declared
Net increase in stockholders' equity resulting
from operations
2,172,000
1,252,964
—
—
—
10,697,691
$
13,628,560
—
—
—
24,326,251
$
20,898,504
—
—
—
Balance at December 31, 2013
45,224,755
$
73
22
12
—
—
—
107
136
—
—
—
243
209
—
—
—
452
99,927
29,843
18,477
(3,998)
—
—
—
—
—
—
(8,345)
8,345
—
—
—
—
(855)
1,141
$
144,249
$
— $
286
$
191,561
(323)
—
—
—
—
(19,792)
19,792
—
—
(6,927)
7,593
—
—
—
—
—
845
845
—
—
—
4,399
$
$
335,487
$
— $
952
$
5,244
$
298,177
(281)
—
—
—
—
(50,521)
50,521
$
633,383
$
— $
—
—
(1,323)
5,427
5,056
—
—
—
5,972
$
11,216
$
—
100,000
29,865
18,489
(3,998)
(9,200)
10,331
145,487
191,697
(323)
(26,719)
31,784
341,926
298,386
(281)
(51,844)
61,920
650,107
_______________________________________________________________________________
(1) On May 19, 2011, NMFC priced its IPO of 7,272,727 shares of common stock at a public offering price of $13.75 per share.
(2) 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 the Concurrent Private Placement.
(3) On May 19, 2011, NMFC issued 1,252,964 share of common stock to New Mountain Guardian Partners, L.P. for their respective ownership interest in the Predecessor Entities.
54
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The table below illustrates the effect of certain transactions on the capital accounts of AIV Holdings:
Balance at December 31, 2010
— $
—
$
— $
— $
— $
— $
—
Common Stock
Shares
Par Amount
Paid in Capital
in Excess
of Par
Undistributed
Net Investment
Income
Distributions
In Excess of Net
Realized Gains
Net Unrealized
(Depreciation)
Appreciation
Total
Stockholder's
Equity
Issuance of common stock to New Mountain
Guardian AIV, L.P.(2)
Deferred offering costs allocated from New
Mountain Finance Holdings, L.L.C.
Dividends declared
Net increase (decrease) in stockholder's equity
resulting from operations
Tax reclassifications related to consent dividends
(See Note 10)
100
—
—
—
—
— (1)
298,407
—
—
—
—
(7,559)
—
—
1,536
—
—
(15,775)
15,775
—
—
—
(1,616)
2,158
(1,536)
—
—
—
(16,375)
—
298,407
(7,559)
(17,391)
1,558
—
Balance at December 31, 2011
100
$
— (1) $
292,384
$
— $
(994)
$
(16,375)
$
275,015
Deferred offering costs allocated from New
Mountain Finance Holdings, L.L.C.
Dividends declared
Distribution to New Mountain Guardian
AIV, L.P.
Net increase in stockholder's equity resulting
from operations
Tax reclassifications related to return of capital
distributions (See Note 10)
—
—
—
—
—
—
—
—
—
—
(241)
—
(57,835)
—
9,707
—
(25,426)
—
25,426
—
—
(7,234)
(381)
11,640
(9,707)
—
—
—
7,049
—
(241)
(32,660)
(58,216)
44,115
—
Balance at December 31, 2012
100
$
— (1) $
244,015
$
— $
(6,676)
$
(9,326)
$
228,013
Deferred offering costs allocated from New
Mountain Finance Holdings, L.L.C.
Dividends declared
Distribution to New Mountain Guardian
AIV, L.P.
Net increase (decrease) in stockholder's equity
resulting from operations
Tax reclassifications related to return of capital
distributions (See Note 10)
Balance at December 31, 2013
—
—
—
—
—
—
—
—
(50)
—
(203,793)
—
—
100
$
—
— (1) $
21,821
61,993
$
—
(13,155)
—
13,155
—
—
(141)
14,925
(13,099)
(21,821)
—
—
—
12,554
—
— $
(26,812)
$
3,228
$
(50)
(13,296)
(188,868)
12,610
—
38,409
_______________________________________________________________________________
(1) As of December 31, 2013, December 31, 2012 and December 31, 2011, the par amount of the total common stock was $1.
(2) On May 19, 2011, AIV Holdings issued 100 shares of common stock to New Mountain Guardian AIV, L.P. for their respective ownership interest in the Predecessor Entities.
