Section 1: 10-K (10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________________
_________________________________________________________________________________
FORM 10-K
ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
o
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
5.75% Notes due 2023
Name of each exchange on which registered
New York Stock Exchange
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 o No ý
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 o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes o No o
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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and
"emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer ý
Non-accelerated filer o
Emerging growth company o
Accelerated filer o
Smaller reporting company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of common stock held by non-affiliates of New Mountain Finance Corporation on June 29, 2018, based on the
closing price on that date of $13.60, on the New York Stock Exchange was $927.5 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 27, 2019
80,418,872
Portions of the Registrant's Proxy Statement for its 2019 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
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018
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.
Item 15.
Item 16.
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
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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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"). Since our IPO, and through December 31, 2018, we have raised approximately $614.6 million in net proceeds from
additional offerings of common stock.
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. 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 I") and its general partner, New Mountain Finance SBIC G.P.,
L.L.C. ("SBIC I GP"), are organized in Delaware as a limited partnership and limited liability company, respectively. New Mountain Finance SBIC II,
L.P. (“SBIC II”) and its general partner, New Mountain Finance SBIC II G.P., L.L.C. (“SBIC II GP”), were also organized in Delaware as a limited
partnership and limited liability company, respectively. SBIC I, SBIC I GP, SBIC II and SBIC II GP are our consolidated wholly-owned direct and
indirect subsidiaries. SBIC I and SBIC II received licenses from the United States ("U.S.") Small Business Administration (the "SBA") to operate as
small business investment companies ("SBICs") under Section 301(c) of the Small Business Investment Act of 1958, as amended (the "1958 Act").
Our wholly-owned subsidiary, New Mountain Net Lease Corporation ("NMNLC"), a Maryland corporation, was formed to acquire commercial real
properties that are subject to "triple net" leases and has qualified and intends to continue to qualify as a real estate investment trust, or REIT, within
the meaning of Section 856(a) of the Code. During the year ended December 31, 2018, New Mountain Finance DB, L.L.C. ("NMFDB") was organized
in Delaware as a limited liability company whose assets are used to secure NMFDB's credit facility.
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 Group,
L.P. (together with New Mountain Capital L.L.C. and its affiliates, "New Mountain Capital") whose ultimate owners include Steven B. Klinsky and
related other vehicles. 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
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 maintains, or oversees the maintenance of, our
consolidated 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.
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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.
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. The first lien debt may include
traditional first lien senior secured loans or unitranche loans. Unitranche loans combine characteristics of traditional first lien senior secured loans
as well as second lien and subordinated loans. Unitranche loans will expose us to the risks associated with second lien and subordinated loans to
the extent we invest in the “last out” tranche. In some cases, our investments may also include equity interests.
We make investments through both primary originations and open-market secondary purchases. We predominantly target loans to, and
invest in, 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 $10.0 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, each of SBIC I's and SBIC II's investment objective
is to generate current income and capital appreciation under our investment criteria. However, SBIC I’s and SBIC II's investments must be in SBA
eligible small businesses. For additional information on SBA regulations, see "SBA Regulation". Our portfolio may be concentrated in a limited
number of industries. As of December 31, 2018, our top five industry concentrations were business services, software, healthcare services,
education and investment funds. Our targeted investments typically have maturities of between five and ten years and generally range in size
between $10.0 million and $125.0 million. This investment size may vary proportionately as the size of our capital base changes. At December 31,
2018, our portfolio consisted of 92 portfolio companies and was invested 50.1% in first lien loans, 28.3% in second lien loans, 2.8% in subordinated
debt and 18.8% in equity and other, as measured at fair value versus 84 portfolio companies invested 38.0% in first lien loans, 37.4% in second lien
loans, 3.8% in subordinated debt and 20.8% in equity and other, as measured at fair value at December 31, 2017.
The fair value of our investments was approximately $2,342.0 million in 92 portfolio companies at December 31, 2018, approximately $1,825.7
million in 84 portfolio companies at December 31, 2017 and approximately $1,558.8 million in 78 portfolio companies at December 31, 2016.
The following table shows our portfolio and investment activity for the years ended December 31, 2018, December 31, 2017 and
December 31, 2016:
(in millions)
New investments in 67, 64 and 43 portfolio companies, respectively
Debt repayments in existing portfolio companies
Sales of securities in 14, 17 and 10 portfolio companies, respectively
Change in unrealized appreciation on 25, 58 and 71 portfolio companies, respectively
Change in unrealized depreciation on 88, 43 and 24 portfolio companies, respectively
$
Year Ended December 31,
2018
2017
2016
$
1,321.6
592.4
210.5
14.8
(37.0)
$
999.7
696.6
70.7
66.1
(15.3)
558.1
479.5
67.6
76.5
(36.4)
At December 31, 2018 and December 31, 2017, our weighted average yield to maturity at cost ("YTM at Cost") was approximately 10.4%
and 10.9%, respectively. This YTM at Cost calculation assumes that all investments, including secured
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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. At December 31, 2018 and December 31, 2017, our weighted average yield to maturity at cost for
investments ("YTM at Cost for Investments") was approximately 10.4% and 10.9%, respectively. This YTM at Cost for Investments calculation
assumes that all investments, including secured collateralized agreements, 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. YTM at Cost and YTM at Cost for Investments calculations
exclude the impact of existing leverage. YTM at Cost and YTM at Cost for Investments use 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.
The following summarizes our ten largest portfolio company investments and the top ten industries in which we were invested as of
December 31, 2018, calculated as a percentage of total assets as of December 31, 2018:
Portfolio Company
UniTek Global Services, Inc.
NMFC Senior Loan Program II LLC
NMFC Senior Loan Program III LLC
Benevis Holding Corp.
Integro Parent Inc.
Avatar Topco, Inc.
Kronos Incorporated
CentralSquare Technologies, LLC
Dealer Tire, LLC
Tenawa Resource Holdings, LLC
Total
Industry Type
Business Services
Software
Healthcare Services
Education
Investment Fund
Consumer Services
Energy
Net Lease
Distribution & Logistics
Federal Services
Total
Investment Criteria
Percent of Total Assets
3.4%
3.2%
3.2%
3.2%
2.6%
2.5%
2.3%
2.3%
2.1%
2.0%
26.8%
Percent of Total Assets
22.6%
19.5%
14.2%
8.6%
7.4%
4.9%
4.3%
3.9%
3.3%
3.0%
91.7%
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.
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•
•
•
•
•
•
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.
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 is managed by a five member investment committee (the “Investment Committee”), which is responsible for
approving purchases and sales of our investments above $10.0 million in aggregate by issuer. 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. Peter N. Masucci
served on the Investment Committee from August 2017 to July 2018. Beginning in August 2018, Andre V. Moura 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. 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.
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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. Our first lien loans may include traditional first lien senior
secured loans or unitranche loans. Unitranche loans combine characteristics of traditional first lien senior secured loans as well as
second lien and subordinated loans. Unitranche loans will expose us to the risks associated with second lien and subordinated loans
to the extent we invest in the “last out” tranche.
•
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, where the risk of loss has materially increased since the
original investment; and
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•
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.
The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of December 31, 2018:
(in millions)
Investment Rating
Investment Rating 1
Investment Rating 2
Investment Rating 3
Investment Rating 4
Exit Strategies/Refinancing
Cost
Percent
Fair Value
Percent
As of December 31, 2018
$
$
147.1
2,181.1
—
1.5
2,329.7
6.3% $
93.6%
—%
0.1%
100.0% $
147.9
2,194.0
—
0.1
2,342.0
6.3%
93.7%
—%
0.0%
100.0%
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 principles generally accepted in the United States of America ("GAAP") and the 1940 Act, we
conduct a valuation of our 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
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materiality threshold, the investment is valued similarly to those assets with no readily available quotes (see (3) below).
(3) Investments for which quotations are not readily available through exchanges, pricing services, brokers, or dealers are valued through a
multi-step valuation process:
a. Each portfolio company or investment is initially valued by the investment professionals of the Investment Adviser responsible for
the credit monitoring;
b. Preliminary valuation conclusions will then be documented and discussed with 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 150.0% (i.e., the amount of debt
may not exceed 66.7% of the value of our total assets or we may borrow an amount equal to 200.0% 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.
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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 December 18, 2017, the SEC issued an exemptive order (the “Exemptive Order”), which superseded a prior order issued on June 5, 2017, which
permits us to co-invest in portfolio companies with certain 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, subject to the conditions of the Exemptive Order. Pursuant to
the Exemptive Order, we are permitted to co-invest with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our
independent directors make certain conclusions in connection with a co-investment transaction, including, but not limited to, that (1) the terms of
the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not
involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the potential co-investment transaction is
consistent with the interests of our stockholders and is consistent with our then-current investment objective and strategies.
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 distributions. Rather, distributions paid 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 for tax treatment 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
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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
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 and August 25, 2017, respectively, SBIC I and SBIC II, our wholly-owned direct and indirect subsidiaries, received
licenses from the SBA to operate as SBICs under Section 301(c) of the 1958 Act. SBIC I and SBIC II have an investment strategy and philosophy
substantially similar to ours and make similar types of investments in accordance with SBA regulations.
An SBIC license allows each of SBIC I and SBIC II 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. In June 2018, the limit of SBA leverage available to an individual SBIC eligible for two
tiers of leverage was increased from $150.0 million to $175.0 million, subject to SBA approval. Currently, SBIC I and SBIC II operate under the prior
$150.0 million cap. 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 I and SBIC II are 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. The SBA, as a creditor, will have a superior
claim to SBIC I's and SBIC II's assets over our stockholders in the event SBIC I and SBIC II are liquidated or the SBA exercises its remedies under
the SBA-guaranteed debentures issued by SBIC I and SBIC II 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 I, SBIC II
and any other future SBIC subsidiaries from our 150.0% asset coverage test under the 1940 Act. As such, our ratio of total consolidated assets to
outstanding indebtedness may be less than 150.0%. This provides us with increased investment flexibility but also increases our risks related to
leverage.
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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 enterprises", as defined by the SBA. The definition of a smaller enterprise 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 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.
The maximum leverage available to a "family" of affiliated SBIC funds is $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.
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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.
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.
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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 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 5. Agreements 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. The Investment Adviser also manages New Mountain Guardian Partners II, L.P., a Delaware limited partnership, and New Mountain
Guardian II Offshore, L.P., a Cayman Islands exempted limited partnership, (together "Guardian II"), which commenced operations in April 2017.
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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 New Mountain Finance
SPV Funding, L.L.C. Loan and Security Agreement with Wells Fargo Bank, National Association, dated 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, as amended and
restated, dated May 19, 2011, 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. The amendment merged the credit facilities and combined the amount of borrowings
previously available. 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 $525.7 million as of December 31, 2018. The Investment Adviser cannot recoup
management fees that the Investment Adviser has previously waived. For the year ended December 31, 2018, total management fees waived was
approximately $6.7 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, upfront, 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, 2018), 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
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capital depreciation ("Adjusted Unrealized Capital Depreciation"). As of December 31, 2017, all predecessor investments have been sold or matured.
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-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
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(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%
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
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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)
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)).
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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);
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 6, 2019 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
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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;
the total of all assets managed by the Adviser, as well as total number of investment companies and other clients serviced by the
Adviser and 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;
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 the possibility of obtaining similar services from other third party
service providers, 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
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(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)
Securities of any eligible portfolio company that the BDC controls.
3)
4)
5)
6)
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.
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.
As of December 31, 2018, 14.9% of our total assets were non-qualifying assets.
Significant 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, 2018.
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 150.0% immediately after each such issuance. If our asset ratio coverage is not at least 150.0%, we would be unable to issue additional
senior securities, and certain provisions of our senior securities may preclude us from making distributions to our stockholders. However, at
December 31, 2018, none of our senior securities have provisions that may preclude us from making distributions to stockholders. 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.
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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. The
code of ethics is available on the SEC’s website at http://www.sec.gov.
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 the adequacy and the
effectiveness of their implementation. Our chief compliance officer is responsible for administering these policies and procedures.
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;
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•
•
•
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.
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. The SEC maintains a website that contains reports, proxy and information statements and other information filed electronically by us with the
SEC at http://www.sec.gov.
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. 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. The initial negotiations on Brexit commenced in June 2017. Brexit created political and economic uncertainty
and instability in the global markets (including currency and credit markets), and especially in the United Kingdom and the European Union, and
this uncertainty and instability may last indefinitely. Because the U.K. Parliament rejected Prime Minister Theresa May’s proposed Brexit deal with
the European Union in January 2019, there is increased uncertainty on the outcome of Brexit. 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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The Republican Party currently controls the executive branch and the Senate portion of the legislative branch 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. For example, in March 2018, the U.S. Senate passed a bill that eased financial regulations and reduced oversight for certain entities. 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.
Changes to U.S. tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.
There has been on-going discussion and commentary regarding potential significant changes to U.S. trade policies, treaties and tariffs.
The current administration, along with Congress, has created significant uncertainty about the future relationship between the U.S. and other
countries with respect to the trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a
material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in
particular, trade between the impacted nations and the U.S. Any of these factors could depress economic activity and restrict our portfolio
companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations,
which in turn would negatively impact us.
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 reflection of 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.
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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 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, 2018 consisted of approximately 145 employees and senior advisors 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 tax treatment as a RIC, our operating flexibility could be significantly reduced.
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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 tax treatment as a RIC. 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.
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 management fee and 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
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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 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 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 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 and we would expect such lenders to seek recovery against our assets in the event of default. 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 distribution 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 and increases the risks
associated with investing in our securities.
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.
As of December 31, 2018, we had $512.6 million, $60.0 million, $57.0 million, $270.3 million, $336.8 million, and $165.0 million of indebtedness
outstanding under the Holdings Credit Facility, the NMFC Credit Facility, the DB Credit Facility, the Convertible Notes, the Unsecured Notes and
the SBA-guaranteed debentures, respectively. The Holdings Credit Facility, the NMFC Credit Facility, the DB Credit Facility, the SBA-guaranteed
debentures and the Unsecured Notes had weighted average interest rates of 4.2%, 4.6%, 5.7%, 3.2% and 5.1%, respectively, for the year ended
December 31, 2018. The interest rate on the 2014 Convertible Notes and 2018 Convertible Notes is 5.0% and 5.75%, respectively, per annum.
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Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various
annual returns, net of interest expense and adjusted for unsettled securities purchased. The calculations in the table below are hypothetical. Actual
returns may be higher or lower than those appearing below. The calculation assumes (i) $2,448.7 million in total assets, (ii) a weighted average cost
of borrowings of 4.6%, which assumes the weighted average interest rates as of December 31, 2018 for the Holdings Credit Facility, the NMFC
Credit Facility, the DB Credit Facility, and the SBA-guaranteed debentures and the interest rate as of December 31, 2018 for the Convertible Notes
and Unsecured Notes, (iii) $1,401.6 million in debt outstanding and (iv) $1,006.3 million in net assets.
Corresponding return to stockholder
(10.0)%
(5.0)%
—%
(30.8)%
(18.6)%
(6.4)%
5.0%
5.8%
10.0%
17.9%
Assumed Return on Our Portfolio (net of interest expense)
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.
The DB Credit Facility contains certain customary affirmative and negative covenants and 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.
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.
The terms of our credit facilities may contractually limit our ability to incur additional indebtedness.
We will need additional capital to fund new investments and grow our portfolio of investments. We intend to access the capital markets periodically
to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. We believe that having the
flexibility to incur additional leverage could augment the returns to our stockholders and would be in the best interests of our stockholders. Even
though our board of directors and our shareholders have approved a resolution permitting us to be subject to a 150.0% asset coverage ratio
effective as of June 9, 2018, contractual leverage limitations under our existing credit facilities or future borrowings may limit our ability to incur
additional indebtedness.
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Currently, our NMFC Credit Facility restricts our ability to incur additional indebtedness if after incurring such additional debt, our asset coverage
ratio would be below 165.0%. Also, the NMFC Credit Facility requires that we not exceed a secured debt ratio of 0.70 to 1.00 at any time. We cannot
assure you that we will be able to negotiate a change to our credit facilities to allow us to incur additional leverage or that any such an amendment
will be available to us on favorable terms. An inability on our part to amend the contractual asset coverage limitation and access additional leverage
could limit our ability to take advantage of the benefits described above related to our ability to incur additional leverage and could decrease our
earnings, if any, which would have an adverse effect on our results of operations and the value of our shares of common stock.
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 Holdings Credit Facility, the NMFC Credit Facility, the DB Credit Facility, the NMNLC Credit Facility, the
2014 Convertible Notes and the 2018 Convertible Notes mature on October 24, 2022, June 4, 2022, December 14, 2023, September 23, 2019, June 15,
2019 and August 15, 2023, respectively. Our $90.0 million in aggregate principal amount of five-year unsecured notes will mature on May 15, 2021
(the "2016 Unsecured Notes"), our $55.0 million in aggregate principal amount of five-year unsecured notes will mature on July 15, 2022 (the "2017A
Unsecured Notes"), our $90.0 million in aggregate principal amount of five-year unsecured notes will mature on January 30, 2023 (the "2018A
Unsecured Notes"), our $50.0 million in aggregate principal amount of five-year unsecured notes will mature on June 28, 2023 (the "2018B
Unsecured Notes") and our $51.8 million in aggregate principal amount of five-year unsecured notes will mature on October 1, 2023 (the "5.75%
Unsecured Notes"). 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, the NMFC Credit Facility, the Unsecured Notes and the 2018 Convertible Notes. Any such failure
would result in a default under such indebtedness and otherwise affect our ability to issue senior securities, borrow under the 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 I and SBIC II are licensed by the SBA and is subject to SBA regulations.
On August 1, 2014 and August 25, 2017, respectively, our wholly-owned direct and indirect subsidiaries, SBIC I and SBIC II, received
licenses to operate as SBICs under the 1958 Act and are 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 I and
SBIC II 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 I and SBIC II fail
to comply with applicable regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I's and SBIC II's use of the
debentures, declare outstanding debentures
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immediately due and payable, and/or limit SBIC I and SBIC II from making new investments. In addition, the SBA could revoke or suspend SBIC I's
or SBIC II's licenses 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 I and SBIC II are our wholly-owned
direct and indirect subsidiaries.
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. Recent legislation raised
the limit the amount that any single SBIC may borrow to two tiers of leverage capped from $150.0 million to $175.0 million, subject to SBA approval,
where each tier is equivalent to the SBIC's regulatory capital, which generally equates to the amount of equity capital in the SBIC. Currently, SBIC I
and SBIC II operate under the prior $150.0 million cap. The amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding
is $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 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 150.0%. 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 I and SBIC II may be unable to make distributions to us that will enable us to meet or maintain our RIC tax treatment.
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 I and SBIC II. We will be partially dependent on SBIC I and SBIC II for cash distributions to enable us to meet the RIC
distribution requirements. SBIC I and SBIC II may be limited by SBA regulations governing SBICs from making certain distributions to us that may
be necessary to maintain our tax treatment as a RIC. We may have to request a waiver of the SBA’s restrictions for SBIC I and SBIC II to make
certain distributions to maintain our RIC tax treatment. We cannot assure you that the SBA will grant such waiver and if SBIC I and SBIC II are
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
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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.
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. 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, including Guardian II, 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. On December 18, 2017, the SEC issued the
Exemptive Order, which superseded a prior order issued on June 5, 2017, which permits us to co-invest in portfolio companies with certain 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, subject to the conditions of the Exemptive Order. Pursuant to the Exemptive Order, we are permitted to co-invest with our
affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection
with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including the
consideration to be paid, are reasonable and fair to us and our stockholders and does not involve overreaching by us or our stockholders on the
part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent
with our then-current investment objectives and strategies.
If the Investment Adviser forms other affiliates in the future, we may co-invest on a concurrent basis with such other affiliates, 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.
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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 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
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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 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, we 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 150.0% 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 150.0% asset
coverage ratio we are required to maintain under the 1940 Act. If our asset coverage ratio is not at least 150.0%, we would be unable to issue
additional senior securities, and certain provisions of certain of our senior securities may preclude us from making distributions to our stockholders.
For example, our 2016 Unsecured Notes, 2017A Unsecured Notes, 2018A Unsecured Notes and 2018B Unsecured Notes contain a covenant that
prohibits us from declaring or paying a distribution to our stockholders unless we satisfy the asset coverage ratio immediately after the distribution.
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 October 24, 2022 and permits borrowings of $615.0 million as of December 31, 2018. The Holdings
Credit Facility had $512.6 million in debt outstanding as of December 31, 2018. The NMFC Credit Facility matures on June 4, 2022 and permits
borrowings of $135.0 million as of December 31, 2018. The NMFC Credit Facility had $60.0 million in debt outstanding as of December 31, 2018. The
DB Credit Facility matures on December 14, 2023 and permits borrowings of $100.0 million as of December 31, 2018. The DB Credit Facility had $57.0
million in debt
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outstanding as of December 31, 2018. The NMNLC Credit Facility matures September 23, 2019 and permits borrowings of $30.0 million as of
December 31, 2018. The NMNLC Credit Facility had $0 in debt outstanding as of December 31, 2018. The 2014 Convertible Notes and 2018
Convertible Notes mature on June 15, 2019 and August 15, 2023, respectively. The 2014 Convertible Notes and 2018 Convertible Notes had $155.3
million and $115.0 million in debt outstanding as of December 31, 2018. The 2016 Unsecured Notes, 2017A Unsecured Notes, 2018A Unsecured
Notes, 2018B Unsecured Note and 5.75% Unsecured Notes mature on May 15, 2021, July 15, 2022, January 30, 2023, June 28, 2023 and October 1,
2023, respectively, and had $90.0 million, $55.0 million, $90.0 million, $50.0 million and $51.8 million, respectively, in debt outstanding as of
December 31, 2018. The SBA-guaranteed debentures have ten year maturities and will begin to mature on March 1, 2025. As of December 31, 2018,
$165.0 million of SBA-guaranteed debentures were outstanding.
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 tax treatment as a RIC 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 tax treatment. 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 to an asset coverage ratio requirement under the 1940 Act,
and we are subject to certain financial
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•
•
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 Annual 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 maintain our tax treatment as a RIC 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, the DB 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,
the DB 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 PIK interest and dividends, 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 we receive
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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 for tax treatment 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.
We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely
affect our business.
Legislative or other actions relating to taxes could have a negative effect on us. The rules relating to U.S. federal income taxation are
constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. We cannot predict with
certainty how any changes in the tax laws might affect us, our stockholders, or our portfolio investments. New legislation and any U.S. Treasury
regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our ability to
qualify for tax treatment as a RIC or the U.S. federal income tax consequences to us and our stockholders of such qualification, or could have other
adverse consequences. Stockholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments
and proposals and their potential effect on an investment in our securities.
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.
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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 gas emissions. Although the U.S. ratified the Paris
Agreement on November 4, 2016, the current administration announced the U.S. would cease participation. As a result, some of our portfolio
companies may become subject to new or strengthened regulations or legislation, at least through November 4, 2020 (the earliest date the U.S. may
withdraw from the Paris Agreement), which could increase their operating costs and/or decrease their revenues.
Recent legislation allows us to incur additional leverage, which could increase the risk of investing in our securities.
The 1940 Act generally prohibits us from incurring 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% of the value of our assets). However, on March 23, 2018, the
Consolidated Appropriations Act of 2018, which includes the SBCA, was signed into law. The SBCA amends the 1940 Act to permit a BDC to
reduce the required minimum asset coverage ratio applicable to it from 200.0% to 150.0% (i.e., the amount of debt may not exceed 66.7% of the value
of our assets), subject to certain requirements described therein. On April 12, 2018, our board of directors, including a ‘‘required majority’’ (as such
term is defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coverage requirements set forth in Section 61(a)(2)
of the 1940 Act, as amended by the SBCA, and recommended the submission of a proposal for stockholders to approve the application of the
150.0% minimum asset coverage ratio to us at a special meeting of stockholders, which was held on June 8, 2018. The stockholder proposal was
approved by the required votes of our stockholders at such special meeting of stockholders, and thus we became subject to the 150.0% minimum
asset coverage ratio on June 9, 2018. Changing the asset coverage ratio permits us to double our leverage, which results in increased leverage risk
and increased expenses.
As a result of this legislation, we are able to increase our leverage up to an amount that reduces our asset coverage ratio from 200.0% to
150.0%. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to
partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then
leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had
we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net
investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to
decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends,
scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.
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. 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. In June 2018, the U.S. Senate passed the Small Business Investment Opportunity Act,
which the President signed into law, that amended the 1958 Act by increasing the individual leverage limit from $150.0 million to $175.0 million,
subject to SBA approvals.
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.
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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.
Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively.
The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural
catastrophe, an industrial accident, failure of our disaster recovery systems, or consequential employee error, could have an adverse effect on our
ability to communicate or conduct business, negatively impacting our operations and financial condition. This adverse effect can become
particularly acute if those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability,
integrity, or confidentiality of our data.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security
measures, our computer systems, networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access,
use, alteration, or destruction, such as from physical and electronic break-ins or unauthorized tampering. If one or more of these events occurs, it
could potentially jeopardize the confidential, proprietary, and other information processed, stored in, and transmitted through our computer systems
and networks. Such an attack could cause interruptions or malfunctions in our operations, which could result in financial losses, litigation,
regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation.
If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete or modify
private and sensitive information, including nonpublic personal information related to stockholders (and their beneficial owners) and material
nonpublic information. The systems we have implemented to manage risks relating to these types of events could prove to be inadequate and, if
compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately secure private information.
Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other espionage may not be
identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being
addressed appropriately. The failure of these systems or of disaster recovery plans for any reason could cause significant interruptions in our and
our Investment Advisor’s operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal
information relating to stockholders, material nonpublic information and other sensitive information in our possession.
A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or
other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse
impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the
harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses,
if at all.
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Third parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certain functions
and these relationships allow for the storage and processing of our information, as well as client, counterparty, employee, and borrower information.
While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure,
destruction, or other cybersecurity incident that affects our data, resulting in increased costs and other consequences as described above.
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;
•
•
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 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
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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, 2018, our investments in the business
services and the software industries represented approximately 23.7% and 20.4%, 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.
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
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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:
•
•
•
•
•
•
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.
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.
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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 obligations which 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 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.
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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, 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,
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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.
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, we may incur greater and indirect costs to engage in derivatives transactions or financial commitment
transactions, and 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.
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, or the ‘‘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.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out
LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods of calculating LIBOR will be
established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a
steering committee comprised of large US financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term
repurchase agreements, backed by Treasury securities. The future of LIBOR at this time is uncertain. If LIBOR ceases to exist, we may need to
renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate
to replace LIBOR with the new standard that is established.
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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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
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;
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•
•
•
•
•
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.
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, the DB 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, the DB 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 treatment 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.
We will have broad discretion over the use of proceeds of any offering made pursuant to our prospectus.
We will have significant flexibility in applying the proceeds of any offering made pursuant to our prospectus. We will also pay operating
expenses, and may pay other expenses such as due diligence expenses of potential new investments, from net proceeds. Our ability to achieve our
investment objective may be limited to the extent that the net proceeds of the offering, pending full investment, are used to pay operating expenses.
In addition, we can provide you no assurance that any offering will be successful, or that by increasing the size of our available equity capital, our
aggregate expenses, and correspondingly, our expense ratio, will be lowered.
Your interest in NMFC may be diluted if you do not fully exercise your subscription rights in any rights offering.
In the event we issue subscription rights to purchase shares of our common stock, stockholders who do not fully exercise their rights
should expect that they will, at the completion of the offer, own a smaller proportional interest in NMFC than would otherwise be the case if they
fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what
proportion of the shares will be purchased as a result of the offer.
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
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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 tax treatment 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 tax treatment as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.
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.
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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 threated against us as of December 31, 2018. 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.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
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".
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 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. 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 income 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.
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.
Unregistered Sales of Equity Securities
We did not engage in unregistered sales of equity securities during the year ended December 31, 2018.
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Issuer Purchases of Equity Securities
Dividend Reinvestment Plan
During the year ended December 31, 2018, as part of our dividend reinvestment plan for our common stockholders, our dividend
reinvestment plan administrator purchased 547,043 shares of our common stock for $7.2 million in the open market in order to satisfy the
reinvestment portion of our distribution. The following table outlines purchases by our dividend reinvestment administrator of our common stock
for this purpose during the year ended December 31, 2018.
(in thousands, except shares and per share data)
Period
January 2018
February 2018
March 2018
April 2018
May 2018
June 2018
July 2018
August 2018
September 2018
October 2018
November 2018
December 2018
Total
Total Number of
Shares Purchased
—
—
—
166,286
—
—
—
—
—
189,595
—
191,162
547,043
Weighted Average
Price
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
Paid Per Share
or Programs
$
$
—
—
—
13.24
—
—
—
—
—
13.76
—
12.66
13.22
—
—
—
—
—
—
—
—
—
—
—
—
—
Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the
Plans or Programs
—
$
—
—
—
—
—
—
—
—
—
—
—
Stock 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 31,
2018, our board of directors extended our repurchase program and we expect the repurchase program to be in place until the earlier of December 31,
2019 or until $50.0 million of outstanding shares of common stock have been repurchased. We did not repurchase any shares of our common stock
under the repurchase program during the year ended December 31, 2018.
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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, 2018. 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.
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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, 2018, December 31, 2017, December 31, 2016, December 31, 2015 and December 31, 2014, 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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The below selected financial and other data is for NMFC.
(in thousands except shares and per share data)
New Mountain Finance Corporation
2018
2017
2016
2015
2014
Year Ended December 31,
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 (depreciation) appreciation of
investments
Net change in unrealized (depreciation) appreciation of
securities purchased under collateralized agreements to
resell
(Provision) benefit 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
Unsecured Notes
Convertible Notes
SBA-guaranteed debentures
NMFC Credit Facility
DB 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 YTM at Cost on debt portfolio at
period end (unaudited)(7)
Weighted average YTM at Cost for Investments at
period end (unaudited)(7)
Weighted average shares outstanding for the period
(basic)
Weighted average shares outstanding for the period
(diluted)
Portfolio turnover(6)
$
$
$
$
$
$
231,465
—
125,433
—
106,032
(9,657)
$
197,806
—
95,602
—
102,204
(39,734)
$
168,084
—
79,976
—
88,108
(16,717)
$
153,855
—
71,360
—
82,495
(12,789)
—
—
—
—
91,923
43,678
34,727
20,808
80,066
357
9,508
(22,206)
50,794
40,131
(35,272)
(43,863)
(1,704)
(112)
72,353
(4,006)
140
109,398
(486)
642
111,678
(296)
(1,183)
32,955
—
(493)
45,575
13.22
$
13.63
$
13.46
$
13.08
$
13.83
$
0.95
0.91
1.36
2,448,666
512,563
336,750
270,301
165,000
60,000
57,000
1,006,269
$
1.47
1.38
1.36
1,928,018
312,363
145,000
155,412
150,000
122,500
—
1,034,975
$
1.72
1.60
1.36
1,656,018
333,513
90,000
155,523
121,745
10,000
—
938,562
0.55
0.55
1.36
1,588,146
419,313
—
115,000
117,745
90,000
—
836,908
$
2.70%
7.16%
92
1,321,559
802,964
$
$
5.54%
11.77%
84
999,677
767,360
$
$
19.68%
13.98%
78
558,068
547,078
$
$
(4.00)%
4.32 %
75
612,737
483,936
$
$
10.4%
10.9%
11.1%
10.7 %
10.4%
10.9%
10.5%
10.7 %
0.88
0.86
1.48
1,500,868
468,108
—
115,000
37,500
50,000
—
802,170
9.66%
6.56%
71
720,871
384,568
10.7%
10.6%
76,022,375
74,171,268
64,918,191
59,715,290
51,846,164
88,627,741
83,995,395
72,863,387
66,968,089
56,157,835
36.75%
41.98%
36.07%
33.93 %
29.51%
53
Table of Contents
(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, 2018, December 31, 2017,
December 31, 2016 and December 31, 2014, there was no anti-dilution.
(2) 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.
(3) 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.
(4)
(5)
(6)
(7)
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.
For the year ended December 31, 2014, amounts include our investment activity and the investment activity of the Predecessor Operating
Company.
The weighted average YTM 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. The YTM at Cost for Investments calculation assumes that all investments, including secured
collateralized agreements, 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. YTM at Cost and YTM at Cost for Investments calculations exclude the impact of existing leverage. YTM
at Cost and YTM at Cost for Investments use 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. 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
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 Group, L.P. (together with New
Mountain Capital, L.L.C. and its affiliates, "New Mountain Capital") whose ultimate owners include Steven B. Klinsky and related
other vehicles; 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 (the "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.
55
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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"). 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"). Since NMFC’s IPO, and through December 31, 2018, NMFC raised approximately $614.6 million in net proceeds from
additional offerings of its common stock.
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. 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. The Investment Adviser also manages New Mountain Guardian Partners II, L.P., a Delaware limited partnership, and New
Mountain Guardian II Offshore, L.P., a Cayman Islands exempted limited partnership, (together "Guardian II"), which commenced operations in April
2017. 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. 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 I") and its general partner, New Mountain Finance SBIC G.P.,
L.L.C. ("SBIC I GP"), were organized in Delaware as a limited partnership and limited liability company, respectively. New Mountain Finance SBIC II,
L.P. (“SBIC II" ) and its general partner, New Mountain Finance SBIC II G.P., L.L.C. (“SBIC II GP”), were also organized in Delaware as a limited
partnership and limited liability company, respectively. SBIC I, SBIC I GP, SBIC II and SBIC II GP are our consolidated wholly-owned direct and
indirect subsidiaries. SBIC I and SBIC II received licenses from the United States ("U.S.") Small Business Administration (the "SBA") to operate as
small business investment companies ("SBICs") under Section 301(c) of the Small Business Investment Act of 1958, as amended (the "1958 Act").
Our wholly-owned subsidiary, New Mountain Net Lease Corporation ("NMNLC"), a Maryland corporation, was formed to acquire commercial real
properties that are subject to "triple net" leases and intends to qualify as a real estate investment trust, or REIT, within the meaning of Section 856
(a) of the Code. During the year ended December 31, 2018, New Mountain Finance DB, L.L.C. ("NMFDB") was organized in Delaware as a limited
liability company whose assets are used to secure NMFDB's credit facility.
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. The first lien debt may include
traditional first lien senior secured loans or unitranche loans. Unitranche loans combine characteristics of traditional first lien senior secured loans
as well as second lien and subordinated loans. Unitranche loans will expose us to the risks associated with second lien and subordinated loans to
the extent we invest in the “last out” tranche. In some cases, our investments may also include equity interests.
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 I's and SBIC II's investment objectives are to generate current
income and capital appreciation under our investment criteria. However, SBIC I’s and SBIC II's investments must be in SBA eligible small
businesses. Our portfolio may be concentrated in a limited number of industries. As of December 31, 2018, our top five industry concentrations were
business services, software, healthcare services, education and investment funds.
As of December 31, 2018, our net asset value was $1,006.3 million and our portfolio had a fair value of approximately $2,342.0 million in 92
portfolio companies, with a weighted average yield to maturity at cost for income producing investments ("YTM at Cost") and a weighted average
yield to maturity at cost for all investments ("YTM at Cost for Investments") of approximately 10.4% and 10.4%, respectively. This YTM 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
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maturities with no prepayments or losses and exited at par at maturity. The YTM at Cost for Investments calculation assumes that all investments,
including secured collateralized agreements, 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. YTM at Cost and YTM at Cost for Investments calculations exclude the impact of existing
leverage. YTM at Cost and YTM at Cost for Investments use 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.
Recent Developments
On January 8, 2019 and January 25, 2019, we entered into certain Joinder Supplements (the "Joinders") to add Old Second National Bank
and Sumitomo Mitsui Trust Bank, Limited, New York, respectively, as new lenders under the Holdings Credit Facility. After giving effect to the
Joinders, the aggregate commitments of the lenders under the Holdings Credit Facility equals $675.0 million. The Holdings Credit Facility continues
to have a revolving period ending on October 24, 2020, and will still mature on October 24, 2022.
On February 14, 2019, we completed a public offering of 4,312,500 shares of our common stock (including 562,500 shares of common stock
that were issued pursuant to the full exercise of the overallotment option granted to the underwriters to purchase additional shares) at a public
offering price of $13.57 per share. The Investment Adviser paid all of the underwriters' sales load of $0.42 per share and an additional supplemental
payment of $0.18 per share to the underwriters, which reflects the difference between the public offering price of $13.57 per share and the net
proceeds of $13.75 per share received by us in this offering. All payments made by the Investment Adviser are not subject to reimbursement by us.
We received total net proceeds of approximately $59.3 million in connection with this offering.
On February 22, 2019, our board of directors declared a first quarter 2019 distribution of $0.34 per share payable on March 29, 2019 to
holders of record as of March 15, 2019.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United
States of America ("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, NMNLC, NMFDB, SBIC I, SBIC I GP,
SBIC II, SBIC II GP, NMF Ancora, NMF QID and NMF YP. We are an investment company following accounting and reporting guidance as
described in Accounting Standards Codification Topic 946, Financial Services—Investment Companies, ("ASC 946").
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
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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:
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.
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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. 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.
The following table summarizes the levels in the fair value hierarchy that our portfolio investments fall into as of December 31, 2018:
(in thousands)
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
1,173,459
662,556
65,297
440,641
2,341,953
$
$
— $
—
—
—
— $
185,931 $
355,741
25,210
—
566,882 $
987,528
306,815
40,087
440,641
1,775,071
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, 2018, we used the relevant EBITDA multiple ranges set forth in the table below to determine the
enterprise value of our portfolio companies. We believe these were reasonable ranges 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, 2018, 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, 2018 were as follows:
(in thousands)
Type
Fair Value as of
December 31, 2018
Approach
Unobservable Input
Low
High
Range
First lien
$
797,985 Market & income approach
Second lien
Subordinated
129,837 Market quote
59,706 Other
102,963 Market & income approach
203,852 Market quote
40,087 Market & income approach
Equity and other
439,977 Market & income approach
664 Black Scholes analysis
$
1,775,071
EBITDA multiple
Revenue multiple
Discount rate
Broker quote
N/A(1)
EBITDA multiple
Discount rate
Broker quote
EBITDA multiple
Discount rate
EBITDA multiple
Discount rate
Expected life in years
Volatility
Discount rate
2.0x
3.5x
7.0%
N/A
N/A
8.5x
10.0%
N/A
5.0x
10.9%
0.4x
6.5%
7.3
37.9%
2.9%
32.0x
6.5x
15.3%
N/A
N/A
15.0x
19.7%
N/A
13.0x
21.4%
18.0x
25.8%
7.3
37.9%
2.9%
Weighted
Average
12.1x
5.8x
9.6%
N/A
N/A
11.1x
12.8%
N/A
10.2x
16.3%
10.3x
13.5%
7.3
37.9%
2.9%
(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 August 31, 2021, subject to earlier termination pursuant to certain terms of the SLP I Agreement. The term may be extended pursuant
to certain terms of the SLP I Agreement. SLP I's re-investment period was through July 31, 2018. In September 2018, the re-investment period was
extended until August 31, 2019. SLP I invests in senior secured loans issued by companies within our core industry verticals. These investments are
typically broadly syndicated first lien loans.
SLP I is capitalized with $93.0 million of capital commitments and $265.0 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
commitments. As of December 31, 2018, SLP I had total investments with an aggregate fair value of approximately $327.2 million, debt outstanding of
$242.6 million and capital that had been called and funded of $93.0 million. As of December 31, 2017, SLP I had total investments with an aggregate
fair value of approximately $348.7 million, debt outstanding of $223.7 million and capital that had been called and funded of $93.0 million. Our
investment in SLP I is disclosed on our Consolidated Schedule of Investments as of December 31, 2018 and December 31, 2017.
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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, 2018,
December 31, 2017 and December 31, 2016, we earned approximately $1.2 million, $1.2 million and $1.2 million, respectively, in management fees
related to SLP I, which is included in other income. As of December 31, 2018 and December 31, 2017, 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, 2018, December 31,
2017 and December 31, 2016, we earned approximately $3.2 million, $3.5 million and $3.7 million, respectively, of dividend income related to SLP I,
which is included in dividend income. As of December 31, 2018 and December 31, 2017, approximately $0.8 million and $0.8 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 were 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.
As of December 31, 2018, we and SkyKnight have committed and contributed $79.4 million and $20.6 million, respectively, of equity to SLP II. Our
investment in SLP II is disclosed on our Consolidated Schedule of Investments as of December 31, 2018 and December 31, 2017.
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 the LIBOR plus 1.75% per annum. Effective April 1, 2018, SLP II's revolving credit facility bears interest
at a rate of LIBOR plus 1.60% per annum. As of December 31, 2018 and December 31, 2017, SLP II had total investments with an aggregate fair value
of approximately $336.9 million and $382.5 million, respectively, and debt outstanding under its credit facility of $243.2 million and $266.3 million,
respectively. As of December 31, 2018 and December 31, 2017, none of SLP II's investments were on non-accrual. Additionally, as of December 31,
2018 and December 31, 2017, SLP II had unfunded commitments in the form of delayed draws of $5.9 million and $4.9 million, respectively. Below is a
summary of SLP II's portfolio, along with a listing of the individual investments in SLP II's portfolio as of December 31, 2018 and December 31, 2017:
(in thousands)
First lien investments (1)
Weighted average interest rate on first lien investments (2)
Number of portfolio companies in SLP II
Largest portfolio company investment (1)
Total of five largest portfolio company investments (1)
December 31, 2018
December 31, 2017
348,577
6.84 %
31
17,150
80,766
386,100
6.05 %
35
17,369
81,728
(1)
(2)
Reflects principal amount or par value of investments.
Computed as the all in interest rate in effect on accruing investments divided by the total principal amount of investments.
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Table of Contents
The following table is a listing of the individual investments in SLP II's portfolio as of December 31, 2018:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
(in thousands)
(in thousands)
(in thousands)
Funded Investments - First lien
Access CIG, LLC
ADG, LLC
Beaver-Visitec International Holdings, Inc.
Brave Parent Holdings, Inc.
CentralSquare Technologies, LLC
CHA Holdings, Inc.
CommerceHub, Inc.
Drilling Info Holdings, Inc.
Greenway Health, LLC
GOBP Holdings, Inc.
Idera, Inc.
J.D. Power (fka J.D. Power and Associates)
Keystone Acquisition Corp.
LSCS Holdings, Inc.
LSCS Holdings, Inc.
Market Track, LLC
Medical Solutions Holdings, Inc.
Ministry Brands, LLC
Ministry Brands, LLC
Ministry Brands, LLC
NorthStar Financial Services Group, LLC
Peraton Corp. (fka MHVC Acquisition Corp.)
Poseidon Intermediate, LLC
Premise Health Holding Corp.
Project Accelerate Parent, LLC
PSC Industrial Holdings Corp.
Quest Software US Holdings Inc.
Salient CRGT Inc.
Sierra Acquisition, Inc.
SSH Group Holdings, Inc.
Wirepath LLC
WP CityMD Bidco LLC
YI, LLC
Zywave, Inc.
Total Funded Investments
Unfunded Investments - First lien
Access CIG, LLC
CHA Holdings, Inc.
Drilling Info Holdings, Inc.
Ministry Brands, LLC
Premise Health Holding Corp.
Total Unfunded Investments
Total Investments
Business Services
Healthcare Services
Healthcare Products
Software
Software
Business Services
Software
Business Services
Software
Retail
Software
Business Services
Healthcare Services
Healthcare Services
Healthcare Services
Business Services
Healthcare Services
Software
Software
Software
Software
Federal Services
Software
Healthcare Services
Business Services
Industrial Services
Software
Federal Services
Food & Beverage
Education
Distribution & Logistics
Healthcare Services
Healthcare Services
Software
Business Services
Business Services
Business Services
Software
Healthcare Services
6.46% (L + 3.75%)
2/27/2025
$
7.63% (L + 4.75%)
9/28/2023
6.62% (L + 4.00%)
8/21/2023
6.52% (L + 4.00%)
4/18/2025
6.27% (L + 3.75%)
8/29/2025
7.30% (L + 4.50%)
4/10/2025
6.27% (L + 3.75%)
5/21/2025
6.77% (L + 4.25%)
7/30/2025
6.56% (L + 3.75%)
6.55% (L + 3.75%)
2/16/2024
10/22/2025
7.03% (L + 4.50%)
6/28/2024
6.27% (L + 3.75%)
9/7/2023
8.05% (L + 5.25%)
5/1/2024
6.86% (L + 4.25%)
3/17/2025
6.89% (L + 4.25%)
3/17/2025
6.87% (L + 4.25%)
6/5/2024
6.27% (L + 3.75%)
6/14/2024
6.52% (L + 4.00%)
12/2/2022
6.52% (L + 4.00%)
12/2/2022
6.52% (L + 4.00%)
12/2/2022
6.10% (L + 3.50%)
5/25/2025
8.06% (L + 5.25%)
4/29/2024
6.78% (L + 4.25%)
8/15/2022
6.55% (L + 3.75%)
7/10/2025
6.64% (L + 4.25%)
6.21% (L + 3.75%)
1/2/2025
10/11/2024
6.78% (L + 4.25%)
5/16/2025
8.27% (L + 5.75%)
6.02% (L + 3.50%)
2/28/2022
11/11/2024
6.77% (L + 4.25%)
7/30/2025
6.71% (L + 4.00%)
8/5/2024
6.30% (L + 3.50%)
6/7/2024
6.80% (L + 4.00%)
7.52% (L + 5.00%)
11/7/2024
11/17/2022
—
—
—
—
—
2/27/2019
10/10/2019
7/30/2020
10/18/2019
7/10/2020
$
$
$
$
8,825
16,862
14,664
15,422
15,000
10,805
2,488
12,242
14,775
2,500
12,492
14,962
5,332
5,321
1,374
11,820
4,432
2,116
600
12,285
7,463
10,342
14,729
1,386
14,887
10,395
15,000
13,509
3,713
8,978
14,963
10,823
15,064
17,150
342,719
1,108
2,143
1,230
1,267
110
5,858
348,577
$
$
$
$
$
8,785
16,740
14,492
15,369
14,964
10,760
2,476
12,190
14,718
2,494
12,388
14,920
5,289
5,312
1,371
11,772
4,413
2,109
597
12,238
7,428
10,301
14,727
1,380
14,821
10,307
14,930
13,418
3,696
8,956
14,963
10,801
15,053
17,091
341,269
$
$
$
—
(11)
(5)
(6)
—
(22) $
$
341,247
8,605
16,609
14,517
14,902
14,648
10,774
2,419
12,196
14,406
2,438
12,242
14,588
5,226
5,294
1,367
11,347
4,343
2,116
600
12,285
7,313
10,084
14,644
1,369
14,663
10,161
14,535
13,306
3,685
8,753
14,738
10,620
14,971
17,150
336,914
(28)
(6)
(10)
—
(1)
(45)
336,869
(1)
(2)
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, 2018.
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.
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The following table is a listing of the individual investments in SLP II's portfolio as of December 31, 2017:
Portfolio Company and Type of Investment
Funded Investments - First lien
ADG, LLC
ASG Technologies Group, Inc.
Beaver-Visitec International Holdings, Inc.
DigiCert, Inc.
Emerald 2 Limited
Evo Payments International, LLC
Explorer Holdings, Inc.
Globallogic Holdings Inc.
Greenway Health, LLC
Idera, Inc.
J.D. Power (fka J.D. Power and Associates)
Keystone Acquisition Corp.
Market Track, LLC
McGraw-Hill Global Education Holdings, LLC
Medical Solutions Holdings, Inc.
Ministry Brands, LLC
Ministry Brands, LLC
Navex Global, Inc.
Navicure, Inc.
OEConnection LLC
Pathway Partners Vet Management Company LLC
Pathway Partners Vet Management Company LLC
Peraton Corp. (fka MHVC Acquisition Corp.)
Poseidon Intermediate, LLC
Project Accelerate Parent, LLC
PSC Industrial Holdings Corp.
Quest Software US Holdings Inc.
Salient CRGT Inc.
Severin Acquisition, LLC
Shine Acquisitoin Co. S.à.r.l / Boing US Holdco Inc.
Sierra Acquisition, Inc.
TMK Hawk Parent, Corp.
University Support Services LLC (St. George's University
Scholastic Services LLC)
Vencore, Inc. (fka SI Organization, Inc., The)
WP CityMD Bidco LLC
YI, LLC
Zywave, Inc.
Total Funded Investments
Unfunded Investments - First lien
Pathway Partners Vet Management Company LLC
TMK Hawk Parent, Corp.
YI, LLC
Total Unfunded Investments
Total Investments
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
(in thousands)
(in thousands)
(in thousands)
Healthcare Services
Software
Healthcare Products
Business Services
Business Services
Business Services
Healthcare Services
Business Services
Software
Software
Business Services
Healthcare Services
Business Services
Education
Healthcare Services
Software
Software
Software
Healthcare Services
Business Services
Consumer Services
Consumer Services
Federal Services
Software
Business Services
Industrial Services
Software
Federal Services
Software
Consumer Services
Food & Beverage
Distribution & Logistics
Education
Federal Services
Healthcare Services
Healthcare Services
Software
6.32% (L + 4.75%)
9/28/2023
$
6.32% (L + 4.75%)
7/31/2024
6.69% (L + 5.00%)
6.13% (L + 4.75%)
5.69% (L + 4.00%)
5.57% (L + 4.00%)
8/21/2023
10/31/2024
5/14/2021
12/22/2023
5.13% (L + 3.75%)
5/2/2023
6.19% (L + 4.50%)
6/20/2022
5.94% (L + 4.25%)
2/16/2024
6.57% (L + 5.00%)
6/28/2024
5.94% (L + 4.25%)
9/7/2023
6.94% (L + 5.25%)
5/1/2024
5.94% (L + 4.25%)
6/5/2024
5.57% (L + 4.00%)
5/4/2022
5.82% (L + 4.25%)
6/14/2024
6.38% (L + 5.00%)
12/2/2022
6.38% (L + 5.00%)
5.82% (L + 4.25%)
5.11% (L + 3.75%)
5.69% (L + 4.00%)
5.82% (L + 4.25%)
5.82% (L + 4.25%)
12/2/2022
11/19/2021
11/1/2024
11/22/2024
10/10/2024
10/10/2024
6.95% (L + 5.25%)
4/29/2024
5.82% (L + 4.25%)
8/15/2022
5.94% (L + 4.25%)
5.71% (L + 4.25%)
6.92% (L + 5.50%)
1/2/2025
10/11/2024
10/31/2022
7.32% (L + 5.75%)
2/28/2022
6.32% (L + 4.75%)
7/30/2021
4.88% (L + 3.50%)
5.68% (L + 4.25%)
10/3/2024
11/11/2024
4.88% (L + 3.50%)
8/28/2024
5.82% (L + 4.25%)
6.44% (L + 4.75%)
7/6/2022
11/23/2019
5.69% (L + 4.00%)
6/7/2024
5.69% (L + 4.00%)
6.61% (L + 5.00%)
11/7/2024
11/17/2022
$
Consumer Services
Distribution & Logistics
Healthcare Services
—
—
—
10/10/2019
$
3/28/2018
11/7/2018
$
$
$
17,034
7,481
14,812
10,000
1,266
17,369
2,940
9,677
14,925
12,619
13,357
5,386
11,940
9,850
6,965
2,138
7,768
14,897
15,000
15,000
6,963
291
10,448
14,881
15,000
10,500
9,899
14,433
14,888
15,000
3,750
1,671
$
16,890
7,446
14,688
9,951
1,211
17,292
2,917
9,611
14,858
12,499
13,308
5,336
11,884
9,813
6,932
2,128
7,735
14,724
14,926
14,925
6,929
290
10,399
14,877
14,925
10,398
9,775
14,310
14,827
14,964
3,731
1,667
1,875
10,686
14,963
8,240
17,325
381,237
2,728
75
2,060
4,863
386,100
$
$
$
$
1,875
10,673
14,928
8,204
17,252
379,098
$
(14 ) $
—
(9 )
(23 ) $
$
379,075
16,779
7,547
14,813
10,141
1,267
17,492
2,973
9,755
15,074
12,556
13,407
5,424
11,940
9,844
7,043
2,138
7,768
14,971
15,000
14,981
6,980
292
10,526
14,955
15,038
10,500
10,071
14,559
14,813
15,108
3,789
1,686
1,900
10,835
15,009
8,230
17,325
382,529
7
1
(3 )
5
382,534
(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, 2017.
(2)
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.
63
Table of Contents
Below is certain summarized financial information for SLP II as of December 31, 2018 and December 31, 2017 and for the years ended
December 31, 2018, December 31, 2017 and December 31, 2016:
Selected Balance Sheet Information:
Investments at fair value (cost of $341,247 and $379,075, respectively)
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 (depreciation) appreciation of investments
Net increase in members' capital
December 31, 2018
December 31, 2017
(in thousands)
(in thousands)
$
$
$
$
$
336,869 $
7,620
344,489 $
243,170 $
(1,374)
—
3,250
2,869
247,915
96,574 $
344,489 $
382,534
8,065
390,599
266,270
(1,966)
15,964
3,500
2,891
286,659
103,940
390,599
Year Ended December 31,
2018
2017
2016(1)
(in thousands)
(in thousands)
(in thousands)
$
$
$
24,654
199
24,853
10,474
681
11,155
13,698
$
22,551
351
22,902
8,356
697
9,053
13,849
782
(7,837)
6,643
$
2,281
(822)
15,308
$
7,463
572
8,035
3,558
650
4,208
3,827
599
4,281
8,707
(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 years ended December 31, 2018, December 31, 2017 and December 31, 2016, we earned approximately $11.1 million, $12.4 million and
$3.5 million, respectively, of dividend income related to SLP II, which is included in dividend income. As of December 31, 2018 and December 31,
2017, approximately $2.6 million and $2.8 million, respectively, 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 ("ASC 810"), 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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Table of Contents
NMFC Senior Loan Program III LLC
NMFC Senior Loan Program III LLC ("SLP III") was formed as a Delaware limited liability company and commenced operations on April 25,
2018. SLP III is structured as a private joint venture investment fund between us and SkyKnight Income II, LLC (“SkyKnight II”) and operates under
a limited liability company agreement (the "SLP III 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 III, which has equal representation from us and SkyKnight II. SLP III
has a five year investment period and will continue in existence until April 25, 2025. The investment period may be extended for up to one year
pursuant to certain terms of the SLP III Agreement.