55
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Note 12. Earnings Per Share
The following information sets forth the computation of basic and diluted net increase in NMFC's net assets per share resulting from operations for the year ended
December 31, 2013, December 31, 2012 and the period from May 19, 2011 (commencement of operations) to December 31, 2011:
Numerator for basic earnings per share:
Denominator for basic weighted average share:
Basic earnings per share:
Numerator for diluted earnings per share(a):
Denominator for diluted weighted average share(b):
Diluted earnings per share:
_______________________________________________________________________________
Years ended December 31,
2013
61,920
35,092,722
1.76
78,924
44,021,920
1.79
$
$
$
$
2012
31,784
14,860,838
2.14
73,996
34,011,738
2.18
$
$
$
$
May 19, 2011
(commencement of
operations) to
December 31, 2011
10,331
10,697,691
0.97
11,881
30,919,629
0.38
$
$
$
$
(a)
Includes the full income at the Operating Company for the period. For the period May 19, 2011 (commencement of operations) to December 31, 2011,
NMFC's unrealized appreciation in the Operating Company resulting from the IPO is netted against AIV Holdings' unrealized depreciation in the Operating
Company resulting from the IPO.
(b) Assumes all AIV Holdings units in the Operating Company were exchanged for public shares of NMFC during the years ended December 31, 2013,
December 31, 2012 and for the period from May 19, 2011 to December 31, 2011, respectively (see Note 1, Formation and Business Purpose).
56
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Note 13. Financial Highlights
The following information sets forth the financial highlights for the Operating Company for the respective years ended December 31st.
2013
2012
2011
2010
2009
Years ended December 31,
Total return based on net asset value(a)
13.27%
16.61%
Average net assets for the period
Ratio to average net assets:
Net investment income
Total expenses (gross)
Total expenses (net of reimbursable expenses)
Net assets, end of year
Average debt outstanding—Holdings Credit
Facility
Average debt outstanding—SLF Credit Facility
Weighted average common membership units
outstanding for the year
Asset coverage ratio
Portfolio turnover
$
$
$
$
630,156
$
474,561
$
10.10%
8.64%
8.13%
688,516
184,124
214,317
$
$
$
9.53%
9.07%
8.55%
569,939
133,600
181,395
$
$
$
10.09%
361,031
10.67%
5.59%
4.99%
420,502
61,561
133,825
$
$
$
$
44,021,920
34,011,738
30,919,629
(b)
257.73%
40.52%
235.31%
52.02%
242.56%
42.13%
26.54%
245,951
$
15.23%
1.59%
1.59%
241,927
68,343
27,672
$
$
N/A
307.43%
76.69%
76.38%
195,467
10.44%
0.72%
0.72%
239,441
65,014
N/A
N/A
407.98%
57.50%
_______________________________________________________________________________
N/A—Not applicable.
(a) For the years ended December 31, 2013 and December 31, 2012, total return is calculated assuming a purchase at net asset value on the opening of the first
day of the year and a sale at net asset value on the last day of the respective year. 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. For the year ended December 31, 2011, total return is calculated in
two parts: (1) from the opening of the first day of the year to NMFC's IPO date, total return is calculated based on net income over weighted average net
assets and (2) from NMFC's IPO date to the last day of the year, total return is calculated assuming a purchase at net asset value on NMFC's IPO date and a
sale at net asset value on the last day of the year. 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. For the years ended December 31, 2010 and December 31, 2009, total return is the ratio of net income
compared to capital, adjusted for capital contributions and distributions.
(b) Weighted average common membership units outstanding presented from May 19, 2011 to December 31, 2011, as the fund became unitized on May 19,
2011, the IPO date.
57
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Per unit data for the Operating Company(a):
Net asset value, January 1, 2013, January 1, 2012 and May 19, 2011(b), respectively
Net investment income
Net realized and unrealized gains (losses)
Dividends from net investment income
Net increase (decrease) in net assets resulting from operations
Net asset value, December 31, 2013, December 31, 2012 and December 31, 2011, respectively
_______________________________________________________________________________
Years ended December 31,
2013
2012
May 19, 2011
(commencement of
operations) to
December 31, 2011
$
$
14.06
$
13.60
$
1.45
0.35
(1.48)
0.32
14.38
$
1.33
0.84
(1.71)
0.46
14.06
$
14.08
0.78
(0.40)
(0.86)
(0.48)
13.60
(a) Per unit data is based on weighted average common membership units outstanding.
(b) Data presented from May 19, 2011 to December 31, 2011 as the fund became unitized on May 19, 2011, the IPO date.
58
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The following information sets forth the financial highlights for NMFC for the year ended December 31, 2013, December 31, 2012 and the period May 19, 2011
to December 31, 2011. The ratios to average net assets have been annualized for the period May 19, 2011 to December 31, 2011.