SLP III 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 III to call down on capital commitments requires approval by the board of managers of SLP III. As
of December 31, 2018, we and SkyKnight II have committed $80.0 million and $20.0 million, respectively, of equity to SLP III. As of December 31,
2018, we and SkyKnight II have contributed $78.4 million and $19.6 million, respectively, of equity to SLP III. Our investment in SLP III is disclosed
on our Consolidated Schedule of Investments as of December 31, 2018.
On May 2, 2018, SLP III closed its $300.0 million revolving credit facility with Citibank, N.A., which matures on May 2, 2023 and bears
interest at a rate of LIBOR plus 1.70% per annum. As of December 31, 2018, SLP III had total investments with an aggregate fair value of
approximately $365.4 million and debt outstanding under its credit facility of $280.3 million. As of December 31, 2018, none of SLP III's investments
were on non-accrual. Additionally, as of December 31, 2018, SLP III had unfunded commitments in the form of delayed draws of $8.8 million. Below
is a summary of SLP III's portfolio, along with a listing of the individual investments in SLP III's portfolio as of December 31, 2018:
(in thousands)
First lien investments (1)
Weighted average interest rate on first lien investments (2)
Number of portfolio companies in SLP III
Largest portfolio company investment (1)
Total of five largest portfolio company investments (1)
December 31, 2018
383,289
6.50%
39
18,958
85,938
(1)
(2)
Reflects principal amount or par value of investment.
Computed as the all in interest rate in effect on accruing investments divided by the total principal amount of investments.
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Table of Contents
The following table is a listing of the individual investments in SLP III's portfolio as of December 31, 2018:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
( in thousands)
$
$
( in thousands)
( in thousands)
1,216
1,025
14,963
14,925
15,000
1,275
997
14,925
14,963
11,940
1,686
17,591
8,000
15,000
14,821
17,329
1,995
2,294
5,985
4,827
4,596
600
14,925
14,963
2,985
10,437
4,988
14,925
1,830
6,500
4,975
15,588
13,862
15,000
2,481
14,963
Funded Investments - First lien
Access CIG, LLC
Affordable Care Holding Corp.
Bracket Intermediate Holding Corp.
Brave Parent Holdings, Inc.
CentralSquare Technologies, LLC
Certara Holdco, Inc.
CHA Holdings, Inc.
CommerceHub, Inc.
CRCI Longhorn Holdings, Inc.
Dentalcorp Perfect Smile ULC
Dentalcorp Perfect Smile ULC
Drilling Info Holdings, Inc.
Financial & Risk US Holdings, Inc.
GOBP Holdings, Inc.
Greenway Health, LLC
Heartland Dental, LLC
HIG Finance 2 Limited
Idera, Inc.
J.D. Power (fka J.D. Power and Associates)
Market Track, LLC
Ministry Brands, LLC
Ministry Brands, LLC
National Intergovernmental Purchasing Alliance
Company
Navex Topco, Inc.
Navicure, Inc.
Netsmart Technologies, Inc.
Newport Group Holdings II, Inc.
NorthStar Financial Services Group, LLC
OEConnection LLC
Outcomes Group Holdings, Inc.
Pelican Products, Inc.
Peraton Corp. (fka MHVC Acquisition Corp.)
Premise Health Holding Corp.
Quest Software US Holdings Inc.
Sierra Enterprises, LLC
SSH Group Holdings, Inc.
University Support Services LLC (St. George's
University Scholastic Services LLC)
VT Topco, Inc.
VT Topco, Inc.
Wirepath LLC
WP CityMD Bidco LLC
YI, LLC
Total Funded Investments
Unfunded Investments - First lien
Dentalcorp Perfect Smile ULC
Drilling Info Holdings, Inc.
Heartland Dental, LLC
Business Services
Healthcare Services
Healthcare Services
Software
Software
Healthcare I.T.
Business Services
Software
Business Services
Healthcare Services
Healthcare Services
Business Services
Business Services
Retail
Software
Healthcare Services
Business Services
Software
Business Services
Business Services
Software
Software
Business Services
Software
Healthcare Services
Healthcare I.T.
Business Services
Software
Business Services
Healthcare Services
Business Products
Federal Services
Healthcare Services
Software
Food & Beverage
Education
Education
Business Services
Business Services
Distribution & Logistics
Healthcare Services
Healthcare Services
6.46% (L + 3.75%)
2/27/2025
$
7.25% (L + 4.75%)
10/24/2022
7.00% (L + 4.25%)
9/5/2025
6.52% (L + 4.00%)
4/18/2025
6.27% (L + 3.75%)
8/29/2025
6.30% (L + 3.50%)
8/15/2024
7.30% (L + 4.50%)
4/10/2025
6.27% (L + 3.75%)
5/21/2025
5.89% (L + 3.50%)
6.27% (L + 3.75%)
6.27% (L + 3.75%)
8/8/2025
6/6/2025
6/6/2025
6.77% (L + 4.25%)
7/30/2025
6.27% (L + 3.75%)
10/1/2025
6.55% (L + 3.75%)
10/22/2025
6.56% (L + 3.75%)
2/16/2024
6.27% (L + 3.75%)
4/30/2025
6.06% (L + 3.50%)
12/20/2024
7.03% (L + 4.50%)
6/28/2024
6.27% (L + 3.75%)
6.87% (L + 4.25%)
9/7/2023
6/5/2024
6.52% (L + 4.00%)
12/2/2022
6.52% (L + 4.00%)
12/2/2022
6.55% (L + 3.75%)
5/23/2025
5.78% (L + 3.25%)
9/5/2025
6.27% (L + 3.75%)
11/1/2024
6.27% (L + 3.75%)
4/19/2023
6.54% (L + 3.75%)
9/12/2025
6.10% (L + 3.50%)
5/25/2025
6.53% (L + 4.00%)
11/22/2024
6.28% (L + 3.50%)
10/24/2025
5.88% (L + 3.50%)
5/1/2025
8.06% (L + 5.25%)
4/29/2024
6.55% (L + 3.75%)
7/10/2025
6.78% (L + 4.25%)
5/16/2025
6.02% (L + 3.50%)
11/11/2024
6.77% (L + 4.25%)
7/30/2025
6.03% (L + 3.50%)
7/17/2025
6.55% (L + 3.75%)
6.55% (L + 3.75%)
6.71% (L + 4.00%)
6.30% (L + 3.50%)
8/1/2025
8/1/2025
8/5/2024
6/7/2024
6.80% (L + 4.00%)
11/7/2024
Healthcare Services
Business Services
Healthcare Services
—
—
—
$
6/6/2020
$
7/30/2020
4/30/2020
3,790
7,980
1,004
17,477
14,887
4,965
374,478
1,308
1,367
1,586
$
$
1,216
1,030
14,890
14,874
14,964
1,280
997
14,856
14,891
11,912
1,685
17,507
7,980
14,963
14,831
17,249
1,985
2,289
5,985
4,821
4,576
597
14,912
14,890
2,985
10,437
4,963
14,856
1,843
6,484
4,963
15,517
13,796
14,930
2,478
14,927
3,772
7,961
1,004
17,477
14,887
4,983
373,443
$
(3 ) $
(7 )
—
1,185
1,005
14,813
14,421
14,648
1,255
995
14,515
14,588
11,701
1,652
17,525
7,512
14,625
14,450
16,593
1,939
2,248
5,835
4,633
4,596
600
14,552
14,102
2,925
10,307
4,875
14,628
1,789
6,394
4,726
15,199
13,689
14,535
2,463
14,588
3,759
7,882
992
17,215
14,608
4,935
365,497
(26 )
(11 )
(67 )
Ministry Brands, LLC
Premise Health Holding Corp.
University Support Services LLC (St. George's
University Scholastic Services LLC)
VT Topco, Inc.
Total Unfunded Investments
Total Investments
Software
Healthcare Services
Education
Business Services
10/18/2019
7/10/2020
7/17/2019
8/1/2020
$
$
1,267
1,103
1,187
993
8,811
383,289
(6 )
(3 )
—
(2 )
(21 ) $
$
373,422
$
$
—
(14 )
(10 )
(12 )
(140 )
365,357
—
—
—
—
66
Table of Contents
(1)
(2)
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, 2018.
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 III.
Below is certain summarized financial information for SLP III as of December 31, 2018 and for the year ended December 31, 2018:
Selected Balance Sheet Information:
Investments at fair value (cost of $373,422)
Cash and other assets
Total assets
Credit facility
Deferred financing costs
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
Net decrease in members' capital
(1)
SLP III commenced operations on April 25, 2018.
December 31, 2018
(in thousands)
365,357
9,138
374,495
280,300
(2,831)
2,600
4,415
284,484
90,011
374,495
Year Ended
December 31, 2018(1)
(in thousands)
9,572
207
9,779
5,402
509
5,911
3,868
9
(8,065)
(4,188)
$
$
$
$
$
$
$
For the year ended December 31, 2018, we earned approximately $3.0 million of dividend income related to SLP III, which is included in
dividend income. As of December 31, 2018 approximately $2.1 million of dividend income related to SLP III was included in interest and dividend
receivable.
We have determined that SLP III 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, ASC 810 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 III.
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Table of Contents
New Mountain Net Lease Corporation
NMNLC was formed to acquire commercial real estate properties that are subject to "triple net" leases. NMNLC's investments are disclosed
on our Consolidated Schedule of Investments as of December 31, 2018.
Below is certain summarized property information for NMNLC as of December 31, 2018:
Portfolio Company
Tenant
Expiration Date
Location
Square Feet
December 31, 2018
Lease
Total
Fair Value as of
(in thousands)
(in thousands)
NM NL Holdings LP / NM
GP Holdco LLC
NM GLCR LP
NM CLFX LP
NM APP Canada Corp.
NM APP US LLC
NM DRVT Jonesboro, LLC FMH Conveyors, LLC
NM KRLN LLC
Various
Arctic Glacier U.S.A.
Victor Equipment Company
A.P. Plasman, Inc.
Plasman Corp, LLC / A-Brite LP
Kirlin Group, LLC
Various
2/28/2038
8/31/2033
9/30/2031
9/30/2033
10/31/2031
6/30/2029
Various
CA
TX
Canada
AL / OH
AR
MD
NM JRA LLC
J.R. Automation Technologies,
LLC
1/31/2031
MI
Collateralized agreements or repurchase financings
Various
214
423
436
261
195
95
88
$
$
33,703
20,343
12,770
9,727
5,912
5,619
4,205
2,537
94,816
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, 2018 and December 31, 2017, we held one collateralized agreement to resell with a cost basis of $30.0 million
and $30.0 million, respectively, and a fair value of $23.5 million and $25.2 million, respectively. The collateralized agreement to resell is guaranteed by
a private hedge fund. The private hedge fund is currently in liquidation under the laws of the Cayman Islands. Pursuant to the terms of the
collateralized agreement, the private hedge fund was obligated to repurchase the collateral from us at the par value of the collateralized agreement.
The private hedge fund has breached its agreement to repurchase the collateral under the collateralized agreement. The default by the private hedge
fund did not release the collateral to us, therefore, we do not have full rights and title to the collateral. A claim has been filed with the Cayman
Islands joint official liquidators to resolve this matter. The joint official liquidators have recognized our contractual rights under the collateralized
agreement. We continue to exercise our rights under the collateralized agreement and continue to monitor the liquidation process of the private
hedge fund. The fair value of the collateralized agreement to resell is reflective of the increased risk of the position.
PPVA Black Elk (Equity) LLC
On May 3, 2013, we entered into a collateralized securities purchase and put agreement (the “SPP Agreement”) with a private hedge fund.
Under the SPP Agreement, we purchased twenty million Class E Preferred Units of Black Elk Energy Offshore Operations, LLC (“Black Elk”) for
$20.0 million with a corresponding obligation of the private hedge fund to repurchase the preferred units for $20.0 million plus other amounts due
under the SPP Agreement. The majority owner of Black Elk was the private hedge fund. In August 2014, we received a payment of $20.5 million, the
full amount due under the SPP Agreement.
In August 2017, a trustee (the “Trustee”) for Black Elk informed us that the Trustee intended to assert a fraudulent conveyance claim (the
“Claim”) against us and one of its affiliates seeking the return of the $20.5 million repayment. Black Elk filed a Chapter 11 bankruptcy petition
pursuant to the United States Bankruptcy Code in August 2015. The Trustee alleges that individuals affiliated with the private hedge fund
conspired with Black Elk and others to improperly use proceeds from the sale of certain Black Elk assets to repay, in August 2014, the private hedge
fund’s obligation to us under the SPP Agreement. We were unaware of these claims at the time the repayment was received. The private hedge fund
is currently in liquidation under the laws of the Cayman Islands.
On December 22, 2017, we settled the Trustee’s $20.5 million Claim for $16.0 million and filed a claim with the Cayman Islands joint official
liquidators of the private hedge fund for $16.0 million that is owed to us under the SPP Agreement. The SPP Agreement was restored and is in effect
since repayment has not been made. We continue to exercise our rights under the SPP
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Table of Contents
Agreement and continue to monitor the liquidation process of the private hedge fund. During the year ended December 31, 2018, we received a $1.5
million payment from our insurance carrier in respect to the settlement. As of December 31, 2018, the SPP Agreement has a cost basis of $14.5 million
and a fair value of $11.4 million, which is reflective of the higher inherent risk in this transaction.
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 are generally due at maturity or when redeemed by the issuer. For the years ended December 31, 2018, December 31, 2017
and December 31, 2016, we recognized PIK and non-cash interest from investments of $8.6 million, $6.4 million and $4.3 million, respectively, and PIK
and non-cash dividends from investments of and $24.9 million, $17.8 million and $3.2 million, respectively.
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 collectibility. 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.
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, where the risk of loss has materially increased 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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Table of Contents
The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of December 31, 2018:
(in millions)
Investment Rating
Investment Rating 1
Investment Rating 2
Investment Rating 3
Investment Rating 4
Cost
Percent
Fair Value
Percent
As of December 31, 2018
$
$
147.1
2,181.1
—
1.5
2,329.7
6.3 % $
93.6 %
— %
0.1 %
100.0 % $
147.9
2,194.0
—
0.1
2,342.0
6.3 %
93.7 %
— %
0.0 %
100.0 %
As of December 31, 2018, all investments in our portfolio had an Investment Rating of 1 or 2 with the exception of one portfolio company,
which had an Investment Rating of 4.
During the second quarter of 2018, we placed a portion of our second lien position in National HME, Inc. on non-accrual status and wrote
down the aggregate fair value of our preferred shares in TW-NHME Holdings Corp. (together with our second lien position, "NHME") to $0. In
November of 2018, NHME completed a restructuring which resulted in a material modification of the original terms and an extinguishment of our
original investments in NHME. Prior to the extinguishment in November 2018, our original investments in NHME had an aggregate cost of $30.1
million, an aggregate fair value of $15.3 million and total unearned interest income of $1.1 million for the year ended December 31, 2018. The
extinguishment resulted in a realized loss of $15.0 million. As a result of the restructuring, we received second lien debt in NHME and common
shares in NHME Holdings Corp. In addition, we funded additional second lien debt and received warrants to purchase common shares for this
additional funding. Post restructuring, our investments in NHME have been restored to full accrual status. As of December 31, 2018, our
investments in NHME had an aggregate cost basis of $22.8 million and an aggregate fair value of $22.7 million.
During the first quarter of 2018, we placed our first lien positions in Education Management II LLC on non-accrual status as the portfolio
company announced its intention to wind down and liquidate the business. Our first lien positions and our preferred and common shares in
Education Management Corporation ("EDMC") have an investment rating of 4. As of December 31, 2018, our investment in EDMC with an
Investment Rating of 4 had an aggregate cost basis of $1.5 million, an aggregate fair value of $0.1 million and total unearned interest income of $0.2
million for the year then ended.
Portfolio and Investment Activity
The fair value of our investments was approximately $2,342.0 million in 92 portfolio companies at December 31, 2018, approximately $1,825.7
million in 84 portfolio companies at December 31, 2017 and approximately $1,558.8 million in 78 portfolio companies at December 31, 2016.
The following table shows our portfolio and investment activity for the years ended December 31, 2018, December 31, 2017 and
December 31, 2016:
(in millions)
New investments in 67, 64 and 43 portfolio companies, respectively
Debt repayments in existing portfolio companies
Sales of securities in 14, 17 and 10 portfolio companies, respectively
Change in unrealized appreciation on 25, 58 and 71 portfolio companies, respectively
Change in unrealized depreciation on 88, 43 and 24 portfolio companies, respectively
Recent Accounting Standards Updates
Year Ended December 31,
2018
2017
2016
$
1,321.6 $
592.4
210.5
14.8
(37.0 )
$
999.7
696.6
70.7
66.1
(15.3 )
558.1
479.5
67.6
76.5
(36.4 )
See Item 8.—Financial Statements and Supplementary Data—Note 15. Recent Accounting Standards for details on recent accounting
standards updates.
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Table of Contents
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.
As of December 31, 2017, all predecessor investments have been sold or matured. For the years ended December 31, 2017 and December
31, 2018, no cost basis adjustment is necessary.
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
Total 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
Net increase in net assets resulting from operations
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
—
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
(1)
(2)
(3)
(4)
For the year ended December 31, 2016, we incurred total incentive fees of $22.0 million, none of which 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 (losses) on investments and net change in unrealized appreciation (depreciation) of investments from non-
controlled/non-affiliated investments, non-controlled/affiliated investments and controlled investments.
For the year ended December 31, 2016, we had a $0.1 million adjustment to interest income for amortization, a decrease of $0.2 million to net
realized losses and an increase of $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.
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Table of Contents
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.
Results of Operations for the Years Ended December 31, 2018, December 31, 2017 and December 31, 2016
Revenue
(in thousands)
Interest income
Total dividend income
Other income
Total investment income
Year Ended December 31,
2018
2017
2016
$
$
161,899
53,824
15,742
231,465
$
$
149,800
37,250
10,756
197,806
$
$
147,425
11,200
9,459
168,084
Our total investment income increased by approximately $33.7 million, 17%, for the year ended December 31, 2018 as compared to the year
ended December 31, 2017. For the year ended December 31, 2018, total investment income of $231.5 million consisted of approximately $143.6 million
in cash interest from investments, approximately $8.6 million in PIK and non-cash interest from investments, approximately $4.5 million in
prepayment fees, net amortization of purchase premiums and discounts of approximately $5.2 million, approximately $28.9 million in cash dividends
from investments, approximately $24.9 million in PIK and non-cash dividends from investments and approximately $15.8 million in other income. The
increase in dividend income of approximately $16.6 million during the year ended December 31, 2018 as compared to the year ended December 31,
2017 was primarily attributable to distributions from our investments in NMNLC, SLP III and PIK and non-cash dividend income from six portfolio
companies where we hold equity positions. The increase in interest income of approximately $12.1 million from the year ended December 31, 2017 to
the year ended December 31, 2018, is attributable to larger invested balances and rising LIBOR rates. Our larger invested balances were driven by
the proceeds from our August 2018 Convertible Notes issuance and our January 2018, July 2018 and September 2018 unsecured notes issuances, as
well as, our use of leverage from our revolving credit facilities to originate new investments. The increase in other income, which represents fees
that are generally non-recurring in nature, of approximately $5.0 million during the year ended December 31, 2018 as compared to the year ended
December 31, 2017 was primarily attributable to upfront, amendment and consent fees received from forty-nine different portfolio companies.
Our total investment income increased by approximately $29.7 million, 18%, for the year ended December 31, 2017 as compared to the year
ended December 31, 2016. For the year ended December 31, 2017, total investment income of $197.8 million consisted of approximately $129.3 million
in cash interest from investments, approximately $6.4 million in PIK and non-cash interest from investments, approximately $4.9 million in
prepayment fees, net amortization of purchase premiums and discounts of approximately $9.2 million, approximately $19.4 million in cash dividends
from investments, approximately $17.8 million in PIK and non-cash dividends from investments and approximately $10.8 million in other income. 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 and non-cash 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,
approximately $3.2 million in PIK and non-cash dividends from investments and approximately $9.4 million in other income. The increase in interest
income of approximately $2.4 million from the year ended December 31, 2016 to the year ended December 31, 2017 is attributable to larger invested
balances and prepayment fees received associated with the early repayments of eleven different portfolio companies held as of December 31, 2016.
Our larger invested balances were driven by the proceeds from the April 2017 primary offering of our common stock, our June 2017 unsecured 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 $26.1 million during the year ended December 31, 2017 as compared to the year ended December 31,
2016 was primarily attributable to distributions from our investments in SLP II and NMNLC and PIK non-cash dividend income from five equity
positions. The increase in other income, which represents fees that are generally non-recurring in nature, of approximately $1.3 million during the
year ended
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December 31, 2017 as compared to the year ended December 31, 2016 was primarily attributable to structuring, upfront, amendment, consent and
commitment fees received from 46 different portfolio companies.
Operating Expenses
(in thousands)
Management fee
Less: management fee waiver
Total management fee
Incentive fee
Less: incentive fee waiver
Total incentive fee
Interest and other financing expenses
Professional fees
Administrative fees
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
Year Ended December 31,
2018
2017
2016
$
$
$
38,530
(6,709)
31,821
26,508
—
26,508
57,050
4,497
3,629
1,913
125,418
(276)
125,142
291
125,433
$
$
32,694
(5,642)
27,052
25,101
(1,800)
23,301
37,094
3,658
2,779
1,636
95,520
(474)
95,046
556
95,602
$
27,551
(4,824)
22,727
22,011
—
22,011
28,452
3,087
2,683
1,589
80,549
(725)
79,824
152
79,976
Our total net operating expenses increased by approximately $29.8 million for the year ended December 31, 2018 as compared to the year
ended December 31, 2017. Our management fee increased by approximately $4.8 million, net of a management fee waiver, and incentive fees
increased by approximately $3.2 million, net of an incentive fee waiver, for the year ended December 31, 2018 as compared to the year ended
December 31, 2017. The increase in management and incentive fees from the year ended December 31, 2017 to the year ended December 31, 2018 was
attributable to larger invested balances, driven by the proceeds from our April 2017 primary offering of our common stock, our convertible notes
issuance, our unsecured notes issuances and our use of leverage from our revolving credit facilities and SBA-guaranteed debentures to originate
new investments. In addition, our increase in incentive fees was attributable to an incentive fee waiver by the Investment Adviser for the year
ended December 31, 2017 of approximately $1.8 million. No capital gains incentive fee was accrued for the year ended December 31, 2018.
Interest and other financing expenses increased by approximately $20.0 million during the year ended December 31, 2018, primarily due to
our issuances of convertible and unsecured notes, higher drawn balances on our SBA-guaranteed debentures, Holdings Credit Facility and NMFC
Credit Facility and rising LIBOR rates. Our increase in total professional fees, administrative fees, net of expenses waived and reimbursed, and other
general and administrative expenses for the year ended December 31, 2018 as compared to the year ended December 31, 2017 was mainly attributable
to an increase in professional fees relating to evaluating and making investments, as well as on-going monitoring of investments.
Our total net operating expenses increased by approximately $15.6 million for the year ended December 31, 2017 as compared to the year
ended December 31, 2016. Our management fee increased by approximately $4.3 million, net of a management fee waiver, and incentive fees
increased by approximately $1.3 million, net of an incentive fee waiver, for the year ended December 31, 2017 as compared to the year ended
December 31, 2016. The increase in management and incentive fees from the year ended December 31, 2016 to the year ended December 31, 2017 was
attributable to larger invested balances, driven by the proceeds from our April 2017 primary offering of our common stock, our unsecured notes
issuances 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, 2017.
Interest and other financing expenses increased by approximately $8.6 million during the year ended December 31, 2017, primarily due to
our issuance of our unsecured notes, higher drawn balances on our SBA-guaranteed debentures and an increase in LIBOR rates. Our total
professional fees, administrative fees, net of expenses waived and reimbursed, and other general and administrative expenses remained relatively
flat for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
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Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
(in thousands)
Net realized losses on investments
Net change in unrealized (depreciation) appreciation of investments
Net change in unrealized depreciation of securities purchased under collateralized
agreements to resell
(Provision) benefit for taxes
Net realized and unrealized (losses) gains
Year Ended December 31,
2018
2017
2016
$
$
(9,657) $
(22,206)
(1,704)
(112)
(33,679) $
(39,734) $
50,794
(4,006)
140
7,194
$
(16,717)
40,131
(486)
642
23,570
Our net realized and unrealized losses resulted in a net loss of approximately $33.7 million for the year ended December 31, 2018 compared
to the net realized losses and unrealized gains resulting in a net gain of approximately $7.2 million for the same period in 2017. As movement in
unrealized appreciation or depreciation can be the result of realizations, we look at net realized and unrealized gains or losses together. The net loss
for the year ended December 31, 2018 was primarily driven by the overall decrease in the market prices of our investments during the period. Also
contributing to our net loss were the realized loss on our investment in American Tire Distributors, Inc. ("ATD"), which was sold during the quarter
ended June 30, 2018 due to ATD's reported loss of its largest supplier and by the realized loss on our investment in NHME during the quarter ended
December 31, 2018 due to the material modification of the original terms and extinguishment of our original investment in the company. This was
partially offset by the realized gain on the sale of our investment in HI Technology Corp. The provision for income taxes was attributable to equity
investments that are held as of December 31, 2018 in three of our corporate subsidiaries.
Our net realized losses and unrealized gains resulted in a net gain of approximately $7.2 million for the year ended December 31, 2017
compared to the net realized losses and unrealized gains resulting in a net gain of approximately $23.6 million for the same period in 2016. As
movement in unrealized appreciation or depreciation can be the result of realizations, we look at net realized and unrealized gains or losses
together. The net gain for the year ended December 31, 2017 was primarily driven by the overall increase in market prices of our investments during
the period. With the completion of the Transtar and Sierra restructurings in April 2017 and July 2017, respectively, $27.6 million and $14.5 million,
respectively, of previously recorded unrealized depreciation related to these investments were realized during the year ended December 31, 2017.
The benefit for income taxes was primarily attributable to equity investments that are held in three of our corporate subsidiaries as of December 31,
2017.
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 equity investments that are held in three of our corporate subsidiaries as of December 31, 2016.
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, 2018, we raised approximately $614.6 million in net proceeds from additional offerings of common
stock.
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 150.0% after such borrowing. On March 23, 2018, the Small Business Credit Availability
Act (the “SBCA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The
SBCA included changes to the 1940 Act to allow BDCs to decrease their asset coverage requirement to 150.0% from 200.0% under certain
circumstances. On April 12, 2018, our board of directors, including a ‘‘required majority’’ (as such term is defined in Section 57(o) of the 1940 Act)
approved the application of the modified asset coverage
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requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCA, and recommended the submission of a proposal for
stockholders to approve the application of the 150.0% minimum asset coverage ratio to us at a special meeting of stockholders, which was held on
June 8, 2018. The stockholder proposal was approved by the required votes of our stockholders at such special meeting of stockholders, and thus
we became subject to the 150.0% minimum asset coverage ratio on June 9, 2018. As a result of our exemptive relief received on November 5, 2014, we
are permitted to exclude our SBA-guaranteed debentures from the 150.0% asset coverage ratio that the we are required to maintain under the 1940
Act. The agreements governing the NMFC Credit Facility, the 2018 Convertible Notes and the Unsecured Notes (as defined below) contain certain
covenants and terms, including a requirement that we not exceed a debt-to-equity ratio of 1.65 to 1.00 at the time of incurring additional
indebtedness and a requirement that we not exceed a secured debt ratio of 0.70 to 1.00 at any time. As of December 31, 2018, our asset coverage
ratio was 181.37%.
At December 31, 2018, December 31, 2017 and December 31, 2016, we had cash and cash equivalents of approximately $49.7 million, $34.9
million and $45.9 million, respectively. Our cash (used in) provided by operating activities during the years ended December 31, 2018, December 31,
2017 and December 31, 2016, was approximately $(393.5) million, $(166.3) million and $60.5 million, respectively. 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
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 (as amended from time to time, the "Holdings Credit Facility"). As of the most
recent amendment on November 19, 2018, the maturity date of the Holdings Credit Facility is October 24, 2022, and the maximum facility amount is
the lesser of $695.0 million and the actual commitments of the lenders to make advances as of such date.
As of December 31, 2018, the maximum amount of revolving borrowings available under the Holdings Credit Facility is $615.0 million. 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 Bank, National Association. 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 of 150.0%. 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.
As of the amendment entered into on April 1, 2018, 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 2.25% 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).
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Holdings Credit
Facility for the years ended December 31, 2018, December 31, 2017 and December 31, 2016.
(in millions)
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018
2017
2016
$
$
$
16.1
0.6
2.5
4.2%
5.0%
384.4
$
$
$
$
11.6
0.7
1.8
3.3%
4.1%
345.2
$
9.5
0.8
1.6
2.8%
3.5%
341.1
$
$
$
$
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the Holdings Credit Facility was $512.6
million, $312.4 million and $333.5 million, respectively, and NMF Holdings was in compliance with the applicable covenants in the Holdings Credit
Facility on such dates.
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NMFC Credit Facility—The Senior Secured Revolving Credit Agreement, (as amended from time to time, and together with the related
guarantee and security agreement, the "NMFC Credit Facility"), dated June 4, 2014, 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. 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 the most
recent amendment on July 5, 2018, the maturity date of the NMFC Credit Facility is June 4, 2022 and the NMFC Credit Facility includes the financial
covenants related to the asset coverage discussed above.
As of December 31, 2018, the maximum amount of revolving borrowings available under the NMFC Credit Facility was $135.0 million. We
are permitted to borrow at various advance rates depending on the type of portfolio investment as outlined in the related 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 the 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).
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, 2018, December 31, 2017 and December 31, 2016.
(in millions)
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
$
$
5.4
0.1
0.5
4.6%
5.1%
117.7
$
$
$
$
2.0
0.3
0.4
3.6%
4.8%
54.9
$
2.0
0.2
0.4
3.0%
3.8%
66.9
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the NMFC Credit Facility was $60.0
million, $122.5 million and $10.0 million, respectively, and NMFC was in compliance with the applicable covenants in the NMFC Credit Facility on
such dates.
DB Credit Facility—The Loan Financing and Servicing Agreement (the "DB Credit Facility") dated December 14, 2018, among NMFDB as
the borrower, Deutsche Bank AG, New York Branch ("Deutsche Bank") as the facility agent, Lender and other agent from time to time party thereto
and U.S. Bank National Association, as collateral agent and collateral custodian, is structured as a secured revolving credit facility and matures on
December 14, 2023.
As of December 31, 2018, the maximum amount of revolving borrowings available under the DB Credit Facility was $100.0 million. We are
permitted to borrow at various advance rates depending on the type of portfolio investment, as outlined in the Loan Financing and Servicing
Agreement. The DB Credit Facility is non-recourse to us and is collateralized by all of the investments of NMFDB on an investment by investment
basis. All fees associated with the origination of the DB 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 DB Credit Facility. The DB Credit Facility contains certain customary
affirmative and negative covenants and events of default. The covenants are generally not tied to mark to market fluctuations in the prices of
NMFDB investments, but rather to the performance of the underlying portfolio companies.
The advances under the DB Credit Facility accrue interest at a per annum rate equal to the Applicable Margin plus the lender's Cost of
Funds Rate. The "Applicable Margin" is equal to 2.85% during the Revolving Period and then increases by 0.20% during an Event of Default. The
"Cost of Funds Rate" for a conduit lender is the lower of its commercial paper rate and the Base Rate plus 0.50%, and for any other lender is the
Base Rate. The "Base Rate" is the three-months LIBOR Rate but may become an alternative base rate based on Deutsche Bank's base lending rate if
certain LIBOR disruption events occur. We are also charged a non-usage fee, based on the unused facility amount multiplied by the Undrawn Fee
Rate (as defined in the Loan Financing and Servicing Agreement).
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The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the DB Credit Facility
for the years ended December 31, 2018, December 31, 2017 and December 31, 2016.
2018(1)
2017(2)
2016(2)
Year Ended December 31,
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
$
$
$
$
$
(3) $
(3) $
0.1
—
—
5.7 %
6.7 %
49.8
$
$
$
$
—
—
—
— %
— %
—
$
—
—
—
— %
— %
—
(1)
(2)
(3)
For the year ended December 31, 2018, amounts reported relate to the period from December 14, 2018 (commencement of the DB Credit
Facility) to December 31, 2018.
Not applicable as the DB Credit Facility commenced on December 14, 2018.
For the year ended December 31, 2018, non-usage fees and amortization of financing costs were less than $50 thousand.
As of December 31, 2018, the outstanding balance on the DB Credit Facility was $57.0 million and NMFDB was in compliance with the
applicable covenants in the DB Credit Facility on such date.
NMNLC Credit Facility—The Revolving Credit Agreement (together with the related guarantee and security agreement, the “NMNLC
Credit Facility”), dated September 21, 2018, among NMNLC, as the Borrower, and KeyBank National Association, as the Administrative Agent and
Lender, is structured as a senior secured revolving credit facility and matures on September 23, 2019. The NMNLC Credit Facility is guaranteed by
us and proceeds from the NMNLC Credit Facility may be used for funding of additional acquisition properties.
The NMNLC 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 0.15% per annum (as defined in the Revolving Credit Agreement).
As of December 31, 2018, the maximum amount of revolving borrowings available under the NMNLC Credit Facility was $30.0 million. For
the year ended December 31, 2018, interest expense, non-usage fees and amortization of financing costs were all less than $50 thousand. As of
December 31, 2018, the outstanding balance on the NMNLC Credit Facility was $0 and NMNLC was in compliance with the applicable covenants in
the NMNLC Credit Facility on such dates.
Convertible Notes
2014 Convertible Notes—On June 3, 2014, we closed a private offering of $115.0 million aggregate principal amount of unsecured
convertible notes (the “2014 Convertible Notes”), pursuant to an indenture, dated June 3, 2014 (the “2014 Indenture”). The 2014 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 June 3, 2015, the restrictions under Rule 144A under the Securities Act were removed, allowing the 2014 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, we
closed a public offering of an additional $40.3 million aggregate principal amount of the 2014 Convertible Notes. These additional 2014 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 2014 Convertible Notes that we issued on June 3, 2014.
The 2014 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 2014 Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at
the holder’s option.
We may not redeem the 2014 Convertible Notes prior to maturity. No sinking fund is provided for the 2014 Convertible Notes. In addition,
if certain corporate events occur, holders of the 2014 Convertible Notes may require us to repurchase for cash all or part of their 2014 Convertible
Notes at a repurchase price equal to 100.0% of the principal amount of the 2014 Convertible Notes to be repurchased, plus accrued and unpaid
interest through, but excluding, the repurchase date.
The 2014 Indenture contains certain covenants, including covenants requiring us to provide financial information to the holders of the
2014 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 that are described in the 2014 Indenture.
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2018 Convertible Notes—On August 20, 2018, we closed a registered public offering of $100.0 million aggregate principal amount of
unsecured convertible notes (the “2018 Convertible Notes” and together with the 2014 Convertible Notes, the “Convertible Notes”), pursuant to an
indenture, dated August 20, 2018, as supplemented by a first supplemental indenture thereto, dated August 20, 2018 (together the “2018A
Indenture”). On August 30, 2018, in connection with the registered public offering, we issued an additional $15.0 million aggregate principal amount
of the 2018 Convertible Notes pursuant to the exercise of an overallotment option by the underwriter of the 2018 Convertible Notes.
The 2018 Convertible Notes bear interest at an annual rate of 5.75%, payable semi-annually in arrears on February 15 and August 15 of
each year, commencing on February 15, 2019. The 2018 Convertible Notes will mature on August 15, 2023 unless earlier converted, repurchased or
redeemed pursuant to the terms of the 2018A Indenture. We may not redeem the 2018 Convertible Notes prior to May 15, 2023. On or after May 15,
2023, we may redeem the 2018 Convertible Notes for cash, in whole or from time to time in part, at our option at a redemption price, subject to an
exception for redemption dates occurring after a record date but on or prior to the interest payment date, equal to the sum of (i) 100% of the principal
amount of the 2018 Convertible Notes to be redeemed, (ii) accrued and unpaid interest thereon to, but excluding, the redemption date and (iii) a
make-whole premium.
No sinking fund is provided for the 2018 Convertible Notes. Holders of 2018 Convertible Notes may, at their option, convert their 2018
Convertible Notes into shares of our common stock at any time on or prior to the close of business on the business day immediately preceding the
maturity date of the 2018 Convertible Notes. In addition, if certain corporate events occur, holders of the 2018 Convertible Notes may require us to
repurchase for cash all or part of their 2018 Convertible Notes at a repurchase price equal to 100.0% of the principal amount of the 2018 Convertible
Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the repurchase date.
The 2018A Indenture contains certain covenants, including covenants requiring us to provide certain financial information to the holders
of the 2018 Convertible Notes and the trustee if we cease to be subject to the reporting requirements of the Exchange Act. The 2018A Indenture
also includes additional financial covenants related to our asset coverage ratio. These covenants are subject to limitations and exceptions that are
described in the 2018A Indenture.
The following table summarizes certain key terms related to the convertible features of our Convertible Notes as of December 31, 2018.
Initial conversion premium
Initial conversion rate(1)
Initial conversion price
Conversion premium at December 31, 2018
Conversion rate at December 31, 2018(1)(2)
Conversion price at December 31, 2018(2)(3)
Last conversion price calculation date
$
$
2014 Convertible Notes
2018 Convertible Notes
10.0%
12.5%
62.7746
15.93
11.7%
$
65.8762
15.18
10.0%
63.2794
15.80
June 3, 2018
$
65.8762
15.18
August 20, 2018
(1)
(2)
(3)
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, 2018 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.
The conversion rate will be subject to adjustment upon certain events, such as stock splits and combinations, mergers, spin-offs, increases
in distributions in excess of $0.34 per share per quarter and certain changes in control. Certain of these adjustments, including adjustments for
increases in distributions, are subject to a conversion price floor of $14.05 per share for the 2014 Convertible Notes and $13.80 per share for the 2018
Convertible Notes. 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 2014 Convertible Notes or 72.4637 per $1 principal amount of the 2018 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, if any, 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
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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 Supplemental Data, Note 12. Earnings Per Share, the issuance is considered part of
the if-converted method for calculation of diluted earnings per share.
The following table summarizes the interest expense, amortization of financing costs and amortization of premium incurred on the
Convertible Notes for the years ended December 31, 2018, December 31, 2017 and December 31, 2016.
(in millions)
Interest expense
Amortization of financing costs
Amortization of premium(2)
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018(1)
2017
2016
$
$
$
10.2
1.3
(0.1)
5.2%
5.7%
197.1
$
$
$
$
7.8
1.2
(0.1)
5.0%
5.7%
155.3
$
6.3
0.9
—
5.0%
5.7%
125.2
$
$
$
$
(1)
(2)
For the year ended December 31, 2018, amounts reported include interest and amortization of financing costs related to the 2018 Convertible
Notes for the period from August 20, 2018 (issuance of the 2018 Convertible Notes) to December 31, 2018.
For the year ended December 31, 2016, the total amortization of premium was less than $50 thousand.
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the Convertible Notes was $270.3
million, $155.3 million and $155.3 million, respectively, and NMFC was in compliance with the terms of the 2014 Indenture and 2018A Indenture on
such dates, as applicable.
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 “2016
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 2016 Unsecured Notes to institutional investors in a private placement. On June 30, 2017, we issued $55.0 million in aggregate principal
amount of five-year unsecured notes that mature on July 15, 2022 (the "2017A Unsecured Notes"), pursuant to the NPA and a supplement to the
NPA. On January 30, 2018, we issued $90.0 million in aggregate principal amount of five year unsecured notes that mature on January 30, 2023 (the
"2018A Unsecured Notes") pursuant to the NPA and a second supplement to the NPA. On July 5, 2018, we issued $50.0 million in aggregate
principal amount of five year unsecured notes that mature on June 28, 2023 (the "2018B Unsecured Notes") pursuant to the NPA and a third
supplement to the NPA (the "Third Supplement"). The NPA provides for future issuances of unsecured notes in separate series or tranches.
The 2016 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. The 2017A Unsecured Notes bear interest at an annual rate of 4.760%, payable semi-annually on January
15 and July 15 of each year, which commenced on January 15, 2018. The 2018A Unsecured Notes bear interest at an annual rate of 4.870%, payable
semi-annually on February 15 and August 15 of each year, which commenced on August 15, 2018. The 2018B Unsecured Notes bear interest at an
annual rate of 5.360%, payable semi-annually on January 15 and July 15 of each year, which commences on January 15, 2019. These interest rates
are subject to increase in the event that: (i) subject to certain exceptions, the underlying 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
underlying unsecured notes at par, in which case holders of the underlying unsecured notes who accept the offer would not receive the increased
interest rate. In addition, we are obligated to offer to prepay the underlying 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 NPA contains customary terms and conditions for unsecured notes issued, including, without limitation, an option to offer to prepay
all or a portion of the unsecured notes under its governance 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 Code, minimum stockholders’ equity,
minimum asset coverage ratio, and prohibitions on certain fundamental changes at NMFC or any subsidiary guarantor, as well as customary events
of default with customary cure and notice,
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including, without limitation, nonpayment, misrepresentation in a material respect, breach of covenant, cross-default under other indebtedness of
NMFC or certain significant subsidiaries, certain judgments and orders, and certain events of bankruptcy. The Third Supplement includes
additional financial covenants related to asset coverage as well as other terms.
On September 25, 2018, we closed a registered public offering of $50.0 million in aggregate principal amount of five-year 5.75% Unsecured
Notes (together with the 2016 Unsecured Notes, 2017A Unsecured Notes, 2018A Unsecured Notes and 2018B Unsecured Notes, the "Unsecured
Notes"), pursuant to an indenture, dated August 20, 2018, as supplemented by a second supplemental indenture thereto, dated September 25, 2018
(together, the "2018B Indenture"). On October 17, 2018, in connection with the registered public offering, we issued an additional $1.8 million
aggregate principal amount of the 5.75% Unsecured Notes pursuant to the exercise of an overallotment option by the underwriters of the 5.75%
Unsecured Notes.
The 5.75% Unsecured Notes bear interest at an annual rate of 5.75%, payable quarterly on January 1, April 1, July 1 and October 1 of each
year, which commenced on January 1, 2019. The 5.75% Unsecured Notes will mature on October 1, 2023 unless earlier redeemed. The 5.75%
Unsecured Notes are listed on the New York Stock Exchange and trade under the trading symbol “NMFX.”
We may redeem the 5.75% Unsecured Notes, in whole or in part, at any time, or from time to time, at our option on or after October 1, 2020,
upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100%
of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest
period accrued to but not including the date fixed for redemption.
No sinking fund is provided for the 5.75% Unsecured Notes and holders of the 5.75% Unsecured Notes have no option to have their 5.75%
Unsecured Notes repaid prior to the stated maturity date.
The 2018B Indenture contains certain covenants, including covenants requiring us to (i) comply with the asset coverage requirements set
forth in Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a)(1) of the 1940 Act as may be applicable to us from time to time or any
successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any
exemptive relief granted to us by the SEC and (ii) provide certain financial information to the holders of the 5.75% Unsecured Notes and the trustee
if we cease to be subject to the reporting requirements of the Exchange Act. The 2018B Indenture also includes additional financial covenants
related to asset coverage. These covenants are subject to limitations and exceptions that are described in the 2018B Indenture.
The 2018B Indenture provides for customary events of default and further provides that the trustee or the holders of 25% in aggregate
principal amount of the outstanding 5.75% Unsecured Notes may declare such 5.75% Unsecured Notes immediately due and payable upon the
occurrence of any event of default after expiration of any applicable grace period.
The Unsecured Notes are unsecured obligations and rank senior in right of payment to our existing and future indebtedness, if any, that is
expressly subordinated in right of payment to the Unsecured 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.
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The following table summarizes the interest expense and amortization of financing costs incurred on the Unsecured Notes for the years
ended December 31, 2018, December 31, 2017 and December 31, 2016.
(in millions)
Interest expense
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018(1)
2017(2)
2016(3)
$
$
$
$
$
13.5
0.8
5.1 %
5.4 %
266.3
$
$
$
6.1
0.5
5.2 %
5.6 %
117.9
$
2.3
0.2
5.3 %
5.8 %
65.5
(1)
(2)
(3)
For the year ended December 31, 2018, amounts reported include interest and amortization of financing costs related to the 2018A
Unsecured Notes for the period from January 30, 2018 (issuance of the 2018A Unsecured Notes) to December 31, 2018, the 2018B
Unsecured Notes for the period from July 5, 2018 (issuance of the 2018B Unsecured Notes) to December 31, 2018 and the 5.75% Unsecured
Notes for the period from September 25, 2018 (issuance of the 5.75% Unsecured Notes) to December 31, 2018.
For the year ended December 31, 2017, amounts reported include interest and amortization of financing costs related to the 2017A
Unsecured Notes for the period from June 30, 2017 (issuance of the 2017A Unsecured Notes) to December 31, 2018.
For the year ended December 31, 2016 amounts reported include interest and amortization of financing costs for the period from May 6,
2016 (issuance of the 2016 Unsecured Notes) to December 31, 2016.
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the Unsecured Notes was $336.8 million,
$145.0 million and $90.0 million, respectively, and we were in compliance with the terms of the NPA and the 2018B Indenture as of such dates, as
applicable.
SBA-guaranteed debentures—On August 1, 2014 and August 25, 2017, respectively, SBIC I and SBIC II received SBIC licenses from the
SBA to operate as SBICs.
The SBIC license allows SBICs 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 I and SBIC II over
our stockholders in the event SBIC I and SBIC II are 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. In June 2018, legislation amended the 1958 Act by increasing the individual leverage limit from $150.0 million to $175.0
million, subject to SBA approvals.
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As of December 31, 2018 and December 31, 2017, SBIC I had regulatory capital of $75.0 million and $75.0 million, respectively, and SBA-
guaranteed debentures outstanding of $150.0 million and $150.0 million, respectively. As of December 31, 2018 and December 31, 2017, SBIC II had
regulatory capital of $42.5 million and $2.5 million, respectively, and SBA-guaranteed debentures outstanding of $15.0 million and $0.0 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, 2018.
(in millions)
Issuance Date
Fixed SBA-guaranteed debentures(1):
March 25, 2015
September 23, 2015
September 23, 2015
March 23, 2016
September 21, 2016
September 20, 2017
March 21, 2018
Fixed SBA-guaranteed debentures(2):
Maturity Date
Debenture Amount
Interest Rate
SBA Annual Charge
March 1, 2025
September 1, 2025
September 1, 2025
March 1, 2026
September 1, 2026
September 1, 2027
March 1, 2028
$
$
37.5
37.5
28.8
13.9
4.0
13.0
15.3
15.0
165.0
2.517%
2.829%
2.829%
2.507%
2.051%
2.518%
3.187%
3.548%
0.355%
0.355%
0.742%
0.742%
0.742%
0.742%
0.742%
0.222%
September 19, 2018
September 1, 2028
Total SBA-guaranteed debentures
(1)
(2)
SBA-guaranteed debentures are held in SBIC I.
SBA-guaranteed debentures are held in SBIC II.
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, 2018, December 31, 2017 and December 31, 2016.
(in millions)
Interest expense
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018
2017
2016
$
$
5.1
0.5
3.2%
3.6%
158.5
$
$
$
4.2
0.4
3.1%
3.5%
132.6
$
3.8
0.4
3.1%
3.5%
119.8
$
$
$
The SBIC program is designed to stimulate the flow of private investor capital into eligible smaller businesses, as defined by the SBA.
Under SBA regulations, SBICs are 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. SBICs are subject to an annual periodic examination by an SBA examiner to
determine the SBIC'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, 2018, December 31, 2017, and
December 31, 2016, SBIC I was in compliance with SBA regulatory requirements and as of December 31, 2018 and December 31, 2017, SBIC II was in
compliance with SBA regulatory requirements.
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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, 2018 and December 31, 2017, we had outstanding
commitments to third parties to fund investments totaling $137.9 million and $77.4 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, 2018 and December 31, 2017, we had commitment letters to purchase investments in aggregate par amount of $27.5
million and $13.9 million, respectively. As of December 31, 2018 and December 31, 2017, we had not entered into any bridge financing commitments
which could require funding in the future.
As of December 31, 2018, we had unfunded commitments related to our equity investment in SLP III of $1.6 million, which may be funded at
our discretion.
Contractual Obligations
A summary of our significant contractual payment obligations as of December 31, 2018 is as follows:
(in millions)
Holdings Credit Facility(1)
Convertible Notes(2)
SBA-guaranteed debentures(3)
Unsecured Notes(4)
NMFC Credit Facility(5)
DB Credit Facility(6)
Total Contractual Obligations
Contractual Obligations Payments Due by Period
Total
Less than
1 Year
1 - 3 Years
3 - 5 Years
More than
5 Years
$
$
512.6
270.3
165.0
336.8
60.0
57.0
1,401.7
$
$
—
155.3
—
—
—
—
155.3
$
$
—
—
—
90.0
—
—
90.0
$
$
512.6
115.0
—
246.8
60.0
57.0
991.4
$
$
—
—
165.0
—
—
—
165.0
(1) Under the terms of the $615.0 million Holdings Credit Facility, all outstanding borrowings under that facility ($512.6 million as of December 31,
2018) must be repaid on or before October 24, 2022. As of December 31, 2018, there was approximately $102.4 million of possible capacity
remaining under the Holdings Credit Facility.
$155.3 million of the 2014 Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at the holder’s option and
the $115.0 million of the 2018 Convertible Notes will mature on August 15, 2023 unless earlier converted or repurchased at the holder's option
or redeemed by us.
(2)
(3) Our SBA-guaranteed debentures will begin to mature on March 1, 2025.
(4)
$90.0 million of the 2016 Unsecured Notes will mature on May 15, 2021 unless earlier repurchased, $55.0 million of the 2017A Unsecured
Notes will mature on July 15, 2022 unless earlier repurchased, $90.0 million of the 2018A Unsecured Notes will mature on January 30, 2023
unless earlier repurchased and $50.0 million of the 2018B Unsecured Notes will mature on June 28, 2023 unless earlier repurchased. $51.8
million of the 5.75% Unsecured Notes will mature on October 1, 2023 unless earlier repurchased.
(5) Under the terms of the $135.0 million NMFC Credit Facility, all outstanding borrowings under that facility ($60.0 million as of December 31,
2018) must be repaid on or before June 4, 2022. As of December 31, 2018, there was approximately $75.0 million of possible capacity remaining
under the NMFC Credit Facility.
(6) Under the terms of the $100.0 million DB Credit Facility, all outstanding borrowings under that facility ($57.0 million as of December 31, 2018)
must be repaid on or before December 14, 2023. As of December 31, 2018, there was approximately $43.0 million of possible capacity
remaining under the DB Credit Facility.
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 the administration agreement, as amended and restated (the "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
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conduct our respective day-to-day operations. The Administrator has also agreed to maintain, or oversee the maintenance of, our financial records,
our reports to stockholders and reports filed with the SEC.
If any of the contractual obligations discussed above are terminated, our costs under any new agreements that are entered into may
increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive
under the Investment Management Agreement and the Administration Agreement.
Distributions and Dividends
Distributions declared and paid to stockholders for the year ended December 31, 2018 totaled $103.4 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, 2018 and December 31, 2017:
Fiscal Year Ended
December 31, 2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
December 31, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Date Declared
Record Date
Payment Date
Per Share Amount
November 1, 2018
August 1, 2018
May 2, 2018
February 21, 2018
December 14, 2018
September 14, 2018
June 15, 2018
December 28, 2018
September 28, 2018
June 29, 2018
March 15, 2018
March 29, 2018
November 2, 2017
August 4, 2017
May 4, 2017
February 23, 2017
December 15, 2017
September 15, 2017
June 16, 2017
March 17, 2017
December 28, 2017
September 29, 2017
June 30, 2017
March 31, 2017
$
$
$
$
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, 2018 and December 31, 2017, total distributions were $103.4 million and $100.9 million, respectively, of which the distributions
were comprised of approximately 83.74% and 71.50%, respectively, of ordinary income, 0.00% and 0.00%, respectively, of long-term capital gains
and approximately 16.26% and 28.50%, 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 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 the 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
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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
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, 2018, approximately $2.4 million of indirect administrative expenses were included
in administrative expenses, of which $0.3 million were waived by the Administrator. As of December 31, 2018, $0.7 million of indirect
administrative expenses were included in payable to affiliates.
• 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, which is available on our
website at http://www.newmountainfinance.com. 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 or in part, to our investment mandates, including Guardian II. 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 December 18, 2017, the SEC issued an exemptive order (the “Exemptive Order”), which superseded a
prior order issued on June 5, 2017, which permits us to co-invest in portfolio companies with certain 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, subject to the
conditions of the Exemptive Order. Pursuant to the Exemptive Order, we are permitted to co-invest with our affiliates if a “required majority” (as
defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction,
including, but not limited to, that (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and
fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2)
the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current investment
objective and strategies.
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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, 2018, certain of the
loans held in our portfolio had floating interest rates. As of December 31, 2018, approximately 92.2% of investments at fair value (excluding
investments on non-accrual, unfunded debt investments and non-interest bearing equity investments) represent floating-rate investments with a
LIBOR floor (includes investments bearing prime interest rate contracts) and approximately 7.8% 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, 2018. Interest expense is calculated based on the terms of our outstanding revolving credit facilities,
convertible notes and unsecured notes. For our floating rate credit facilities, we use the outstanding balance as of December 31, 2018. Interest
expense on our floating rate credit facilities is calculated using the interest rate as of December 31, 2018, 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, 2018. These hypothetical calculations are based on a model of the investments in our portfolio, held as of
December 31, 2018, 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, 2018 LIBOR rates or a decrease of 25 basis points.
We were not exposed to any foreign currency exchange risks as of December 31, 2018.
86
Estimated Percentage
Change in Interest
Income Net of
Interest Expense
(unaudited)
(2.45 )% (1)
— %
9.81 %
19.62 %
29.43 %
Table of Contents
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
AUDITED FINANCIAL STATEMENTS
Consolidated Statements of Assets and Liabilities as of December 31, 2018 and December 31, 2017
Consolidated Statements of Operations for the years ended December 31, 2018, December 31, 2017 and December 31, 2016
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2018, December 31, 2017 and December 31, 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, December 31, 2017 and December 31, 2016
Consolidated Schedule of Investments as of December 31, 2018
Consolidated Schedule of Investments as of December 31, 2017
Notes to the Consolidated Financial Statements of New Mountain Finance Corporation
PAGE
88
89
90
91
92
93
108
121
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
New Mountain Finance Corporation
Opinion on the Financial Statements and Financial Highlights
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, 2018 and 2017, and the related consolidated statements of
operations, changes in net assets, and cash flows for each of the three years in the period then ended, the consolidated financial highlights for each
of the five years in the period then ended, and the related notes. In our opinion, the consolidated financial statements and financial highlights
present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations,
changes in net assets, and cash flows for each of the three years in the period then ended, 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) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2019, expressed an
unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or
fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and
financial highlights. Our procedures included confirmation of investments owned as of December 31, 2018 and 2017, by correspondence with the
custodian, loan agents and borrowers; when replies were not received we performed other auditing procedures. We believe that our audits provide
a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
February 27, 2019
We have served as the Company's auditor since 2008.