Years ended December 31,
2013
2012
May 19, 2011
(commencement of
operations) to
December 31, 2011
Per share data(a):
Net asset value, January 1, 2013, January 1, 2012 and May 19, 2011(b), respectively
Net increase (decrease) in net assets resulting from operations allocated from New Mountain Finance
$
14.06
$
13.60
$
13.50
Holdings, L.L.C.:
Net investment income
Net realized and unrealized gains (losses)
Total net increase
Net change in unrealized appreciation (depreciation) of investment in New Mountain Finance Holdings,
L.L.C.
Dividends declared
Net asset value, December 31, 2013, December 31, 2012 and December 31, 2011, respectively
Per share market value, December 31, 2013, December 31, 2012 and December 31, 2011, respectively
Total return based on market value(c)
Total return based on net asset value(d)
Shares outstanding at end of period
Average weighted shares outstanding for the period
Average net assets for the period
Ratio to average net assets(e):
1.45
0.35
1.80
—
(1.48)
14.38
15.04
11.62%
13.27%
$
$
1.33
0.84
2.17
—
(1.71)
14.06
14.90
24.84%
16.61%
$
$
0.78
(0.40)
0.38
0.58
(0.86)
13.60
13.41
4.16%
2.82%
45,224,755
35,092,722
24,326,251
14,860,838
502,822
$
196,312
$
10,697,691
10,697,691
147,766
$
$
$
Total expenses allocated from New Mountain Finance Holdings, L.L.C.
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
8.13%
10.10%
8.55%
9.53%
5.79%
9.08%
_______________________________________________________________________________
(a) 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.
(b) Data presented from May 19, 2011 to December 31, 2011 as the fund became unitized on May 19, 2011, the IPO date.
(c) For the years ended December 31, 2013, December 31, 2012 and for the period May 19, 2011 to December 31, 2011, total return is calculated assuming a
purchase of common stock at the opening of the first day of the years ended 2013 and 2012, and assuming a purchase of common stock at IPO, respectively,
and a sale on the closing of the last day of the respective year. Dividends and distributions, if any, are assumed for purposes of this calculation, to be
reinvested at prices obtained under NMFC's dividend reinvestment plan.
(d) 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.
(e) Ratio to average net assets for the years ended December 31, 2013 and December 31, 2012 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.
59
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The following information sets forth the financial highlights for AIV Holdings for the year ended December 31, 2013, December 31, 2012 and the period May 19,
2011 to December 31, 2011. The ratios to average net assets have been annualized for the period May 19, 2011 to December 31, 2011.
Total return based on net asset value(a)
Average net assets for the period
Ratio to average net assets(b):
Years ended December 31,
2013
2012
May 19, 2011
(commencement of
operations) to
December 31, 2011
7.69%
18.04%
(5.44)%
$
127,334
$
270,081
$
279,323
Total expenses allocated from New Mountain Finance Holdings, L.L.C.
Net investment income allocated from New Mountain Finance Holdings, L.L.C.
8.13%
10.10%
8.55%
9.53%
5.79 %
9.08 %
_______________________________________________________________________________
(a) For the years ended December 31, 2013, December 31, 2012 and for the period May 19, 2011 to December 31, 2011, 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 business 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.
(b) Ratio to average net assets for the years ended December 31, 2013 and December 31, 2012 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.
60
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Note 14. Selected Quarterly Financial Data (unaudited)
The below selected quarterly financial data is for the Operating Company.
(in thousands except for per unit data)
Quarter Ended
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010
September 30, 2010
June 30, 2010
March 31, 2010
December 31, 2009
September 30, 2009
June 30, 2009
March 31, 2009
$
$
$
$
$
Investment Income
Net Investment Income
Total Net Realized Gains and Net
Changes in Unrealized Appreciation
(Depreciation) of Investments
Net Increase (Decrease) in Capital
Resulting from Operations
Total
Per
Unit
Total
Per
Unit
Total
Per
Unit
Total
Per
Unit
$
$
$
28,645
25,793
35,156
25,318
24,713
21,752
20,299
19,022
17,127
15,069
13,116
11,212
9,820
13,881
8,597
9,077
7,617
6,148
5,092
2,910
$
$
$
$
$
0.60
0.57
0.82
0.62
0.65
0.60
0.66
0.62
0.55
0.49
0.42
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
$
$
15,848
12,659
23,543
11,627
13,522
10,136
11,646
9,913
9,540
10,002
9,554
9,429
8,335
13,145
7,777
8,208
6,617
6,030
4,877
2,883
$
$
$
$
$
0.33
0.29
0.55
0.28
0.36
0.28
0.38
0.32
0.31
0.32
0.31
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
$
$
3,213
7,819
(8,719)
12,934
3,478
12,109
(561)
13,754
8,317
(21,255)
(899)
6,990
7,978
5,560
(5,349)
18,138
1,617
33,709
42,562
27,385
$
$
$
$
$
0.07
0.17
(0.21)
0.32
0.09
0.34
(0.02)
0.45
0.27
(0.68)
(0.03)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
$
$
19,061
20,478
14,824
24,561
17,000
22,245
11,085
23,667
17,857
(11,253)
8,655
16,419
16,313
18,705
2,428
26,346
8,234
39,739
47,439
30,268
0.40
0.46
0.34
0.60
0.45
0.62
0.36
0.77
0.58
(0.36)
0.28
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
_______________________________________________________________________________
N/A—Not applicable, as the Operating Company was not unitized until May 19, 2011.