88
Table of Contents
New Mountain Finance Corporation
Consolidated Statements of Assets and Liabilities
(in thousands, except shares and per share data)
December 31, 2018
December 31, 2017
Assets
Investments at fair value
Non-controlled/non-affiliated investments (cost of $1,868,785 and $1,438,889, respectively)
Non-controlled/affiliated investments (cost of $78,438 and $180,380, respectively)
Controlled investments (cost of $382,503 and $171,958, respectively)
Total investments at fair value (cost of $2,329,726 and $1,791,227, 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 affiliates
Other assets
Total assets
Liabilities
Borrowings
Holdings Credit Facility
Unsecured Notes
Convertible Notes
SBA-guaranteed debentures
NMFC Credit Facility
DB Credit Facility
Deferred financing costs (net of accumulated amortization of $22,234 and $16,578, respectively)
Net borrowings
Payable for unsettled securities purchased
Interest payable
Management fee payable
Incentive fee payable
Payable to affiliates
Deferred tax liability
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, 76,106,372 and 75,935,093 shares
issued and outstanding, respectively
Paid in capital in excess of par
Accumulated overdistributed earnings
Total net assets
Total liabilities and net assets
Number of shares outstanding
Net asset value per share
$
$
$
$
$
$
1,861,323
77,493
403,137
2,341,953
23,508
49,664
30,081
288
3,172
2,448,666
$
$
$
512,563
336,750
270,301
165,000
60,000
57,000
(17,515)
1,384,099
20,147
12,397
8,392
6,864
1,021
1,006
8,471
1,442,397
1,462,182
178,076
185,402
1,825,660
25,212
34,936
31,844
343
10,023
1,928,018
312,363
145,000
155,412
150,000
122,500
—
(15,777)
869,498
—
5,107
7,065
6,671
863
894
2,945
893,043
—
—
761
1,035,629
(30,121)
1,006,269
2,448,666
$
$
76,106,372
13.22
$
759
1,053,468
(19,252)
1,034,975
1,928,018
75,935,093
13.63
The accompanying notes are an integral part of these consolidated financial statements.
89
Table of Contents
New Mountain Finance Corporation
Consolidated Statements of Operations
(in thousands, except shares and per share data)
Year Ended December 31,
2018
2017
2016
Investment income
From non-controlled/non-affiliated investments:
Interest income
Dividend income
Non-cash dividend income
Other income
From non-controlled/affiliated investments:
Interest income
Dividend income
Non-cash dividend income
Other income
From controlled investments:
Interest income
Dividend income
Non-cash dividend income
Other income
Total investment income
Expenses
Incentive fee
Management fee
Interest and other financing expenses
Professional fees
Administrative expenses
Other general and administrative expenses
Total expenses
Less: management and incentive fees waived (see Note 5)
Less: expenses waived and reimbursed (see Note 5)
Net expenses
Net investment income before income taxes
Income tax expense
Net investment income
Net realized (losses) gains:
Non-controlled/non-affiliated investments
Non-controlled/affiliated investments
Controlled investments
Net change in unrealized appreciation (depreciation):
Non-controlled/non-affiliated investments
Non-controlled/affiliated investments
Controlled investments
Securities purchased under collateralized agreements to resell
(Provision) benefit for taxes
Net realized and unrealized (losses) gains
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
$
$
153,645
486
5,912
12,174
2,028
6,714
12,333
1,832
6,226
21,731
6,648
1,736
231,465
26,508
38,530
57,050
4,497
3,629
1,913
132,127
(6,709 )
(276 )
125,142
106,323
291
106,032
(18,047 )
8,387
3
(30,758 )
(2,344 )
10,896
(1,704 )
(112 )
(33,679 )
$
$
$
72,353
$
0.95
76,022,375
0.91
$
$
$
145,283
159
811
8,751
2,808
3,498
12,627
1,186
1,709
15,740
4,415
819
197,806
25,101
32,694
37,094
3,658
2,779
1,636
102,962
(7,442 )
(474 )
95,046
102,760
556
102,204
(39,734 )
—
—
56,340
(4,748 )
(798 )
(4,006 )
140
7,194
109,398
$
140,983
220
—
7,708
4,538
3,728
156
1,193
1,904
4,073
3,023
558
168,084
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
1.47
74,171,268
1.38
$
$
1.72
64,918,191
1.60
Weighted average shares of common stock outstanding—diluted (See Note 12)
Distributions declared and paid per share
88,627,741
1.36
$
83,995,395
1.36
$
72,863,387
1.36
$
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)
Increase (decrease) in net assets resulting from operations:
Net investment income
Net realized losses on investments
Net change in unrealized (depreciation) appreciation of investments
Net change in unrealized depreciation of securities purchased under collateralized agreements to
resell
(Provision) benefit for taxes
Net increase in net assets resulting from operations
Capital transactions
Net proceeds from shares sold
Deferred offering costs
Other
Distributions declared to stockholders from net investment income
Reinvestment of distributions
Repurchase of shares under repurchase program
Total net decrease in net assets resulting from capital transactions
Net (decrease) increase in net assets
Net assets at the beginning of the period
Net assets at the end of the period
Capital share activity
Shares sold
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
Year Ended December 31,
2018
2017
2016
$
106,032 $
(9,657 )
(22,206 )
$
102,204
(39,734 )
50,794
(1,704 )
(112 )
72,353
—
—
—
(103,388 )
2,329
—
(101,059 )
(4,006 )
140
109,398
81,478
(172 )
(81 )
(100,905 )
6,695
—
(12,985 )
(28,706 )
1,034,975
1,006,269 $
96,413
938,562
1,034,975
$
$
88,108
(16,717 )
40,131
(486 )
642
111,678
79,063
(328 )
—
(88,764 )
2,953
(2,948 )
(10,024 )
101,654
836,908
938,562
—
171,279
—
—
171,279
5,750,000
429,706
37,573
—
6,217,279
5,750,000
—
210,926
(248,499 )
5,712,427
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 realized losses on investments
Net change in unrealized depreciation (appreciation) of investments
Net change in unrealized depreciation of securities purchased under collateralized agreements to
resell
Amortization of purchase discount
Amortization of deferred financing costs
Amortization of premium on Convertible Notes
Non-cash investment income
(Increase) decrease in operating assets:
Purchase of investments and delayed draw facilities
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 facilities
Cash paid for drawn revolvers
Cash repayments on drawn revolvers
Interest and dividend receivable
Receivable from affiliates
Receivable from unsettled securities sold
Other assets
Increase (decrease) in operating liabilities:
Payable for unsettled securities purchased
Interest payable
Management fee payable
Incentive fee payable
Payable to affiliates
Deferred tax liability (benefit)
Other liabilities
Net cash flows (used in) provided by operating activities
Cash flows from financing activities
Net proceeds from shares sold
Distributions paid
Offering costs paid
Proceeds from Holdings Credit Facility
Repayment of Holdings Credit Facility
Proceeds from Unsecured Notes
Proceeds from Convertible Notes
Proceeds from SBA-guaranteed debentures
Proceeds from NMFC Credit Facility
Repayment of NMFC Credit Facility
Proceeds from DB Credit Facility
Repayment of DB Credit Facility
Proceeds from NMNLC Credit Facility
Year Ended December 31,
2018
2017
2016
$
72,353
$
109,398
$
111,678
9,657
22,206
1,704
(5,198 )
5,656
(111 )
(20,336 )
39,734
(50,794 )
4,006
(9,202 )
4,299
(111 )
(9,367 )
16,717
(40,131 )
486
(3,096 )
3,457
(28 )
(7,644 )
(1,311,002 )
(1,000,229 )
802,964
767,360
(557,897 )
547,078
1,074
(11,631 )
(28,633 )
24,606
1,763
55
—
6,043
20,147
7,290
1,327
193
158
112
6,114
(393,489 )
—
(101,059 )
—
466,800
(266,600 )
191,750
115,000
15,000
255,000
(317,500 )
60,000
(3,000 )
21,617
552
—
(24,615 )
19,718
(14,011 )
3
990
(6,523 )
(2,740 )
1,935
1,213
926
727
(140 )
558
(166,313 )
81,478
(94,210 )
(441 )
505,450
(526,600 )
55,000
—
28,255
354,600
(242,100 )
—
—
—
177
(348 )
(11,651 )
10,202
(4,001 )
14
(990 )
(1,080 )
(2,701 )
829
386
123
(428 )
(642 )
(2 )
60,508
79,063
(85,811 )
(261 )
177,600
(263,400 )
90,000
40,552
4,000
166,500
(246,500 )
—
—
—
Repayment of NMNLC Credit Facility
Deferred financing costs paid
Repurchase of shares under repurchase program
Other
Net cash flows provided by (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
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 issued in connection with reinvestment of distributions
Value of shares reissued from repurchase program in connection with reinvestment of
distributions
Accrual for offering costs
Accrual for deferred financing costs
(21,617 )
(7,174 )
—
—
408,217
14,728
34,936
49,664
43,118
521
$
$
—
(6,030 )
—
(81 )
155,321
(10,992 )
45,928
34,936
$
$
29,658
414
16,622
$
12,858
$
2,329
$
6,135
$
—
272
186
560
944
103
—
(3,477 )
(2,948 )
—
(44,682 )
15,826
30,102
45,928
23,768
85
7,186
—
2,953
598
99
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
92
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments
December 31, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Non-Controlled/Non-Affiliated
Investments
Funded Debt Investments - Canada
Dentalcorp Perfect Smile ULC**
Healthcare Services
Second lien (3)
Second lien (8)
10.02% (L + 7.50%/M)
10.02% (L + 7.50%/M)
Second lien (3)(10) -
Drawn
10.02% (L + 7.50%/M)
Total Funded Debt Investments - Canada
Funded Debt Investments - United Kingdom
Shine Acquisition Co. S.à.r.l / Boing US
Holdco Inc.**
Consumer Services
Second lien (2)
Second lien (8)
10.09% (L + 7.50%/Q)
10.09% (L + 7.50%/Q)
9/25/2017
9/25/2017
10/3/2025
10/3/2025
6/1/2018
6/8/2026
$
6/1/2018
6/8/2026
12,130 $
7,500
12,032 $
7,439
11,948
7,388
6/1/2018
6/8/2026
$
$
2,797
22,427
22,427 $
2,772
22,243
22,243 $
2,754
22,090
22,090
2.20 %
2.20 %
37,853 $
6,000
43,853
37,648 $
5,968
43,616
36,150
5,730
41,880
4.16 %
Air Newco LLC**
Software
Total Funded Debt Investments - United
Kingdom
Funded Debt Investments - United States
Benevis Holding Corp.
Healthcare Services
Integro Parent Inc.
Business Services
Kronos Incorporated
Software
CentralSquare Technologies, LLC
Software
Dealer Tire, LLC
Distribution & Logistics
PhyNet Dermatology LLC
Healthcare Services
NM GRC Holdco, LLC
Business Services
First lien (2)
7.14% (L + 4.75%/M)
5/25/2018
5/31/2024
20,125
20,079
19,987
1.99 %
$
63,978 $
63,695 $
61,867
6.15 %
First lien (2)(9)
First lien (8)(9)
First lien (3)(9)
8.86% (L + 6.32%/Q)
8.86% (L + 6.32%/Q)
8.86% (L + 6.32%/Q)
3/15/2018
3/15/2018
3/15/2018
$
3/15/2024
3/15/2024
3/15/2024
First lien (2)(9)
Second lien (8)(9)
8.48% (L + 5.75%/Q)
11.97% (L + 9.25%/Q)
10/9/2015
10/9/2015
10/31/2022
10/30/2023
First lien (3)(9)(10)
- Drawn
7.23% (L + 4.50%/Q)
6/8/2018
10/30/2021
Second lien (2)
Second lien (3)
10.79% (L + 8.25%/Q)
10.79% (L + 8.25%/Q)
10/26/2012
10/26/2012
11/1/2024
11/1/2024
Second lien (3)
Second lien (8)
10.02% (L + 7.50%/M)
10.02% (L + 7.50%/M)
8/15/2018
8/15/2018
8/31/2026
8/31/2026
63,370 $
8,578
6,970
78,918
63,370 $
8,578
6,970
78,918
51,245
10,000
50,952
9,930
2,057
63,302
2,046
62,928
36,000
21,147
57,147
35,560
21,145
56,705
47,838
7,500
55,338
47,241
7,406
54,647
62,261
8,428
6,848
77,537
51,245
10,000
2,057
63,302
35,657
20,945
56,602
47,838
7,500
55,338
7.71 %
6.29 %
5.62 %
5.50 %
First lien (2)
8.02% (L + 5.50%/M)
12/4/2018
12/12/2025
53,784
52,444
51,296
5.10 %
First lien (2)(9)
8.02% (L + 5.50%/M)
9/17/2018
8/16/2024
50,879
50,391
50,371
5.01 %
First lien (2)(9)
8.80% (L + 6.00%/Q)
2/9/2018
2/9/2024
38,735
38,565
38,542
First lien (2)(9)(10)
- Drawn
8.80% (L + 6.00%/Q)
2/9/2018
2/9/2024
10,766
10,715
10,739
The accompanying notes are an integral part of these consolidated financial statements.
93
49,501
49,280
49,281
4.90 %
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Nomad Buyer, Inc.
Healthcare Services
Brave Parent Holdings, Inc.
Software
Associations, Inc.
Consumer Services
Quest Software US Holdings Inc.
Software
Tenawa Resource Holdings LLC (13)
Tenawa Resource Management LLC
Energy
Frontline Technologies Group Holdings,
LLC
Education
Salient CRGT Inc.
Federal Services
Trader Interactive, LLC
Business Services
Peraton Holding Corp. (fka MHVC
Acquisition Corp.)
Federal Services
TDG Group Holding Company
Consumer Services
Geo Parent Corporation
Business Services
Finalsite Holdings, Inc.
Software
Navicure, Inc.
Healthcare Services
iCIMS, Inc.
First lien (2)
7.38% (L + 5.00%/M)
8/3/2018
8/1/2025
$
48,953 $ 47,538 $
46,383
4.61 %
Second lien (5)
Second lien (2)
Second lien (8)
10.02% (L + 7.50%/M)
10.02% (L + 7.50%/M)
10.02% (L + 7.50%/M)
4/17/2018
7/18/2018
7/18/2018
4/17/2026
4/17/2026
4/17/2026
First lien (2)(9)
9.40% (L + 4.00% + 3.00%
PIK/Q)*
7/30/2018
First lien (3)(9)(10)
- Drawn
9.40% (L + 4.00% + 3.00%
PIK/Q)*
7/30/2018
7/30/2024
7/30/2024
22,500
16,624
6,000
45,124
22,394
16,464
5,942
44,800
22,416
16,562
5,978
44,956
4.47 %
40,855
40,613
40,599
3,625
44,480
3,603
44,216
3,602
44,201
4.39 %
Second lien (2)
10.78% (L + 8.25%/Q)
5/17/2018
5/18/2026
43,697
43,281
43,224
4.30 %
First lien (3)(9)
10.90% (Base + 8.50%/Q)
5/12/2014
10/30/2024
39,500
39,442
39,500
3.93 %
First lien (4)(9)
First lien (2)(9)
9.02% (L + 6.50%/M)
9.02% (L + 6.50%/M)
9/18/2017
9/18/2017
9/18/2023
9/18/2023
22,387
16,582
38,969
22,248
16,480
38,728
22,387
16,582
38,969
3.87 %
First lien (2)
8.27% (L + 5.75%/M)
1/6/2015
2/28/2022
38,275
37,928
37,701
3.75 %
First lien (2)(9)
9.02% (L + 6.50%/M)
6/15/2017
6/17/2024
37,259
37,044
37,259
3.70 %
First lien (2)
8.06% (L + 5.25%/Q)
4/25/2017
4/29/2024
37,285
37,134
36,353
3.61 %
First lien (2)(9)
First lien (2)(9)
8.30% (L + 5.50%/Q)
8.30% (L + 5.50%/Q)
5/22/2018
5/22/2018
5/31/2024
5/31/2024
First lien (3)(9)(10)
- Drawn
8.02% (L + 5.50%/M)
5/22/2018
5/31/2024
30,112
3,354
29,974
3,338
1,261
34,727
1,255
34,567
29,962
3,337
1,255
34,554
3.43 %
First lien (2)
8.09% (L + 5.50%/M)
12/13/2018
12/19/2025
33,578
33,410
33,410
3.32 %
First lien (4)(9)
First lien (2)(9)
8.03% (L + 5.50%/Q)
8.03% (L + 5.50%/Q)
9/28/2018
9/28/2018
9/25/2024
9/25/2024
Second lien (2)
Second lien (8)
10.02% (L + 7.50%/M)
10.02% (L + 7.50%/M)
10/23/2017
10/23/2017
10/31/2025
10/31/2025
22,444
11,085
33,529
22,281
11,005
33,286
25,970
6,000
31,970
25,907
5,985
31,892
22,275
11,002
33,277
25,580
5,910
31,490
3.31 %
3.13 %
Software
First lien (8)(9)
8.94% (L + 6.50%/M)
9/12/2018
9/12/2024
31,636
31,332
31,320
3.11 %
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Ansira Holdings, Inc.
Business Services
Keystone Acquisition Corp.
Healthcare Services
Sovos Brands Intermediate, Inc.
Food & Beverage
EN Engineering, LLC
Business Services
SW Holdings, LLC
Business Services
DCA Investment Holding, LLC
Healthcare Services
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
CRCI Longhorn Holdings, Inc.
Business Services
AAC Holding Corp.
Education
Avatar Topco, Inc. (22)
EAB Global, Inc.
Education
Help/Systems Holdings, Inc.
Software
First lien (2)
8.27% (L + 5.75%/M)
12/19/2016
12/20/2022
$
28,744 $ 28,645 $
28,615
First lien (3)(10) -
Drawn
8.27% (L + 5.75%/M)
12/19/2016
12/20/2022
First lien (2)
Second lien (2)
8.05% (L + 5.25%/Q)
12.05% (L + 9.25%/Q)
5/10/2017
5/10/2017
5/1/2024
5/1/2025
1,791
30,535
1,784
30,429
1,782
30,397
3.02 %
24,732
4,500
29,232
24,597
4,461
29,058
24,238
4,444
28,682
2.85 %
First lien (2)
7.64% (L + 5.00%/M)
11/16/2018
11/20/2025
28,240
28,099
27,957
2.78 %
First lien (2)(9)
First lien (2)(9)
7.02% (L + 4.50%/M)
7.02% (L + 4.50%/M)
7/30/2015
7/30/2015
6/30/2021
6/30/2021
Second lien (4)(9)
Second lien (3)(9)
11.55% (L + 8.75%/Q)
11.55% (L + 8.75%/Q)
6/30/2015
4/16/2018
12/30/2021
12/30/2021
23,347
1,350
24,697
23,226
1,343
24,569
18,161
6,181
24,342
18,052
6,130
24,182
23,347
1,350
24,697
18,161
6,181
24,342
2.45 %
2.42 %
First lien (2)(9)
8.05% (L + 5.25%/Q)
7/2/2015
7/2/2021
17,274
17,194
17,274
First lien (3)(9)(10)
- Drawn
First lien (3)(9)(10)
- Drawn
7.98% (L + 5.25%/Q)
12/20/2017
7/2/2021
6,702
6,647
6,702
9.75% (P + 4.25%/Q)
7/2/2015
7/2/2021
First lien (4)(9)
First lien (4)(9)
First lien (2)(9)
First lien (4)(9)
7.28% (L + 4.75%/M)
7.28% (L + 4.75%/M)
7.28% (L + 4.75%/M)
7.28% (L + 4.75%/M)
8/4/2015
6/16/2017
9/25/2017
9/25/2017
8/4/2022
8/4/2022
8/4/2022
8/4/2022
Second lien (3)
Second lien (8)
9.64% (L + 7.25%/M)
9.64% (L + 7.25%/M)
8/2/2018
8/10/2026
8/2/2018
8/10/2026
144
24,120
142
23,983
144
24,120
2.40 %
17,415
4,531
1,149
506
23,601
17,314
4,514
1,145
504
23,477
14,349
7,500
21,849
14,296
7,473
21,769
17,415
4,531
1,149
506
23,601
14,295
7,472
21,767
2.35 %
2.16 %
First lien (2)(9)
10.60% (L + 8.25%/M)
9/30/2015
9/30/2020
22,403
22,269
21,578
2.14 %
Second lien (3)
Second lien (8)
10.16% (L + 7.50%/Q)
10.16% (L + 7.50%/Q)
11/17/2017
11/17/2017
11/17/2025
11/17/2025
13,950
7,500
21,450
13,762
7,399
21,161
13,811
7,425
21,236
2.11 %
Second lien (5)
10.27% (L + 7.75%/M)
3/23/2018
3/27/2026
20,231
20,136
20,029
1.99 %
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Symplr Software Intermediate Holdings, Inc.
(23)
Caliper Software, Inc.
Healthcare Information Technology
SSH Group Holdings, Inc.
Education
DiversiTech Holdings, Inc.
Distribution & Logistics
FR Arsenal Holdings II Corp.
Business Services
Integral Ad Science, Inc.
Software
The Kleinfelder Group, Inc.
Business Services
Navex Topco, Inc.
Software
TIBCO Software Inc.
Software
Hill International, Inc.**
Business Services
QC McKissock Investment, LLC (14)
McKissock, LLC
Education
First lien (4)(9)
First lien (2)(9)
8.02% (L + 5.50%/M)
8.02% (L + 5.50%/M)
11/30/2018
11/30/2018
11/28/2025
$
11/28/2025
15,000 $
5,171
20,171
14,888 $
5,133
20,021
14,888
5,132
20,020
1.99 %
Second lien (2)
10.77% (L + 8.25%/Q)
7/26/2018
7/30/2026
20,116
20,019
19,960
1.98 %
Second lien (3)
Second lien (8)
10.30% (L + 7.50%/Q)
10.30% (L + 7.50%/Q)
5/18/2017
5/18/2017
6/2/2025
6/2/2025
12,000
7,500
19,500
11,897
7,436
19,333
11,580
7,238
18,818
1.87 %
First lien (2)(9)
10.06% (L + 7.25%/Q)
9/29/2016
9/8/2022
18,545
18,404
18,545
1.84 %
First lien (8)(9)
9.78% (L + 6.00% + 1.25%
PIK/M)*
7/19/2018
7/19/2024
18,678
18,503
18,491
1.84 %
First lien (4)
7.17% (L + 4.75%/M)
12/18/2018
11/29/2024
17,500
17,413
17,413
1.73 %
Second lien (2)
9.53% (L + 7.00%/M)
8/9/2018
9/4/2026
16,807
16,725
16,218
1.61 %
Subordinated (3)
11.38%/S
11/24/2014
12/1/2021
15,000
14,776
15,750
1.57 %
First lien (2)(9)
8.55% (L + 5.75%/Q)
6/21/2017
6/21/2023
15,563
15,502
15,563
1.55 %
First lien (2)(9)
First lien (2)(9)
First lien (2)(9)
First lien (2)(9)
First lien (2)(9)
First lien (2)(9)
8.55% (L + 5.75%/Q)
8.55% (L + 5.75%/Q)
8.55% (L + 5.75%/Q)
8.55% (L + 5.75%/Q)
8.55% (L + 5.75%/Q)
8.55% (L + 5.75%/Q)
8/6/2014
8/24/2018
8/5/2021
8/5/2021
8/6/2014
8/5/2021
8/6/2014
8/5/2021
8/3/2018
5/23/2018
8/5/2021
8/5/2021
6,351
3,649
3,028
977
842
572
15,419
6,330
3,616
3,019
974
835
564
15,338
7,660
7,500
15,160
7,564
7,407
14,971
6,351
3,649
3,028
977
842
572
15,419
7,602
7,443
15,045
1.53 %
1.49 %
OEConnection LLC
Business Services
Second lien (3)
Second lien (8)
10.53% (L + 8.00%/M)
10.53% (L + 8.00%/M)
11/22/2017
11/22/2017
11/22/2025
11/22/2025
Netsmart Inc. / Netsmart Technologies, Inc.
Healthcare Information Technology
Second lien (2)
10.03% (L + 7.50%/Q)
4/18/2016
10/19/2023
15,000
14,727
14,925
1.48 %
Xactly Corporation
Software
Transcendia Holdings, Inc.
Packaging
First lien (4)(9)
9.78% (L + 7.25%/M)
7/31/2017
7/29/2022
14,690
14,577
14,690
1.46 %
Second lien (8)
Second lien (3)
10.52% (L + 8.00%/M)
10.52% (L + 8.00%/M)
6/28/2017
6/28/2017
5/30/2025
5/30/2025
7,500
7,000
14,500
7,411
6,917
14,328
7,385
6,893
14,278
1.42 %
Alegeus Technologies Holdings Corp.
Healthcare Services
First lien (2)(9)
8.66% (L + 6.25%/Q)
9/5/2018
9/5/2024
13,444
13,378
13,376
1.33 %
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
NorthStar Financial Services Group, LLC
Software
Project Accelerate Parent, LLC
Business Services
Castle Management Borrower LLC
Business Services
Ministry Brands, LLC
Software
Second lien (5)
10.10% (L + 7.50%/M)
5/23/2018
5/25/2026
$
13,450 $ 13,418 $
13,316
1.32 %
Second lien (8)(9)
Second lien (3)(9)
10.89% (L + 8.50%/M)
10.89% (L + 8.50%/M)
1/2/2018
1/2/2026
1/2/2018
1/2/2026
7,500
5,973
13,473
7,414
5,905
13,319
7,406
5,898
13,304
1.32 %
First lien (2)(9)
8.87% (L + 6.25%/Q)
5/31/2018
2/15/2024
13,347
13,286
13,281
1.32 %
First lien (2)
Second lien (8)(9)
Second lien (3)(9)
6.52% (L + 4.00%/M)
11.77% (L + 9.25%/M)
11.77% (L + 9.25%/M)
12/7/2016
12/7/2016
12/7/2016
12/2/2022
6/2/2023
6/2/2023
2,962
7,840
2,160
12,962
2,952
7,796
2,148
12,896
2,962
7,840
2,160
12,962
1.29 %
BackOffice Associates Holdings, LLC
Business Services
First lien (2)(9)
13.03% (L + 10.50%/M)
8/25/2017
8/25/2023
13,262
13,169
12,477
First lien (3)(9)(10)
- Drawn
13.03% (L + 7.50% +
3.00% PIK/M)*
8/25/2017
8/25/2023
17
13,279
17
13,186
16
12,493
1.24 %
Zywave, Inc.
Software
CHA Holdings, Inc.
Business Services
PPVA Black Elk (Equity) LLC
Business Services
Amerijet Holdings, Inc.
Distribution & Logistics
Vectra Co.
Business Products
Masergy Holdings, Inc.
Business Services
VT Topco, Inc.
Business Services
Affinity Dental Management, Inc.
Healthcare Services
Second lien (4)(9)
11.65% (L + 9.00%/Q)
11/22/2016
11/17/2023
11,000
10,936
11,000
First lien (3)(9)(10)
- Drawn
7.52% (L + 5.00%/M)
11/22/2016
11/17/2022
Second lien (4)
Second lien (3)
11.55% (L + 8.75%/Q)
11.55% (L + 8.75%/Q)
4/3/2018
4/10/2026
4/3/2018
4/10/2026
1,200
12,200
1,191
12,127
1,200
12,200
1.21 %
7,012
4,453
11,465
6,946
4,411
11,357
7,103
4,511
11,614
1.15 %
Subordinated (3)(9)
—
5/3/2013
—
14,500
14,500
11,362
1.13 %
First lien (4)(9)
First lien (4)(9)
10.52% (L + 8.00%/M)
10.52% (L + 8.00%/M)
7/15/2016
7/15/2016
7/15/2021
7/15/2021
8,972
1,495
10,467
8,935
1,489
10,424
8,972
1,495
10,467
1.04 %
Second lien (8)
9.77% (L + 7.25%/M)
2/23/2018
3/8/2026
10,788
10,751
10,465
1.04 %
Second lien (2)
10.31% (L + 7.50%/Q)
12/14/2016
12/16/2024
10,500
10,452
10,290
1.02 %
Second lien (4)
9.80% (L + 7.00%/Q)
8/14/2018
7/31/2026
10,000
9,976
9,987
0.99 %
First lien (2)(9)
8.57% (L + 6.00%/S)
9/15/2017
9/15/2023
4,344
4,308
4,344
First lien (3)(9)(10)
- Drawn
8.61% (L + 6.00%/S)
9/15/2017
9/15/2023
5,277
9,621
5,240
9,548
5,277
9,621
0.96 %
AgKnowledge Holdings Company, Inc.
Business Services
First Lien (4)
7.27% (L + 4.75%/Q)
11/30/2018
7/23/2023
9,450
9,403
9,426
0.94 %
WD Wolverine Holdings, LLC
Healthcare Services
First lien (2)
8.02% (L + 5.50%/M)
2/22/2017
8/16/2022
9,488
9,269
9,179
0.91 %
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Wrike, Inc.
Software
JAMF Holdings, Inc.
Software
Idera, Inc.
Software
J.D. Power (fka J.D. Power and Associates)
Business Services
CP VI Bella Midco, LLC
Healthcare Services
DealerSocket, Inc.
Software
MH Sub I, LLC (Micro Holding Corp.)
Software
Restaurant Technologies, Inc.
Business Services
DG Investment Intermediate Holdings 2,
Inc. (aka Convergint Technologies Holdings,
LLC)
First lien (8)
9.28% (L + 6.75%/M)
12/31/2018
12/31/2024
$
9,067 $
8,976 $
8,976
0.89 %
First lien (8)(9)
10.61% (L + 8.00%/Q)
11/13/2017
11/11/2022
8,757
8,686
8,757
0.87 %
Second lien (4)
11.53% (L + 9.00%/M)
6/27/2017
6/27/2025
8,000
7,895
8,020
0.80 %
Second lien (3)
11.02% (L + 8.50%/M)
6/9/2016
9/7/2024
7,583
7,508
7,508
0.75 %
Second lien (3)
9.27% (L + 6.75%/M)
1/25/2018
12/29/2025
6,732
6,701
6,631
0.66 %
First lien (2)
7.27% (L + 4.75%/M)
4/16/2018
4/26/2023
6,678
6,633
6,597
0.66 %
Second lien (2)
10.00% (L + 7.50%/M)
8/16/2017
9/15/2025
7,000
6,938
6,545
0.65 %
Second lien (4)
8.90% (L + 6.50%/Q)
9/24/2018
10/1/2026
6,722
6,705
6,520
0.65 %
Business Services
Second lien (3)
9.27% (L + 6.75%/M)
1/29/2018
2/2/2026
6,732
6,702
6,429
0.64 %
First American Payment Systems, L.P.
Business Services
Solera LLC / Solera Finance, Inc.
Software
ADG, LLC
Healthcare Services
York Risk Services Holding Corp.
Business Services
Ensemble S Merger Sub, Inc.
Software
Education Management Corporation (12)
Education Management II LLC
Education
PPVA Fund, L.P.
Business Services
Total Funded Debt Investments - United
States
Total Funded Debt Investments
Equity - Hong Kong
Bach Special Limited (Bach Preference
Limited)**
First lien (2)
7.29% (L + 4.75%/Q)
1/3/2017
1/5/2024
6,391
6,342
6,359
0.63 %
Subordinated (3)
10.50%/S
2/29/2016
3/1/2024
5,000
4,816
5,350
0.53 %
Second lien (3)(9)
11.88% (L + 9.00%/S)
10/3/2016
3/28/2024
5,000
4,942
4,578
0.45 %
Subordinated (3)
8.50%/S
9/17/2014
10/1/2022
3,000
3,000
2,100
0.20 %
Subordinated (3)
9.00%/S
9/21/2015
9/30/2023
2,000
1,953
2,010
0.20 %
11.00% (P + 5.50%/Q)
(24)
11.00% (P + 5.50%/Q)
(24)
14.00% (P + 8.50%/Q)
(24)
14.00% (P + 8.50%/Q)
(24)
1/5/2015
7/2/2020
1/5/2015
7/2/2020
1/5/2015
7/2/2020
1/5/2015
7/2/2020
211
119
475
205
116
437
268
1,073
246
1,004
15
8
19
11
53
0.01 %
—
11/7/2014
—
—
—
—
— %
$ 1,733,369 $ 1,719,771 $ 1,709,641 169.89 %
$ 1,819,774 $ 1,805,709 $ 1,793,598 178.24 %
First Lien (2)
First Lien (3)
First Lien (2)
First Lien (3)
Collateralized
Financing (25)
Preferred shares (3)
Education
Total Shares - Hong Kong
(9)(21)
—
9/1/2017
—
66,528 $
$
6,573 $
6,573 $
6,653
6,653
0.66 %
0.66 %
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Equity - United States
Avatar Topco, Inc.
Education
Tenawa Resource Holdings LLC (13)
QID NGL LLC
Energy
Preferred shares (3)
(9)(22)
Preferred shares (6)
(9)
Ordinary shares (6)
(9)
Symplr Software Intermediate Holdings, Inc.
Healthcare Information Technology
Education Management Corporation (12)
Education
Preferred Shares (4)
(9)(23)
Preferred Shares (3)
(9)(23)
Preferred shares (2)
Preferred shares (3)
Ordinary shares (2)
Ordinary shares (3)
—
—
—
—
—
—
—
—
—
11/17/2017
10/30/2017
5/12/2014
11/30/2018
11/30/2018
1/5/2015
1/5/2015
1/5/2015
1/5/2015
—
—
—
—
—
—
—
—
—
Total Shares - United States
Total Shares
Warrants - United States
ASP LCG Holdings, Inc.
Education
Total Warrants - United States
Total Funded Investments
Unfunded Debt Investments - Canada
Dentalcorp Perfect Smile ULC**
Warrants (3)(9)
—
5/5/2014
5/5/2026
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
35,750 $
40,247 $
39,890
3.96 %
1,623,385
1,623
2,717
5,290,997
5,291
6,914
8,412
11,129
1.11 %
7,500
7,470
7,469
2,586
2,575
10,045
2,575
10,044
1.00 %
3,331
1,879
2,994,065
1,688,976
$
$
200
113
100
56
469
57,675 $
64,248 $
—
—
—
—
—
61,063
67,716
— %
6.07 %
6.73 %
622 $
$
0.07 %
$ 1,869,994 $ 1,861,978 185.04 %
37 $
37 $
664
664
0.07 %
Healthcare Services
Total Unfunded Debt Investments - Canada
Second lien (3)(10) -
Undrawn
—
6/1/2018
6/6/2020
$
$
2,110 $
2,110 $
2 $
2 $
(32 )
(32 )
(0.00 )%
(0.00 )%
Unfunded Debt Investments - United States
DCA Investment Holding, LLC
Healthcare Services
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
Ministry Brands, LLC
Software
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(10) -
Undrawn
—
—
—
—
12/20/2017
12/20/2019
$
6,755 $
(59 ) $
7/2/2015
7/2/2021
1,956
8,711
(20 )
(79 )
—
—
—
— %
8/4/2015
8/4/2021
1,000
(10 )
—
— %
12/7/2016
12/2/2022
1,000
(5 )
—
— %
The accompanying notes are an integral part of these consolidated financial statements.
99
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Zywave, Inc.
Software
Trader Interactive, LLC
Business Services
Xactly Corporation
Software
Integro Parent Inc.
Business Services
Affinity Dental Management, Inc.
Healthcare Services
Frontline Technologies Group Holdings,
LLC
Education
JAMF Holdings, Inc.
Software
AgKnowledge Holdings Company, Inc.
Business Services
NM GRC Holdco, LLC
Business Services
DealerSocket, Inc.
Software
Wrike, Inc.
Software
Integral Ad Science, Inc.
Software
Finalsite Holdings, Inc.
Software
TDG Group Holding Company
Consumer Services
iCIMS, Inc.
Software
Ansira Holdings, Inc.
Business Services
BackOffice Associates Holdings, LLC
Business Services
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(10) -
Undrawn
First lien (2)(9)(10)
- Undrawn
First lien (3)(10) -
Undrawn
First lien (3)(10) -
Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(10) -
Undrawn
First lien (3)(9)(10)
- Undrawn
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11/22/2016
11/17/2022
$
800 $
(6 ) $
—
— %
6/15/2017
6/15/2023
1,673
(13 )
—
— %
7/31/2017
7/29/2022
992
(10 )
—
— %
6/8/2018
10/30/2021
4,686
(23 )
—
— %
9/15/2017
3/15/2019
9/15/2017
3/15/2023
6,307
1,738
8,045
(16 )
(17 )
(33 )
—
—
—
— %
9/18/2017
9/18/2019
7,738
(58 )
—
— %
11/13/2017
11/11/2022
750
(8 )
—
— %
11/30/2018
7/21/2023
526
(3 )
(1 )
(0.00 )%
2/9/2018
2/9/2020
771
(2 )
(2 )
(0.00 )%
4/16/2018
4/26/2023
560
(4 )
(7 )
(0.00 )%
12/31/2018
12/31/2024
933
(9 )
(9 )
(0.00 )%
7/19/2018
7/19/2023
1,429
(14 )
(14 )
(0.00 )%
9/25/2018
9/25/2024
2,521
(19 )
(19 )
(0.00 )%
5/22/2018
5/31/2024
3,783
(19 )
(19 )
(0.00 )%
9/12/2018
9/12/2024
1,977
(20 )
(20 )
(0.00 )%
12/19/2016
4/16/2020
5,433
(14 )
(24 )
(0.00 )%
8/25/2017
8/25/2023
862
(7 )
(51 )
(0.01 )%
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Associations, Inc.
Consumer Services
Diligent Corporation
Software
Salient CRGT Inc.
Federal Services
PhyNet Dermatology LLC
Healthcare Services
Total Unfunded Debt Investments - United
States
Total Unfunded Debt Investments
Total Non-Controlled/Non-Affiliated
Investments
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(9)(10)
- Undrawn
First lien (3)(10) -
Undrawn
First lien (3)(9)(10)
- Undrawn
—
—
—
—
—
7/30/2018
7/30/2021
$
6,557 $
(41 ) $
(41 )
7/30/2018
7/30/2024
2,033
8,590
(13 )
(54 )
(13 )
(54 )
(0.01 )%
12/19/2018
12/19/2020
13,431
(84 )
(84 )
(0.01 )%
6/26/2018
11/29/2021
6,125
(490 )
(92 )
(0.01 )%
9/17/2018
8/16/2020
45,305
(227 )
(227 )
(0.02 )%
$ 127,641 $
$ 129,751 $
(1,211 ) $
(1,209 ) $
(623 )
(655 )
(0.06 )%
(0.06 )%
$ 1,868,785 $ 1,861,323 184.98 %
Non-Controlled/Affiliated Investments(26)
Funded Debt Investments - United States
Permian Holdco 1, Inc.
Permian Holdco 2, Inc.
Permian Holdco 3, Inc.
Energy
Total Funded Debt Investments - United
States
Equity - United States
NMFC Senior Loan Program I LLC**
Investment Fund
Sierra Hamilton Holdings Corporation
Energy
Permian Holdco 1, Inc.
Energy
Total Shares - United States
Total Funded Investments
First lien (3)(9)(10)
- Drawn
8.87% (L + 6.50%/M)
6/14/2018
6/30/2022
$
17,750 $
17,750 $
17,750
14.85% (L + 7.50% +
First lien (3)(9)
5.00% PIK/Q)*
Subordinated (3)(9) 14.00% PIK/Q*
Subordinated (3)(9) 18.00% PIK/Q*
Subordinated (3)(9) 14.00% PIK/Q*
6/14/2018
10/31/2016
12/26/2018
10/31/2016
6/30/2022
10/15/2021
6/30/2022
10/15/2021
Membership interest
(3)(9)
Ordinary shares (2)
(9)
Ordinary shares (3)
(9)
Preferred shares (3)
(9)(16)
Ordinary shares (3)
(9)
—
—
—
—
—
6/13/2014
7/31/2017
7/31/2017
10/31/2016
10/31/2016
—
—
—
—
—
10,101
2,303
2,054
1,186
33,394
10,101
2,303
2,054
1,186
33,394
10,101
2,187
2,054
1,127
33,219
3.30 %
$
33,394 $
33,394 $
33,219
3.30 %
— $
23,000 $
23,000
2.29 %
25,000,000
11,501
11,271
2,786,000
1,281
12,782
1,256
12,527
1.24 %
1,766,177
7,912
8,257
1,366,452
$
$
1,350
9,262
45,044 $
78,438 $
490
8,747
44,274
77,493
0.87 %
4.40 %
7.70 %
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, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
First lien (3)(9)(10)
- Undrawn
—
6/14/2018
6/30/2022
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
$
$
2,250 $
— $
2,250 $
— $
—
—
— %
— %
$ 78,438 $
77,493
7.70 %
1,671
4,891
18,525
4,557
49,318
1,671
4,889
18,525
4,557
47,456
1,671
4,891
14,820
3,646
42,378
14,664
8,104
22,768
10,718
7,115
17,833
12,542
2,508
15,050
12,542
2,508
15,050
10,631
7,091
17,722
12,542
2,508
15,050
4.21 %
1.76 %
1.50 %
$
87,136 $ 80,339 $
75,150
7.47 %
8/6/2018
2/23/2018
6/9/2021
$
12/9/2021
8,490 $
11,184
7,245 $
10,569
7,004
10,346
First lien (2)
Second lien (3)(9)
11.03% (L + 4.50% +
4.00% PIK/Q)*
7.00% PIK/Q*
Second lien (3)(9)
(10) - Drawn
5.00% PIK/Q*
Subordinated (3)(9) 8.50% PIK/Q*
Subordinated (2)(9) 10.00% PIK/Q*
Subordinated (3)(9) 10.00% PIK/Q*
6/9/2015
12/9/2021
6/9/2015
6/9/2020
6/9/2015
6/9/2020
6/9/2015
6/9/2020
Second lien (3)(9)
Second lien (3)(9)
12.00% PIK/Q*
12.00% PIK/Q*
11/27/2018
11/27/2018
5/27/2024
5/27/2024
First lien (2)(9)
First lien (2)(9)
8.02% (L + 5.50%/M)
7.96% (L + 5.50%/M)
6/29/2018
6/29/2018
8/20/2024
8/20/2024
Unfunded Debt Investments - United States
Permian Holdco 3, Inc.
Energy
Total Unfunded Debt Investments - United
States
Total Non-Controlled/Affiliated
Investments
Controlled Investments(27)
Funded Debt Investments - United States
Edmentum Ultimate Holdings, LLC (15)
Edmentum, Inc. (fka Plato, Inc.)
(Archipelago Learning, Inc.)
Education
NHME Holdings Corp. (20)
National HME, Inc.
Healthcare Services
UniTek Global Services, Inc.
Business Services
Total Funded Debt Investments - United
States
Equity - Canada
NM APP Canada Corp.**
Net Lease
Total Shares - Canada
Equity - United States
Membership interest
(7)(9)
—
9/13/2016
—
— $
$
7,345 $
7,345 $
9,727
9,727
0.97 %
0.97 %
NMFC Senior Loan Program II LLC**
Investment Fund
NMFC Senior Loan Program III LLC**
Investment Fund
Membership interest
(3)(9)
Membership interest
(3)(9)
—
—
5/3/2016
5/4/2018
—
—
— $ 79,400 $
79,400
7.89 %
—
78,400
78,400
7.79 %
The accompanying notes are an integral part of these consolidated financial statements.
102
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
UniTek Global Services, Inc.
Business Services
NM NL Holdings, L.P.**
Net Lease
NM GLCR LLC
Net Lease
NM CLFX LP
Net Lease
NM APP US LLC
Net Lease
NM DRVT LLC
Net Lease
NM KRLN LLC
Net Lease
NHME Holdings Corp. (20)
Healthcare Services
NM JRA LLC
Net Lease
Edmentum Ultimate Holdings, LLC (15)
Education
NM GP Holdco, LLC**
Net Lease
Total Shares - United States
Total Shares
Warrants - United States
Preferred shares (2)
(9)(17)
Preferred shares (3)
(9)(17)
Preferred shares (3)
(9)(18)
Preferred shares (3)
(9)(19)
Ordinary shares (2)
(9)
Ordinary shares (3)
(9)
Membership interest
(7)(9)
Membership interest
(7)(9)
Membership interest
(7)(9)
Membership interest
(7)(9)
Membership interest
(7)(9)
Membership interest
(7)(9)
Ordinary Shares (3)
(9)
Membership interest
(7)(9)
Ordinary shares (3)
(9)
Ordinary shares (2)
(9)
Membership interest
(7)(9)
Edmentum Ultimate Holdings, LLC (15)
Education
NHME Holdings Corp. (20)
Healthcare Services
Warrants (3)(9)
Warrants (3)(9)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1/13/2015
1/13/2015
6/30/2017
8/17/2018
1/13/2015
1/13/2015
6/20/2018
2/1/2018
10/6/2017
9/13/2016
11/18/2016
11/15/2016
11/27/2018
8/12/2016
6/9/2015
6/9/2015
6/20/2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
24,841,813 $
22,462 $
22,012
6,865,095
6,207
6,083
13,079,442
13,079
13,036
7,070,545
7,071
7,071
2,096,477
1,925
10,013
1,993,749
532
51,276
9,523
67,738
6.73 %
—
32,575
33,392
3.32 %
—
14,750
20,343
2.02 %
—
12,538
12,770
1.27 %
—
5,080
5,912
0.59 %
—
5,152
5,619
0.56 %
—
7,510
4,205
0.42 %
640,000
4,000
4,000
0.40 %
—
2,043
2,537
0.25 %
123,968
107,143
11
9
20
238
205
443
0.04 %
—
306
$ 293,050 $
$ 300,395 $
311
315,070
324,797
0.03 %
31.31 %
32.28 %
2/23/2018
5/5/2026
1,141,846 $
769 $
2,190
0.22 %
11/27/2018
—
160,000
1,000
1,000
0.10 %
Total Warrants - United States
Total Funded Investments
1,769 $
$
$ 382,503 $
3,190
403,137
0.32 %
40.07 %
The accompanying notes are an integral part of these consolidated financial statements.
103
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
(in thousands, except shares)
Portfolio Company, Location and Industry
(1)
Type of
Investment
Interest Rate (11)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Unfunded Debt Investments - United States
Edmentum Ultimate Holdings, LLC (15)
Edmentum, Inc. (fka Plato, Inc.)
(Archipelago Learning, Inc.)
Education
Total Unfunded Debt Investments - United
States
Total Controlled Investments
Total Investments
Second lien (3)(9)
(10) - Undrawn
—
6/9/2015
12/9/2021
$
$
5,945 $
— $
—
— %
5,945 $
— $
—
$ 382,503 $ 403,137
40.07 %
$ 2,329,726 $ 2,341,953 232.75 %
— %
(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 the Collateral Manager, New Mountain Finance Holdings, L.L.C. ("NMF
Holdings") as the Borrower and Wells Fargo Bank, National Association as the Administrative Agent 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 New Mountain Finance SBIC II, L.P.
(6)
Investment is held in NMF QID NGL Holdings, Inc.
(7)
Investment is held in New Mountain Net Lease Corporation.
(8)
Investment is pledged as collateral for the DB Credit Facility, a revolving credit facility among New Mountain Finance DB, L.L.C as the Borrower and Deutsche Bank AG, New York Branch as the
Facility Agent. See Note 7. Borrowings, for details.
(9)
The fair value of the Company's investment is determined using unobservable inputs that are significant to the overall fair value measurement. See Note 4. Fair Value, for details.
(10)
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 of the impact of paydowns and cash paid for drawn revolvers or delayed draws.
(11)
(12)
(13)
(14)
(15)
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, 2018.
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.
The Company holds investments in three 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), class A preferred units in QID NGL LLC and 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 first lien term loans and a delayed draw
term loan in McKissock, LLC, a wholly-owned subsidiary of McKissock Investment Holdings, LLC.
The Company holds investments in Edmentum Ultimate Holdings, LLC and its related entities. The Company holds subordinated notes, ordinary equity and warrants in Edmentum Ultimate
Holdings, LLC and holds a first lien term loan, second lien revolver and a second lien term loan in Edmentum, Inc. and Archipelago Learning, Inc., which are wholly-owned subsidiaries of
Edmentum Ultimate Holdings, LLC.
(16)
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.
The accompanying notes are an integral part of these consolidated financial statements.
104
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
(in thousands, except shares)
(17)
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.
(18)
The Company holds preferred equity in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 19.0% per annum payable in additional shares.
(19)
The Company holds preferred equity in UniTek Global Services, Inc. that is entitled to received cumulative preferential dividends at a rate of 20.0% per annum payable in additional shares.
(20)
The Company holds ordinary shares and warrants in NHME Holdings Corp., as well as second lien term loans in National HME, Inc., a wholly-owned subsidiary of NHME Holdings Corp.
(21)
The Company holds preferred equity in Bach Special Limited (Bach Preference Limited) that is entitled to receive cumulative preferential dividends at a rate of 12.25% per annum payable in
additional shares.
(22)
The Company holds preferred equity in Avatar Topco, Inc. and holds a second lien term loan investment in EAB Global, Inc., a wholly-owned subsidiary of Avatar Topco, Inc. The preferred equity is
entitled to receive cumulative preferential dividends at a rate of L + 11.00% per annum.
(23)
The Company holds preferred equity in Symplr Software Intermediate Holdings, Inc. and holds a first lien term loan investment in Caliper Software, Inc., a wholly-owned subsidiary of Symplr
Software Intermediate Holdings, Inc. The preferred equity is entitled to receive cumulative preferential dividends at a rate of L + 10.50% per annum.
(24)
Investment or a portion of the investment is on non-accrual status. See Note 3. Investments, for details.
(25)
The Company holds one security purchased under a collateralized agreement to resell on its Consolidated Statement of Assets and Liabilities with a cost basis of $30,000 and a fair value of $23,508
as of December 31, 2018. See Note 2. Summary of Significant Accounting Policies, for details.
(26)
Denotes investments in which the Company is an “ Affiliated Person”, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), 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, 2018 and December 31, 2017 along with transactions during the
year ended December 31, 2018 in which the issuer was a non-controlled/affiliated investment is as follows:
Portfolio Company
Fair Value at
December 31,
2017
Gross
Additions
(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31,
2018
Interest
Income
Dividend
Income
Other
Income
Edmentum Ultimate Holdings,
LLC/Edmentum Inc.
$
HI Technology Corp.
NMFC Senior Loan Program I LLC
Permian Holdco 1, Inc. / Permian Holdco
2, Inc. / Permian Holdco 3, Inc.
Sierra Hamilton Holdings Corporation
Total Non-Controlled/Affiliated
Investments
$
24,858
105,155
23,000
12,733
12,330
— $
—
—
31,824
—
(24,858 ) $
(105,155 )
—
(50 )
—
$
—
8,387
—
—
—
$
—
—
—
(2,541 )
197
—
—
23,000
41,966
12,527
$
$
—
—
—
2,028
—
$
—
14,791
3,173
1,083
—
—
—
1,179
653
—
$
178,076
$
31,824 $
(130,063 ) $
8,387
$
(2,344 ) $
77,493
$ 2,028
$
19,047
$ 1,832
(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.
105
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
(in thousands, except shares)
(27)
Denotes investments in which the Company is in “ Control”, as defined in the 1940 Act, 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, 2018 and December 31, 2017 along with transactions during the year ended December 31, 2018 in which the issuer was a controlled investment, is as
follows:
Portfolio Company
Edmentum Ultimate Holdings,
LLC/Edmentum Inc.
National HME, Inc./NHME Holdings
Corp.
NM APP CANADA CORP
NM APP US LLC
NM CLFX LP
NM DRVT LLC
NM JRA LLC
NM GLCR LLC
NM KRLN LLC
NM NL Holdings, L.P.
NM GP Holdco, LLC
NMFC Senior Loan Program II LLC
NMFC Senior Loan Program III LLC
UniTek Global Services, Inc.
Total Controlled Investments
$
Fair Value at
December 31,
2017
Gross
Additions
(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31,
2018
Interest
Income
Dividend
Income
Other
Income
$
—
$
51,478 $
(6,937 ) $
3
$
470
$
45,011
$ 4,077
$
—
$
424
—
7,962
5,138
12,538
5,385
2,191
—
8,195
—
—
79,400
—
64,593
185,402
22,832
—
—
—
—
—
14,750
—
32,575
306
—
78,400
28,696
$ 229,037 $
—
—
—
—
—
—
—
—
—
—
—
—
(15,261 )
(22,198 ) $
—
—
—
—
—
—
—
—
—
—
—
—
—
3
$
(110 )
1,765
774
232
234
346
5,593
(3,990 )
817
5
—
—
4,760
10,896
$
22,722
9,727
5,912
12,770
5,619
2,537
20,343
4,205
33,392
311
79,400
78,400
82,788
403,137
306
—
—
—
—
—
—
—
—
—
—
—
1,843
$ 6,226
$
—
841
563
1,507
519
225
1,634
761
1,506
11
11,124
3,040
6,648
28,379
$
—
—
—
—
—
—
—
—
—
—
—
—
1,312
1,736
(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 of an existing portfolio company into this category from a different category.
(B) Gross redemptions 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 1940 Act. Qualifying assets must represent at least 70.0% of the Company’ s total assets at the
time of acquisition of any additional non-qualifying assets. As of December 31, 2018, 13.5% of the Company’ s total investments were non-qualifying assets.
*
**
The accompanying notes are an integral part of these consolidated financial statements.
106
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2018
Table of Contents
Investment Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Industry Type
Business Services
Software
Healthcare Services
Education
Investment Fund
Consumer Services
Energy
Net Lease
Distribution & Logistics
Federal Services
Healthcare Information Technology
Food & Beverage
Packaging
Business Products
Total investments
Interest Rate Type
Floating rates
Fixed rates
Total investments
December 31, 2018
Percent of Total
Investments at Fair Value
50.11%
28.29%
2.79%
18.81%
100.00%
December 31, 2018
Percent of Total
Investments at Fair Value
23.67%
20.41%
14.80%
8.94%
7.72%
5.15%
4.49%
4.05%
3.44%
3.16%
1.92%
1.19%
0.61%
0.45%
100.00%
December 31, 2018
Percent of Total
Investments at Fair Value
93.25%
6.75%
100.00%
The accompanying notes are an integral part of these consolidated financial statements.