61
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
The below selected quarterly financial data is for NMFC.
(in thousands except for per share data)
Quarter Ended
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
Net Investment Income allocated
from the Operating Company
Total Net Realized and Unrealized
Gains (Losses)
Net Increase (Decrease) in Net Assets
Resulting from Operations
Total
Per Share
Total
Per Share
Total
Per Share
$
$
$
$
$
$
14,826
10,803
17,674
7,218
7,759
4,574
4,029
3,430
3,301
3,460
1,584
N/A
$
$
$
0.33
0.29
0.55
0.28
0.36
0.28
0.38
0.32
0.31
0.32
0.15
N/A
$
$
$
3,119
6,664
(6,682)
8,298
2,047
5,381
(194)
4,758
2,877
(7,353)
6,462
N/A
$
$
$
0.07
0.17
(0.21)
0.33
0.09
0.34
(0.02)
0.45
0.27
(0.68)
0.60
N/A
$
$
$
17,945
17,467
10,992
15,516
9,806
9,955
3,835
8,188
6,178
(3,893)
8,046
N/A
0.40
0.46
0.34
0.61
0.45
0.62
0.36
0.77
0.58
(0.36)
0.75
N/A
_______________________________________________________________________________
N/A—Not applicable, as NMFC did not commence operations until May 19, 2011.
The below selected quarterly financial data is for AIV Holdings.
(in thousands)
Quarter Ended
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
_______________________________________________________________________________
N/A—Not applicable, as AIV Holdings did not commence operations until May 19, 2011.
62
Net Investment Income
allocated from the
Operating Company
Total Net Realized and
Unrealized Gains
(Losses)
Net Increase (Decrease)
in Net Assets Resulting
from Operations
$
$
$
$
$
$
1,022
1,855
5,869
4,409
5,764
5,562
7,617
6,483
6,240
6,542
2,994
N/A
$
$
$
(1,614)
1,156
(3,078)
2,991
1,431
8,630
(367)
8,995
5,439
(13,902)
(5,755)
N/A
(592)
3,011
2,791
7,400
7,195
14,192
7,250
15,478
11,679
(7,360)
(2,761)
N/A
Combined Notes to the Consolidated Financial Statements of New Mountain Finance Holdings, L.L.C.,
the Financial Statements of New Mountain Finance Corporation and the Financial Statements
of New Mountain Finance AIV Holdings Corporation (Continued)
December 31, 2013
(in thousands, except units/shares and per unit/share data)
Note 15. 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 adoption of ASU 2013-08 is not expected to have a material impact on
the Companies' financial statements.
Note 16. Subsequent Events
On January 27, 2014, NMFC announced that the U.S. Small Business Administration ("SBA") issued a "green light" letter inviting NMFC to continue its
application process to obtain a license to form and operate a Small Business Investment Company ("SBIC") subsidiary. If approved, a SBIC license would provide NMFC
with an incremental source of attractive long-term capital.
Receipt of a green light letter from the SBA does not assure an applicant that the SBA will ultimately issue an SBIC license, and NMFC has received no assurance
or indication from the SBA that it will receive a SBIC license, or of the timeframe in which it would receive a license, should one ultimately be granted.
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 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 Operating Company and NMFC owns 100.0% of the outstanding units of the Operating Company. As a result, the Companies' current organizational structure
may be collapsed or simplified in the future.
On March 4, 2014, the Operating Company's board of directors, and subsequently NMFC's board of directors, declared a first quarter 2014 distribution of $0.34 per
unit/share payable on March 31, 2014 to holders of record as of March 17, 2014.
63
New Mountain Finance Holdings, L.L.C.
Consolidated Schedule of Investments (Continued)
December 31, 2013
(in thousands)
QuickLinks
EXHIBIT 99.1
TABLE OF CONTENTS
New Mountain Finance Holdings, L.L.C Consolidated Statements of Operations (in thousands) (unaudited)
New Mountain Finance Holdings, L.L.C Consolidated Statements of Cash Flows (in thousands) (unaudited)
(Back To Top)
64