107
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Non-Controlled/Non-Affiliated
Investments
Funded Debt Investments - United
Kingdom
Air Newco LLC**
Software
Shine Acquisition Co. S.à.r.l / Boing
US Holdco Inc.**
Second lien (3)
10.94% (L + 9.50%/Q)
1/30/2015
1/31/2023
$
40,000 $
39,033 $
39,000
3.77 %
Consumer Services
Second lien (3)
8.88% (L + 7.50%/Q)
9/25/2017
10/3/2025
40,353
40,056
40,656
3.93 %
Total Funded Debt Investments -
United Kingdom
Funded Debt Investments - United
States
AmWINS Group, Inc.
Business Services
Alegeus Technologies, LLC
Healthcare Services
PetVet Care Centers LLC
Consumer Services
Integro Parent Inc.
Business Services
Severin Acquisition, LLC
Software
$
80,353 $
79,089 $
79,656
7.70 %
Second lien (3)
8.32% (L + 6.75%/M)
1/19/2017
1/25/2025
$
57,000 $
56,804 $
57,606
5.57 %
Second lien (3)(10)
Second lien (4)(10)
10.19% (L + 8.50%/Q)
10.19% (L + 8.50%/Q)
4/28/2017
10/30/2023
4/28/2017
10/30/2023
23,500
22,500
46,000
23,500
22,500
46,000
23,500
22,500
46,000
4.44 %
First lien (2)(10)
7.69% (L + 6.00%/Q)
6/8/2017
6/8/2023
34,527
34,409
34,872
First lien (3)(10)(11) -
Drawn
First lien (3)(10)(11) -
Drawn
7.55% (L + 6.00%/Q)
6/8/2017
6/8/2023
8,646
8,616
8,733
9.50% (P + 5.00%/Q)
6/8/2017
6/8/2023
First lien (2)
Second lien (3)
7.16% (L + 5.75%/Q)
10.63% (L + 9.25%/Q)
10/9/2015
10/31/2022
10/9/2015
10/30/2023
Second lien (4)(10)
Second lien (3)(10)
Second lien (4)(10)
Second lien (4)(10)
Second lien (3)(10)
Second lien (3)(10)
Second lien (4)(10)
10.32% (L + 8.75%/M)
10.32% (L + 8.75%/M)
10.32% (L + 8.75%/M)
10.82% (L + 9.25%/M)
10.57% (L + 9.00%/M)
10.82% (L + 9.25%/M)
10.82% (L + 9.25%/M)
7/31/2015
7/29/2022
2/1/2017
7/29/2022
11/5/2015
7/29/2022
2/1/2016
10/14/2016
7/29/2022
7/29/2022
8/8/2016
7/29/2022
8/8/2016
7/29/2022
2,200
45,373
2,192
45,217
2,200
45,805
4.43 %
34,873
10,000
44,873
34,601
9,920
44,521
15,000
14,518
4,154
3,273
2,361
1,825
300
41,431
14,891
14,361
4,123
3,248
2,341
1,810
298
41,072
34,786
9,800
44,586
15,000
14,518
4,154
3,273
2,361
1,825
300
41,431
4.31 %
4.00 %
Salient CRGT Inc.
Federal Services
Tenawa Resource Holdings LLC (13)
First lien (2)
Tenawa Resource Management LLC
7.32% (L + 5.75%/M)
1/6/2015
2/28/2022
40,894
40,421
41,251
3.99 %
Energy
First lien (3)(10)
10.50% (Base + 8.00%/Q)
5/12/2014
10/30/2024
39,900
39,835
39,900
3.86 %
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, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
VetCor Professional Practices LLC
Consumer Services
Frontline Technologies Group
Holdings, LLC
Education
Kronos Incorporated
Software
Valet Waste Holdings, Inc.
Business Services
Evo Payments International, LLC
Business Services
Wirepath LLC
First lien (4)
First lien (2)
First lien (3)(11) -
Drawn
First lien (4)
First lien (2)
First lien (4)
First lien (3)(11) -
Drawn
7.69% (L + 6.00%/Q)
7.69% (L + 6.00%/Q)
5/15/2015
5/15/2015
7.69% (L + 6.00%/Q)
7.69% (L + 6.00%/Q)
7.69% (L + 6.00%/Q)
7.69% (L + 6.00%/Q)
2/24/2017
5/15/2015
6/24/2016
3/31/2016
4/20/2021
4/20/2021
4/20/2021
4/20/2021
4/20/2021
4/20/2021
$
19,111 $
7,714
18,996 $
7,603
19,134
7,724
6,005
2,650
1,632
495
5,891
2,632
1,606
487
6,013
2,654
1,634
496
7.69% (L + 6.00%/Q)
5/15/2015
4/20/2021
1,426
39,033
1,412
38,627
1,428
39,083
3.78 %
First lien (2)(10)
First lien (4)(10)
8.09% (L + 6.50%/Q)
8.09% (L + 6.50%/Q)
9/18/2017
9/18/2017
9/18/2023
9/18/2023
16,750
22,613
39,363
16,629
22,450
39,079
16,625
22,444
39,069
3.77 %
Second lien (2)
9.63% (L + 8.25%/Q)
10/26/2012
11/1/2024
36,000
35,508
37,449
3.62 %
First lien (2)(10)
First lien (2)(10)
8.57% (L + 7.00%/M)
8.57% (L + 7.00%/M)
9/24/2015
7/27/2017
9/24/2021
9/24/2021
Second lien (2)
Second lien (3)
10.57% (L + 9.00%/M)
10.57% (L + 9.00%/M)
12/8/2016
12/8/2016
12/23/2024
12/23/2024
29,325
3,731
33,056
29,078
3,697
32,775
25,000
5,000
30,000
24,824
5,052
29,876
29,325
3,731
33,056
25,250
5,050
30,300
3.19 %
2.93 %
Distribution & Logistics
First lien (2)
6.87% (L + 5.25%/Q)
7/31/2017
8/5/2024
27,731
27,598
28,112
2.72 %
Ansira Holdings, Inc.
Business Services
TW-NHME Holdings Corp. (20)
National HME, Inc.
Healthcare Services
Navicure, Inc.
Healthcare Services
Trader Interactive, LLC
Business Services
Marketo, Inc.
Software
Keystone Acquisition Corp.
Healthcare Services
First lien (2)
8.19% (L + 6.50%/Q)
12/19/2016
12/20/2022
25,920
25,809
25,855
First lien (3)(11) -
Drawn
8.19% (L + 6.50%/Q)
12/19/2016
12/20/2022
Second lien (4)(10)
Second lien (3)(10)
10.95% (L + 9.25%/Q)
10.95% (L + 9.25%/Q)
7/14/2015
7/14/2015
7/14/2022
7/14/2022
2,107
28,027
2,097
27,906
2,102
27,957
2.70 %
21,500
5,800
27,300
21,301
5,737
27,038
21,646
5,839
27,485
2.66 %
Second lien (3)
8.86% (L + 7.50%/M)
10/23/2017
10/31/2025
26,952
26,819
27,154
2.62 %
First lien (2)(10)
7.50% (L + 6.00%/M)
6/15/2017
6/17/2024
27,190
26,999
26,986
2.61 %
First lien (3)(10)
11.19% (L + 9.50%/Q)
8/16/2016
8/16/2021
26,820
26,509
26,820
2.59 %
First lien (2)
Second lien (3)
6.94% (L + 5.25%/Q)
10.94% (L + 9.25%/Q)
5/10/2017
5/10/2017
5/1/2024
5/1/2025
19,950
4,500
19,764
4,457
20,087
4,511
The accompanying notes are an integral part of these consolidated financial statements.
109
24,450
24,221
24,598
2.38 %
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
First lien (4)(10)
First lien (4)(10)
First lien (2)(10)
First lien (4)(10)
8.82% (L + 7.25%/M)
7.74% (L + 6.25%/M)
7.74% (L + 6.25%/M)
7.74% (L + 6.25%/M)
8/4/2015
6/16/2017
9/25/2017
9/25/2017
8/4/2022
8/4/2022
8/4/2022
8/4/2022
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
$ 17,589 $ 17,464 $
4,577
1,161
511
23,838
4,556
1,155
508
23,683
17,589
4,554
1,155
508
23,806
2.30 %
AAC Holding Corp.
Education
BackOffice Associates Holdings,
LLC
First lien (2)(10)
9.62% (L + 8.25%/M)
9/30/2015
9/30/2020
23,161
22,953
23,161
2.24 %
Business Services
First lien (2)(10)
8.06% (L + 6.50%/M)
8/25/2017
8/25/2023
22,869
22,679
22,669
2.19 %
TWDiamondback Holdings Corp.
(15)
Diamondback Drugs of Delaware,
L.L.C. (TWDiamondback II Holdings
LLC)
Distribution & Logistics
EN Engineering, LLC
Business Services
Avatar Topco, Inc (23)
EAB Global, Inc.
Education
DigiCert Holdings, Inc.
Business Services
DiversiTech Holdings, Inc.
First lien (4)(10)
First lien (3)(10)
First lien (4)(10)
10.49% (L + 8.75%/Q)
10.44% (L + 8.75%/Q)
10.44% (L + 8.75%/Q)
11/19/2014
11/19/2014
11/19/2014
11/19/2019
11/19/2019
11/19/2019
First lien (2)(10)
First lien (2)(10)
7.69% (L + 6.00%/Q)
7.69% (L + 6.00%/Q)
7/30/2015
7/30/2015
6/30/2021
6/30/2021
19,895
2,158
605
22,658
19,895
2,158
605
22,658
20,893
1,208
22,101
20,760
1,200
21,960
19,895
2,158
605
22,658
20,893
1,208
22,101
2.19 %
2.14 %
Second lien (3)
8.99% (L + 7.50%/M)
11/17/2017
11/17/2025
21,450
21,132
21,236
2.05 %
Second lien (3)
9.38% (L + 8.00%/Q)
9/20/2017
10/31/2025
20,176
20,077
20,347
1.97 %
Distribution & Logistics
Second lien (3)
9.20% (L + 7.50%/Q)
5/18/2017
6/2/2025
19,500
19,315
19,744
1.91 %
ABILITY Network Inc.
Healthcare Information Technology
KeyPoint Government Solutions, Inc.
Second lien (3)
9.21% (L + 7.75%/M)
12/11/2017
12/12/2025
18,851
18,839
18,945
1.83 %
Federal Services
AgKnowledge Holdings Company,
Inc.
Business Services
VF Holding Corp.
Software
DCA Investment Holding, LLC
Healthcare Services
OEConnection LLC
Business Services
TIBCO Software Inc.
Software
American Tire Distributors, Inc.
First lien (2)(10)
7.35% (L + 6.00%/Q)
4/18/2017
4/18/2024
18,413
18,243
18,597
1.80 %
Second lien (2)(10)
9.82% (L + 8.25%/M)
7/23/2014
7/23/2020
18,500
18,409
18,500
1.79 %
Second lien (3)(10)
10.57% (L + 9.00%/M)
7/7/2016
6/28/2024
17,086
17,396
17,598
1.70 %
First lien (2)(10)
6.94% (L + 5.25%/Q)
7/2/2015
7/2/2021
17,453
17,344
17,453
1.69 %
Second lien (3)
9.69% (L + 8.00%/Q)
11/22/2017
11/22/2025
16,841
16,548
16,841
1.63 %
Subordinated (3)
11.38%/S
11/24/2014
12/1/2021
15,000
14,714
16,378
1.58 %
Distribution & Logistics
Subordinated (3)
10.25%/S
2/10/2015
3/1/2022
15,520
15,267
16,063
1.55 %
Hill International, Inc.**
Business Services
First lien (2)(10)
7.32% (L + 5.75%/M)
6/21/2017
6/21/2023
15,721
15,648
15,642
1.51 %
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, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Netsmart Inc. / Netsmart
Technologies, Inc.
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Healthcare Information Technology
Second lien (2)
10.98% (L + 9.50%/Q)
4/18/2016
10/19/2023
$
15,000 $
14,686 $
15,075
1.46 %
Transcendia Holdings, Inc.
Packaging
SW Holdings, LLC
Business Services
Peraton Holding Corp. (fka MHVC
Acquisition Corp.)
Federal Services
Ministry Brands, LLC
Software
nThrive, Inc. (fka Precyse Acquisition
Corp.)
Second lien (3)
9.57% (L + 8.00%/M)
6/28/2017
5/30/2025
14,500
14,309
14,391
1.39 %
Second lien (4)(10)
10.44% (L + 8.75%/Q)
6/30/2015
12/30/2021
14,265
14,167
14,331
1.38 %
First lien (2)
6.95% (L + 5.25%/Q)
4/25/2017
4/29/2024
14,030
13,987
14,135
1.37 %
First lien (3)
6.38% (L + 5.00%/Q)
12/7/2016
12/2/2022
2,993
2,980
2,993
First lien (3)(10)(11) -
Drawn
Second lien (3)(10)
Second lien (3)(10)
6.57% (L + 5.00%/M)
10.63% (L + 9.25%/Q)
10.63% (L + 9.25%/Q)
12/7/2016
12/7/2016
12/7/2016
12/2/2022
6/2/2023
6/2/2023
1,000
7,840
2,160
13,993
995
7,788
2,146
13,909
1,000
7,840
2,160
13,993
1.35 %
Healthcare Services
Second lien (2)(10)
11.32% (L + 9.75%/M)
4/19/2016
4/20/2023
13,000
12,813
12,702
1.23 %
FR Arsenal Holdings II Corp.
Business Services
Amerijet Holdings, Inc.
Distribution & Logistics
SSH Group Holdings, Inc.
Education
ProQuest LLC
Business Services
Xactly Corporation
Software
Zywave, Inc.
Software
First lien (2)(10)
8.81% (L + 7.25%/Q)
9/29/2016
9/8/2022
12,356
12,252
12,373
1.19 %
First lien (4)(10)
First lien (4)(10)
9.57% (L + 8.00%/M)
9.57% (L + 8.00%/M)
7/15/2016
7/15/2016
7/15/2021
7/15/2021
First lien (2)(10)
Second lien (3)(10)
6.69% (L + 5.00%/Q)
10.69% (L + 9.00%/Q)
10/13/2017
10/13/2017
10/2/2024
10/2/2025
10,403
1,734
12,137
10,344
1,724
12,068
8,407
3,363
11,770
8,366
3,330
11,696
10,458
1,743
12,201
8,365
3,329
11,694
1.18 %
1.13 %
Second lien (3)
10.55% (L + 9.00%/M)
12/14/2015
12/15/2022
11,620
11,440
11,620
1.12 %
First lien (4)(10)
8.82% (L + 7.25%/M)
7/31/2017
7/29/2022
11,600
11,492
11,484
1.11 %
Second lien (4)(10)
10.42% (L + 9.00%/Q)
11/22/2016
11/17/2023
11,000
10,927
11,011
First lien (3)(10)(11) -
Drawn
First lien (3)(10)(11) -
Drawn
8.50% (P + 4.00%/Q)
11/22/2016
11/17/2022
200
199
200
6.57% (L + 5.00%/Q)
11/22/2016
11/17/2022
250
11,450
248
11,374
250
11,461
1.11 %
QC McKissock Investment, LLC (14)
McKissock, LLC
Education
Masergy Holdings, Inc.
First lien (2)(10)
First lien (2)(10)
First lien (2)(10)
7.94% (L + 6.25%/Q)
7.94% (L + 6.25%/Q)
7.94% (L + 6.25%/Q)
8/6/2014
8/5/2021
8/6/2014
8/5/2021
8/6/2014
8/5/2021
6,415
3,058
987
10,460
6,386
3,046
983
10,415
6,415
3,058
987
10,460
1.01 %
Business Services
Second lien (2)
10.19% (L + 8.50%/Q)
12/14/2016
12/16/2024
10,000
9,943
10,144
0.98 %
Idera, Inc.
Software
Second lien (4)
10.57% (L + 9.00%/M)
6/27/2017
6/27/2025
10,000
9,856
10,100
0.97 %
The accompanying notes are an integral part of these consolidated financial statements.
111
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Quest Software US Holdings Inc.
Software
PowerPlan Holdings, Inc.
Software
WD Wolverine Holdings, LLC
Healthcare Services
Pelican Products, Inc.
Business Products
J.D. Power (fka J.D. Power and
Associates)
First lien (2)
6.92% (L + 5.50%/Q)
10/31/2016
10/31/2022
$
9,899 $
9,775 $
10,071
0.97 %
Second lien (2)(10)
10.57% (L + 9.00%/M)
2/23/2015
2/23/2023
10,000
9,927
10,000
0.97 %
First lien (2)
7.07% (L + 5.50%/M)
2/22/2017
8/16/2022
9,813
9,534
9,512
0.92 %
Second lien (2)
9.94% (L + 8.25%/Q)
4/9/2014
4/9/2021
9,500
9,533
9,500
0.92 %
Business Services
Second lien (3)
10.19% (L + 8.50%/Q)
6/9/2016
9/7/2024
9,333
9,230
9,473
0.91 %
Harley Marine Services, Inc.
Distribution & Logistics
Second lien (2)
10.63% (L + 9.25%/Q)
12/18/2013
12/20/2019
9,000
8,929
8,955
0.86 %
JAMF Holdings, Inc.
Software
Autodata, Inc. (Autodata Solutions,
Inc.)
First lien (3)(10)
9.41% (L + 8.00%/Q)
11/13/2017
11/11/2022
8,757
8,672
8,670
0.84 %
Business Services
Second lien (3)
8.82% (L + 7.25%/Q)
12/12/2017
12/12/2025
7,406
7,387
7,387
0.71 %
MH Sub I, LLC (Micro Holding
Corp.)
Software
First American Payment Systems, L.P.
Second lien (3)
9.09% (L + 7.50%/Q)
8/16/2017
9/15/2025
7,000
6,932
7,048
0.68 %
Business Services
First lien (2)
7.14% (L + 5.75%/M)
1/3/2017
1/5/2024
6,844
6,783
6,880
0.66 %
Solera LLC / Solera Finance, Inc.
Software
Pathway Partners Vet Management
Company LLC
Consumer Services
Applied Systems, Inc.
Software
ADG, LLC
Subordinated (3)
10.50%/S
2/29/2016
3/1/2024
5,000
4,791
5,650
0.55 %
Second lien (4)
9.57% (L + 8.00%/M)
10/4/2017
10/10/2025
5,556
5,527
5,527
0.53 %
Second lien (3)
8.69% (L + 7.00%/Q)
9/14/2017
9/19/2025
4,923
4,923
5,106
0.49 %
Healthcare Services
Second lien (3)(10)
10.57% (L + 9.00%/M)
10/3/2016
3/28/2024
5,000
4,934
5,038
0.49 %
Vencore, Inc. (fka The SI Organization
Inc.)
Federal Services
Second lien (3)
10.44% (L + 8.75%/Q)
6/14/2016
5/23/2020
4,400
4,350
4,450
0.43 %
Affinity Dental Management, Inc.
Healthcare Services
First lien (2)(10)
7.59% (L + 6.00%/Q)
9/15/2017
9/15/2023
4,344
4,302
4,301
0.41 %
York Risk Services Holding Corp.
Business Services
Subordinated (3)
8.50%/S
9/17/2014
10/1/2022
3,000
3,000
2,940
0.28 %
Ensemble S Merger Sub, Inc.
Software
Education Management Corporation
(12)
Education Management II LLC
Education
Subordinated (3)
9.00%/S
9/21/2015
9/30/2023
2,000
1,946
2,125
0.20 %
First lien (2)
First lien (3)
First lien (2)
First lien (3)
5.85% (L + 4.50%/Q)
5.85% (L + 4.50%/Q)
8.85% (L + 7.50%/Q)
8.85% (L + 7.50%/Q)
1/5/2015
7/2/2020
1/5/2015
7/2/2020
1/5/2015
7/2/2020
1/5/2015
7/2/2020
211
119
475
268
205
116
437
247
82
46
10
6
Total Funded Debt Investments -
United States
Total Funded Debt Investments
1,073
1,005
144
0.01 %
$1,319,560 $1,309,577 $ 1,325,328
$1,399,913 $1,388,666 $ 1,404,984
128.05 %
135.75 %
The accompanying notes are an integral part of these consolidated financial statements.
112
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Equity - Hong Kong
Bach Special Limited (Bach
Preference Limited)**
Education
Total Shares - Hong Kong
Equity - United States
Avatar Topco, Inc. (23)
Preferred shares (3)(10)
(22)
—
9/1/2017
—
58,868 $
$
5,807 $
5,807 $
5,806
5,806
0.56 %
0.56 %
Education
Tenawa Resource Holdings LLC (13)
Preferred shares (3)(10)
(23)
QID NGL LLC
Energy
Ordinary shares (7)(10)
Preferred shares (7)(10)
TWDiamondback Holdings Corp.
(15)
Distribution & Logistics
Preferred shares (4)(10)
TW-NHME Holdings Corp. (20)
Healthcare Services
Ancora Acquisition LLC
Education
Education Management Corporation
(12)
Education
Total Shares - United States
Total Shares
Warrants - United States
ASP LCG Holdings, Inc.
Education
Ancora Acquisition LLC
Education
YP Equity Investors, LLC
Preferred shares (4)(10)
Preferred shares (4)(10)
Preferred shares (4)(10)
Preferred shares (6)(10)
Preferred shares (2)
Preferred shares (3)
Ordinary shares (2)
Ordinary shares (3)
Warrants (3)(10)
Warrants (6)(10)
Media
Warrants (5)(10)
Total Warrants - United States
Total Funded Investments
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11/17/2017
5/12/2014
10/30/2017
11/19/2014
7/14/2015
1/5/2016
6/30/2016
8/12/2013
1/5/2015
1/5/2015
1/5/2015
1/5/2015
—
—
—
—
—
—
—
—
—
—
—
—
35,750 $
35,220 $
35,204
3.40 %
5,290,997
620,706
5,291
621
5,912
8,154
1,007
9,161
0.88 %
200
2,000
4,508
0.44 %
100
16
6
1,000
158
68
1,226
944
149
58
1,151
0.11 %
372
83
393
0.04 %
3,331
1,879
2,994,065
1,688,976
$
$
200
113
100
56
469
44,910 $
50,717 $
—
—
10
6
16
50,433
56,239
0.00 %
4.87 %
5.43 %
5/5/2014
5/5/2026
622 $
37 $
1,089
0.11 %
8/12/2013
8/12/2020
20
—
—
— %
5/3/2012
5/8/2022
—
5
$
1,089
$1,439,420 $ 1,462,312
—
37 $
— %
0.11 %
141.29 %
The accompanying notes are an integral part of these consolidated financial statements.
113
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Unfunded Debt Investments - United
States
PetVet Care Centers LLC
Consumer Services
VetCor Professional Practices LLC
Consumer Services
DCA Investment Holding, LLC
Healthcare Services
First lien (3)(10)(11) -
Undrawn
First lien (3)(11) -
Undrawn
First lien (3)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
iPipeline, Inc. (Internet Pipeline, Inc.)
Software
Valet Waste Holdings, Inc.
Business Services
Zywave, Inc.
Software
Marketo, Inc.
Software
Ansira Holdings, Inc.
Business Services
JAMF Holdings, Inc.
Software
Xactly Corporation
Software
Pathway Partners Vet Management
Company LLC
Consumer Services
Trader Interactive, LLC
Business Services
BackOffice Associates Holdings,
LLC
Business Services
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
Second lien (4)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6/8/2017
6/8/2019
$
4,439 $
(16) $
44
0.00 %
5/15/2015
4/20/2021
12/29/2017
12/29/2019
7/2/2015
7/2/2021
12/20/2017
12/20/2019
1,274
8,552
9,826
(13)
(75)
(88)
2,100
(21)
13,465
15,565
(118)
(139)
2
11
13
—
—
—
0.00 %
— %
8/4/2015
8/4/2021
1,000
(10)
—
— %
9/24/2015
9/24/2021
3,750
(47)
—
— %
11/22/2016
11/17/2022
1,550
(12)
—
— %
8/16/2016
8/16/2021
1,788
(27)
—
— %
12/19/2016
12/20/2018
1,700
(9)
(4)
(0.00)%
11/13/2017
11/11/2022
750
(8)
(8)
(0.00)%
7/31/2017
7/29/2022
992
(10)
(10)
(0.00)%
10/4/2017
10/10/2019
2,444
(12)
(12)
(0.00)%
6/15/2017
6/15/2023
1,673
(13)
(13)
(0.00)%
8/25/2017
8/24/2018
8/25/2017
8/25/2023
3,448
2,586
6,034
(13)
(23)
(36)
(13)
(23)
(36)
(0.00)%
The accompanying notes are an integral part of these consolidated financial statements.
114
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
Affinity Dental Management, Inc.
Healthcare Services
Frontline Technologies Group
Holdings, LLC
Education
Total Unfunded Debt Investments -
United States
Total Non-Controlled/Non-
Affiliated Investments
Non-Controlled/Affiliated
Investments(24)
Funded Debt Investments - United
States
Edmentum Ultimate Holdings, LLC
(16)
Edmentum, Inc. (fka Plato, Inc.)
(Archipelago Learning, Inc.)
Education
Permian Holdco 1, Inc.
Permian Holdco 2, Inc.
Energy
Total Funded Debt Investments -
United States
Equity - United States
HI Technology Corp.
First lien (3)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
—
—
9/15/2017
3/15/2019
$
11,584 $
(29) $
(29)
9/15/2017
3/15/2023
1,738
13,322
(17)
(46)
(17)
(46)
(0.00)%
First lien (3)(10)(11) -
Undrawn
—
9/18/2017
9/18/2019
7,738
(58)
(58)
(0.01)%
$
72,571 $
(531) $
(130)
(0.01)%
$1,438,889 $ 1,462,182
141.28 %
Second lien (3)(10)(11) -
Drawn
Subordinated (3)(10)
Subordinated (2)(10)
Subordinated (3)(10)
5.00%/M
8.50% PIK/Q*
10.00% PIK/Q*
10.00% PIK/Q*
6/9/2015
6/9/2020
$
6/9/2015
6/9/2020
6/9/2015
6/9/2020
6/9/2015
6/9/2020
3,172 $
4,491
16,760
4,123
28,546
3,172 $
4,486
16,760
4,123
28,541
3,172
4,491
13,408
3,298
24,369
2.36 %
Subordinated (3)(10)
14.00% PIK/Q*
10/31/2016
10/15/2021
2,007
2,007
2,007
Subordinated (3)(10)
(11) - Drawn
14.00% PIK/Q*
10/31/2016
10/15/2021
696
2,703
696
2,703
696
2,703
0.26 %
$
31,249 $
31,244 $
27,072
2.62 %
Business Services
NMFC Senior Loan Program I LLC**
Preferred shares (3)(10)
(21)
Investment Fund
Sierra Hamilton Holdings
Corporation
Energy
Permian Holdco 1, Inc.
Energy
Membership interest (3)
(10)
Ordinary shares (2)(10)
Ordinary shares (3)(10)
Preferred shares (3)(10)
(17)
Ordinary shares (3)(10)
—
—
—
—
—
—
3/21/2017
6/13/2014
7/31/2017
7/31/2017
10/31/2016
10/31/2016
—
—
—
—
—
—
2,768,000 $ 105,155 $
105,155
10.16 %
—
23,000
23,000
2.22 %
25,000,000
2,786,000
11,501
1,281
12,782
11,094
1,236
12,330
1,569,226
1,366,452
6,829
1,350
8,179
8,631
1,399
10,030
1.19 %
0.97 %
The accompanying notes are an integral part of these consolidated financial statements.
115
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Ordinary shares (3)(10)
Ordinary shares (2)(10)
—
—
6/9/2015
6/9/2015
—
—
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
123,968 $
107,143
11 $
9
20
$ 149,136 $
$ 180,380 $
262
227
489
151,004
178,076
0.05 %
14.59 %
17.21 %
Edmentum Ultimate Holdings, LLC
(16)
Education
Total Shares - United States
Total Funded Investments
Unfunded Debt Investments - United
States
Edmentum Ultimate Holdings, LLC
(16)
Edmentum, Inc. (fka Plato, Inc.)
(Archipelago Learning, Inc.)
Education
Permian Holdco 1, Inc.
Permian Holdco 2, Inc.
Energy
Total Unfunded Debt Investments -
United States
Total Non-Controlled/Affiliated
Investments
Controlled Investments(25)
Funded Debt Investments - United
States
UniTek Global Services, Inc.
Business Services
Total Funded Debt Investments -
United States
Equity - Canada
NM APP Canada Corp.**
Net Lease
Total Shares - Canada
Equity - United States
NMFC Senior Loan Program II
LLC**
Second lien (3)(10)(11) -
Undrawn
—
6/9/2015
6/9/2020
$
1,709 $
— $
—
— %
Subordinated (3)(10)
(11) - Undrawn
—
10/31/2016
10/15/2021
342
—
$
2,051 $
— $
—
—
— %
— %
$ 180,380 $
178,076
17.21 %
First lien (2)(10)
10.20% (L + 8.50%/Q)
1/13/2015
1/13/2019
$ 10,846 $ 10,846 $
10,846
First lien (2)(10)
Subordinated (2)(10)
Subordinated (3)(10)
9.84% (L + 7.50% + 1.00%
PIK/Q)*
15.00% PIK/Q*
15.00% PIK/Q*
1/13/2015
1/13/2019
1/13/2015
7/13/2019
1/13/2015
7/13/2019
797
2,003
1,198
14,844
797
2,003
1,198
14,844
797
2,003
1,198
14,844
1.43 %
$ 14,844 $ 14,844 $
14,844
1.43 %
Membership interest (8)
(10)
—
9/13/2016
—
— $
$
7,345 $
7,345 $
7,962
7,962
0.77 %
0.77 %
Investment Fund
Membership interest (3)
(10)
—
5/3/2016
—
— $ 79,400 $
79,400
7.67 %
The accompanying notes are an integral part of these consolidated financial statements.
116
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
Portfolio Company, Location and
Industry(1)
Type of
Investment
Interest Rate(9)
Acquisition
Date
Maturity/Expiration
Date
Preferred shares (2)(10)
(18)
Preferred shares (3)(10)
(18)
Preferred shares (3)(10)
(19)
Ordinary shares (2)(10)
Ordinary shares (3)(10)
Membership interest (8)
(10)
Membership interest (8)
(10)
Membership interest (8)
(10)
Membership interest (8)
(10)
Membership interest (8)
(10)
—
—
—
—
—
—
—
—
—
—
1/13/2015
1/13/2015
6/30/2017
1/13/2015
1/13/2015
10/6/2017
11/15/2016
11/18/2016
9/13/2016
8/12/2016
—
—
—
—
—
—
—
—
—
—
UniTek Global Services, Inc.
Business Services
NM CLFX LP
Net Lease
NM KRLN LLC
Net Lease
NM DRVT LLC
Net Lease
NM APP US LLC
Net Lease
NM JRA LLC
Net Lease
Total Shares - United States
Total Shares
Warrants - United States
UniTek Global Services, Inc.
Business Services
Warrants (3)(10)
—
6/30/2017
12/31/2018
Principal
Amount,
Par Value
or Shares
Cost
Fair Value
Percent of
Net
Assets
21,753,102 $
19,373 $
19,288
6,011,522
5,353
5,330
10,863,583
2,096,477
1,993,749
10,864
1,925
531
38,046
10,864
7,313
6,954
49,749
4.81 %
—
12,538
12,538
1.21 %
—
7,510
8,195
0.79 %
—
5,152
5,385
0.52 %
—
5,080
5,138
0.50 %
—
2,043
$ 149,769 $
$ 157,114 $
2,191
162,596
170,558
0.21 %
15.71 %
16.48 %
— $
526,925 $
$
— $
$ 171,958 $
—
—
185,402
— %
— %
17.91 %
Total Warrants - 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)(10)(11) -
Undrawn
First lien (3)(10)(11) -
Undrawn
—
—
1/13/2015
1/13/2019
$
2,048 $
— $
1/13/2015
1/13/2019
758
2,806
—
—
—
—
—
$
2,806 $
—
— $
$ 171,958 $
185,402
$1,791,227 $ 1,825,660
— %
— %
17.91 %
176.4 %
(1)
(2)
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.
(3)
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.
The accompanying notes are an integral part of these consolidated financial statements.
117
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
(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 is held in New Mountain Net Lease Corporation.
(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, 2017.
(10)
The fair value of the Company's investment is determined using unobservable inputs that are significant to the overall fair value measurement. See Note 4. Fair Value, for details.
(11)
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.
(12)
(13)
(14)
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.
The Company holds investments in three 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), class A preferred units in QID NGL LLC and 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.
(15)
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.
(16)
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 preferred equity in UniTek Global Services, Inc. that is entitled to receive cumulative preferential dividends at a rate of 19.0% per annum payable in additional shares.
(20)
The Company holds equity investments in TW-NHME Holdings Corp., and holds a second lien term loan investment in National HME, Inc., a wholly-owned subsidiary of TW-NHME Holdings
Corp.
(21)
The Company holds convertible preferred equity in HI Technology Corp that is accruing dividends at a rate of 15.0% per annum.
(22)
The Company holds preferred equity in Bach Special Limited (Bach Preference Limited) that is entitled to receive cumulative preferential dividends at a rate of 12.25% per annum payable in
additional shares.
(23)
The Company holds preferred equity in Avatar Topco, Inc., and holds a second lien term loan investment in EAB Global, Inc., a wholly-owned subsidiary of Avatar Topco, Inc. The preferred equity
is entitled to receive cumulative preferential dividends at a rate of L + 11.00% per annum.
The accompanying notes are an integral part of these consolidated financial statements.
118
Table of Contents
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
(in thousands, except shares)
(24)
Denotes investments in which the Company is an “ Affiliated Person”, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), 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, 2017 and December 31, 2016 along with transactions during the
year ended December 31, 2017 in which the issuer was a non-controlled/affiliated investment is as follows:
Portfolio Company
Edmentum Ultimate Holdings,
LLC/Edmentum Inc.
$
HI Technology Corp.
NMFC Senior Loan Program I
LLC
Permian Holdco 1, Inc. /
Permian Holdco 2, Inc.
Sierra Hamilton Holdings
Corporation
Total Non-Controlled/Affiliated
Investments
$
Fair Value at
December 31,
2016
Gross
Additions (A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31,
2017
Interest
Income
Dividend
Income
Other
Income
23,247
—
23,000
11,193
$
10,912 $
105,155
—
1,916
—
12,782
(5,381) $
—
—
—
—
—
—
—
—
—
$
(3,920) $
—
—
(376)
(452)
$
24,858
105,155
2,538
—
$
—
11,667
$
—
—
23,000
12,733
12,330
—
270
—
3,498
1,156
960
—
30
—
57,440
$
130,765 $
(5,381) $
—
$
(4,748) $
178,076
$
2,808
$
16,125
$ 1,186
(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 redemptions 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.
(25)
Denotes investments in which the Company is in “ Control”, as defined in the 1940 Act, 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, 2017 and December 31, 2016 along with transactions during the year ended December 31, 2017 in which the issuer was a controlled investment, is as
follows:
Fair Value at
December 31,
2016
Gross
Additions
(A)
Gross
Redemptions
(B)
Net
Realized
Gains
(Losses)
Net Change In
Unrealized
Appreciation
(Depreciation)
Fair Value at
December 31,
2017
Interest
Income
Dividend
Income
Other
Income
Portfolio Company
New Mountain Net Lease
Corporation
NM APP CANADA CORP
NM APP US LLC
NM CLFX LP
NM DRVT LLC
NM JRA LLC
NM KRLN LLC
$
$
27,000
—
—
—
—
—
—
NMFC Senior Loan Program II
LLC
UniTek Global Services, Inc.
Total Controlled Investments
$
71,460
56,361
154,821
$
—
7,345
5,080
12,538
5,152
2,043
7,510
7,940
14,777
62,385
$
(27,000) $
—
—
—
—
—
—
—
(4,006)
$
(31,006) $
—
—
—
—
—
—
—
—
—
—
$
$
—
617
58
—
233
148
685
$
—
7,962
5,138
12,538
5,385
2,191
8,195
$
—
—
—
—
—
—
—
$
—
911
594
341
520
232
736
—
—
—
—
—
—
—
—
(2,539)
$
(798) $
79,400
64,593
185,402
—
1,709
$ 1,709
$
12,406
4,415
20,155
$
—
819
819
(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 redemptions 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 1940 Act. Qualifying assets must represent at least 70.0% of the Company’ s total assets at the time
of acquisition of any additional non-qualifying assets. As of December 31, 2017, 11.0% of the Company’ s total investments were non-qualifying assets.
The accompanying notes are an integral part of these consolidated financial statements.
119
New Mountain Finance Corporation
Consolidated Schedule of Investments (Continued)
December 31, 2017
Table of Contents
Investment Type
First lien
Second lien
Subordinated
Equity and other
Total investments
Industry Type
Business Services
Software
Healthcare Services
Education
Consumer Services
Distribution & Logistics
Investment Fund
Federal Services
Energy
Net Lease
Healthcare Information Technology
Packaging
Business Products
Total investments
Interest Rate Type
Floating rates
Fixed rates
Total investments
December 31, 2017
Percent of Total
Investments at Fair Value
37.99 %
37.41 %
3.85 %
20.75 %
100.00 %
December 31, 2017
Percent of Total
Investments at Fair Value
31.85 %
16.33 %
9.60 %
9.48 %
7.18 %
6.15 %
5.61 %
4.30 %
4.06 %
2.27 %
1.86 %
0.79 %
0.52 %
100.00 %
December 31, 2017
Percent of Total
Investments at Fair Value
87.48 %
12.52 %
100.00 %
The accompanying notes are an integral part of these consolidated financial statements.
120
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation
December 31, 2018
(in thousands, except share data)
Note 1. Formation and Business Purpose
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”). 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”). Since NMFC’s IPO, and through December 31, 2018, NMFC
raised approximately $614,581 in net proceeds from additional offerings of its common stock.
New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) is a wholly-owned subsidiary of New Mountain Capital Group,
L.P. (together with New Mountain Capital, L.L.C. and its affiliates, "New Mountain Capital") whose ultimate owners include Steven B. Klinsky and
related other vehicles. 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. The Investment Adviser also manages
New Mountain Guardian Partners II, L.P., a Delaware limited partnership, and New Mountain Guardian II Offshore, L.P., a Cayman Islands exempted
limited partnership, (together "Guardian II"), which commenced operations in April 2017. 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. 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 I") and its
general partner, New Mountain Finance SBIC G.P., L.L.C. ("SBIC I GP"), were organized in Delaware as a limited partnership and limited liability
company, respectively. New Mountain Finance SBIC II, L.P. (“SBIC II”) and its general partner, New Mountain Finance SBIC II G.P., L.L.C. (“SBIC II
GP”), were also organized in Delaware as a limited partnership and limited liability company, respectively. SBIC I, SBIC I GP, SBIC II and SBIC II GP
are consolidated wholly-owned direct and indirect subsidiaries of the Company. SBIC I and SBIC II received licenses from the United States ("U.S.")
Small Business Administration (the "SBA") to operate as small business investment companies ("SBICs") under Section 301(c) of the Small
Business Investment Act of 1958, as amended (the "1958 Act"). The Company's wholly-owned subsidiary, New Mountain Net Lease Corporation
("NMNLC"), a Maryland corporation, was formed to acquire commercial real properties that are subject to "triple net" leases and has qualified and
intends to continue to qualify as a real estate investment trust, or REIT, within the meaning of Section 856(a) of the Code. During the year ended
December 31, 2018, New Mountain Finance DB, L.L.C. ("NMFDB") was organized in Delaware as a limited liability company whose assets are used
to secure NMFDB's credit facility.
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. The first lien debt may
include traditional first lien senior secured loans or unitranche loans. Unitranche loans combine characteristics of traditional first lien senior secured
loans as well as second lien and subordinated loans. Unitranche loans will expose the Company to the risks associated with second lien and
subordinated loans to the extent the Company invests in the “last out” tranche. In some cases, the Company’s investments may also include equity
interests. The Company's 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 I's and SBIC II's investment
objectives are to generate current income and capital appreciation under the investment criteria used by the Company. However, SBIC I and SBIC II
investments must be in SBA eligible small businesses.
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The Company's portfolio may be concentrated in a limited number of industries. As of December 31, 2018, the Company’s top five industry
concentrations were business services, software, healthcare services, education and investment funds.
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 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.
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.
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Table of Contents
Restructuring
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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 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
123
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
existing credit facilities with Wells Fargo Bank, National Association, NMF SLF merged with and into NMF Holdings on December 18, 2014.
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, NMFDB, NMF
Servicing, NMNLC, SBIC I, SBIC I GP, SBIC II, SBIC II 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 5. Agreements, for details. 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 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 or 10 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:
124
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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. 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.
125
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
New Mountain Net Lease Corporation
NMNLC was formed to acquire commercial real estate properties that are subject to "triple net" leases. NMNLC's investments are disclosed
on the Company's Consolidated Schedule of Investments as of December 31, 2018.
Below is certain summarized property information for NMNLC as of December 31, 2018:
Portfolio Company
NM NL Holdings LP /
NM GP Holdco LLC
NM GLCR LP
NM CLFX LP
NM APP Canada Corp.
NM APP US LLC
NM DRVT Jonesboro,
LLC
NM KRLN LLC
NM JRA LLC
Tenant
Expiration Date
Location
Square Feet
December 31, 2018
Lease
Total
Fair Value as of
Various
Arctic Glacier U.S.A.
Victor Equipment Company
A.P. Plasman, Inc.
Plasman Corp, LLC / A-Brite LP
Various
2/28/2038
8/31/2033
9/30/2031
9/30/2033
Various
CA
TX
Canada
AL / OH
FMH Conveyors, LLC
Kirlin Group, LLC
J.R. Automation Technologies,
LLC
10/31/2031
6/30/2029
AR
MD
1/31/2031
MI
Various
214
423
436
261
195
95
88
$
$
33,703
20,343
12,770
9,727
5,912
5,619
4,205
2,537
94,816
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, 2018 and December 31, 2017, the
Company held one collateralized agreement to resell with a cost basis of $30,000 and $30,000, respectively, and a fair value of $23,508 and $25,212,
respectively. The collateralized agreement to resell is guaranteed by a private hedge fund. The private hedge fund is currently in liquidation under
the laws of the Cayman Islands. Pursuant to the terms of the collateralized agreement, the private hedge fund was obligated to repurchase the
collateral from the Company at the par value of the collateralized agreement. The private hedge fund has breached its agreement to repurchase the
collateral under the collateralized agreement. The default by the private hedge fund did not release the collateral to the Company, and therefore, the
Company does not have full rights and title to the collateral. A claim has been filed with the Cayman Islands joint official liquidators to resolve this
matter. The joint official liquidators have recognized the Company's contractual rights under the collateralized agreement. The Company continues
to exercise its rights under the collateralized agreement and continues to monitor the liquidation process of the private hedge fund. The fair value of
the collateralized agreement to resell is reflective of the increased risk of the position.
Cash and cash equivalents—Cash and cash equivalents include cash and short-term, highly liquid investments. The Company defines
cash equivalents as securities that are readily convertible into known amounts of cash and so near maturity that there is insignificant risk of
changes in value. These securities have original maturities of three months or less. The Company did not hold any cash equivalents as of
December 31, 2018 and December 31, 2017.
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
126
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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. For the years ended December 31, 2018, December 31, 2017 and December 31, 2016, the Company
recognized PIK and non-cash interest from investments of $8,640, $6,394 and $4,270, respectively, and PIK and non-cash dividends from
investments of and $24,893, $17,853 and $3,179, respectively.
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 collectibility. 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.
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.
Deferred offering costs—The Company's deferred offering costs consists 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.
127
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The Company will be subject to a 4.0% nondeductible U.S. 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, 2018, the Company recognized a total income tax provision of approximately $403 for the Company's
consolidated subsidiaries. For the year ended December 31, 2018, the Company recorded current income tax expense of approximately $291 and
deferred income tax provision of approximately $112. For the year ended December 31, 2017, the Company recognized a total income tax provision of
$416 for the Company's consolidated subsidiaries. For the year ended December 31, 2017, the Company recorded current income tax expense of
approximately $556 and deferred income tax benefit of approximately $140. For the year ended December 31, 2016, the Company recognized a total
income tax benefit of $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.
As of December 31, 2018 and December 31, 2017, the Company had $1,006 and $894, 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.
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 as defined by Accounting Standards Codification Topic 740 ("ASC 740") through December 31, 2018. The 2015 through 2018 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 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 for reinvestment of any distributions declared on behalf of its
stockholders, 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
128
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
the 1940 Act. On December 31, 2018 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, 2019 or until $50,000 of its outstanding shares of common stock have been
repurchased. During the years ended December 31, 2018 and December 31, 2017, the Company did not repurchase any of the Company's common
stock. The Company previously repurchased $2,948, of its common stock under the share repurchase program.
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.
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.
129
Table of Contents
Note 3. Investments
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
At December 31, 2018, 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
Investment Cost and Fair Value by Industry
Business Services
Software
Healthcare Services
Education
Investment Fund
Consumer Services
Energy
Net Lease
Distribution & Logistics
Federal Services
Healthcare Information Technology
Food & Beverage
Packaging
Business Products
Total investments
130
Cost
1,179,129
666,545
72,559
411,493
2,329,726
$
$
Fair Value
1,173,459
662,556
65,297
440,641
2,341,953
Cost
Fair Value
541,901
476,473
350,357
214,032
180,800
122,326
101,794
87,299
82,201
74,572
44,793
28,099
14,328
10,751
2,329,726
$
$
554,404
478,063
346,521
209,433
180,800
120,562
105,122
94,816
80,581
73,962
44,989
27,957
14,278
10,465
2,341,953
$
$
$
$
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
At December 31, 2017, 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
Investment Cost and Fair Value by Industry
Business Services
Software
Healthcare Services
Education
Consumer Services
Distribution & Logistics
Investment Fund
Federal Services
Energy
Net Lease
Healthcare Information Technology
Packaging
Business Products
Total investments
Cost
Fair Value
688,696
674,536
70,991
357,004
1,791,227
$
$
693,563
682,950
70,257
378,890
1,825,660
Cost
Fair Value
566,344
291,445
174,046
176,399
129,311
107,835
102,400
77,001
69,411
39,668
33,525
14,309
9,533
1,791,227
$
$
581,434
298,172
175,348
173,072
131,116
112,241
102,400
78,433
74,124
41,409
34,020
14,391
9,500
1,825,660
$
$
$
$
During the second quarter of 2018, the Company placed a portion of its second lien position in National HME, Inc. on non-accrual status
and wrote down the aggregate fair value of its preferred shares in TW-NHME Holdings Corp. (together with the Company's second lien position,
"NHME") to $0. In November of 2018, NHME completed a restructuring which resulted in a material modification of the original terms and an
extinguishment of the Company's original investments in NHME. Prior to the extinguishment in November 2018, the Company's original investments
in NHME had an aggregate cost of $30,293, an aggregate fair value of $15,275 and total unearned interest income of $1,063 for the year ended
December 31, 2018. The extinguishment resulted in a realized loss of $15,018. As a result of the restructuring, the Company received second lien
debt in NHME and common shares in NHME Holdings Corp. In addition, the Company funded additional second lien debt and received warrants to
purchase common shares for this additional funding. Post restructuring, the Company's investments in NHME have been restored to full accrual
status. As of December 31, 2018, the Company's investments in NHME had an aggregate cost basis of $22,833 and an aggregate fair value of
$22,722.
During the first quarter of 2018, the Company placed its first lien positions in Education Management II LLC ("EDMC") on non-accrual
status as EDMC announced its intention to wind down and liquidate the business. As of December 31, 2018, the Company's investment in EDMC
placed on non-accrual status represented an aggregate cost basis of $1,004, an aggregate fair value of $53 and total unearned interest income of
$178 for the year then ended.
During the first quarter of 2017, the Company placed its entire first lien notes position in Sierra Hamilton LLC / Sierra Hamilton Finance, Inc.
("Sierra") on non-accrual status due to its ongoing restructuring. As of June 30, 2017, the Company's investment in Sierra placed on non-accrual
status represented an aggregate cost basis of $27,231, an aggregate fair value of
131
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
$12,725 and total unearned interest income of $1,388 for the six months then ended. In July 2017, Sierra completed a restructuring which resulted in a
material modification of the original terms and an extinguishment of the Company’s original investment in Sierra. Prior to the extinguishment in July
2017, the Company’s original investment in Sierra had an aggregate cost of $27,307, an aggregate fair value of $12,858 and total unearned interest
income of $1,687. The extinguishment resulted in a realized loss of $14,449. As a result of the restructuring, the Company received common shares in
Sierra Hamilton Holding Corporation. As of December 31, 2018, the Company’s investment has an aggregate cost basis of $12,782 and an aggregate
fair value of $12,527.
As of December 31, 2018, the Company had unfunded commitments on revolving credit facilities and bridge facilities of $43,539 and $0,
respectively. As of December 31, 2018, the Company had unfunded commitments in the form of delayed draws or other future funding commitments
of $94,407. The unfunded commitments on revolving credit facilities and delayed draws are disclosed on the Company's Consolidated Schedule of
Investments as of December 31, 2018.
As of December 31, 2017, the Company had unfunded commitments on revolving credit facilities and bridge facilities of $23,716 and $0,
respectively. As of December 31, 2017, the Company had unfunded commitments in the form of delayed draws or other future funding commitments
of $53,712. The unfunded commitments on revolving credit facilities and delayed draws are disclosed on the Company's Consolidated Schedule of
Investments as of December 31, 2017.
PPVA Black Elk (Equity) LLC
On May 3, 2013, the Company entered into a collateralized securities purchase and put agreement (the “SPP Agreement”) with a private
hedge fund. Under the SPP Agreement, the Company purchased twenty million Class E Preferred Units of Black Elk Energy Offshore Operations,
LLC (“Black Elk”) for $20,000 with a corresponding obligation of the private hedge fund to repurchase the preferred units for $20,000 plus other
amounts due under the SPP Agreement. The majority owner of Black Elk was the private hedge fund. In August 2014, the Company received a
payment of $20,540, the full amount due under the SPP Agreement.
In August 2017, a trustee (the “Trustee”) for Black Elk informed the Company that the Trustee intended to assert a fraudulent conveyance
claim (the “Claim”) against the Company and one of its affiliates seeking the return of the $20,540 repayment. Black Elk filed a Chapter 11 bankruptcy
petition pursuant to the United States Bankruptcy Code in August 2015. The Trustee alleges that individuals affiliated with the private hedge fund
conspired with Black Elk and others to improperly use proceeds from the sale of certain Black Elk assets to repay, in August 2014, the private hedge
fund’s obligation to the Company under the SPP Agreement. The Company was unaware of these claims at the time the repayment was received.
The private hedge fund is currently in liquidation under the laws of the Cayman Islands.
On December 22, 2017, the Company settled the Trustee’s $20,540 Claim for $16,000 and filed a claim with the Cayman Islands joint official
liquidators of the private hedge fund for $16,000 that is owed to the Company under the SPP Agreement. The SPP Agreement was restored and is in
effect since repayment has not been made. The Company continues to exercise its rights under the SPP Agreement and continues to monitor the
liquidation process of the private hedge fund. During the year ended December 31, 2018, the Company received a $1,500 payment from its insurance
carrier in respect to the settlement. As of December 31, 2018, the SPP Agreement has a cost basis of $14,500 and a fair value of $11,362, which is
reflective of the higher inherent risk in this transaction.
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, interests are not readily marketable. SLP I operates under a limited liability company agreement (the “SLP I Agreement”) and will continue in
existence until August 31, 2021, subject to earlier termination pursuant to certain terms of the SLP I Agreement. The term may be extended pursuant
to certain terms of the SLP I Agreement. SLP I's re-investment period was through July 31, 2018. In September 2018, the re-investment period was
extended until August 31, 2019. 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.
SLP I is capitalized with $93,000 of capital commitments and $265,000 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 commitments. As of December 31, 2018, SLP I had total investments with an
132
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
aggregate fair value of approximately $327,240, debt outstanding of $242,567 and capital that had been called and funded of $93,000. As of
December 31, 2017, SLP I had total investments with an aggregate fair value of approximately $348,652, debt outstanding of $223,667 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 Schedule of Investments
as of December 31, 2018 and December 31, 2017.
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, 2018, December 31, 2017 and December 31, 2016, the Company earned approximately $1,179, $1,156 and $1,163, respectively, in
management fees related to SLP I, which is included in other income. As of December 31, 2018 and December 31, 2017, approximately $288 and $291,
respectively, of management fees related to SLP I was included in receivable from affiliates. For the years ended December 31, 2018, December 31,
2017 and December 31, 2016, the Company earned approximately $3,173, $3,498 and $3,728, respectively, of dividend income related to SLP I, which
is included in dividend income. As of December 31, 2018 and December 31, 2017, approximately $750 and $836, respectively, of dividend income
related to SLP I was included in interest and dividend receivable.
NMFC Senior Loan Program III LLC
NMFC Senior Loan Program III LLC ("SLP III") was formed as a Delaware limited liability company and commenced operations on April 25,
2018. SLP III is structured as a private joint venture investment fund between the Company and SkyKnight Income II, LLC (“SkyKnight II”) and
operates under a limited liability company agreement (the "SLP III 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 III, which has equal representation from the
Company and SkyKnight II. SLP III has a five year investment period and will continue in existence until April 25, 2025. The investment period may
be extended for up to one year pursuant to certain terms of the SLP III Agreement.
SLP III 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 III to call down on capital commitments requires approval by the board of managers of SLP III. As
of December 31, 2018, the Company and SkyKnight II have committed $80,000 and $20,000, respectively, of equity to SLP III. As of December 31,
2018, the Company and SkyKnight II have contributed $78,400 and $19,600, respectively, of equity to SLP III. The Company’s investment in SLP III
is disclosed on the Company’s Consolidated Schedule of Investments as of December 31, 2018.
On May 2, 2018, SLP III closed its $300,000 revolving credit facility with Citibank, N.A., which matures on May 2, 2023 and bears interest at
a rate of the London Interbank Offered Rate ("LIBOR") plus 1.70% per annum. As of December 31, 2018, SLP III had total investments with an
aggregate fair value of approximately $365,357 and debt outstanding under its credit facility of $280,300. As of December 31, 2018, none of SLP III's
investments were on non-accrual. Additionally, as of December 31, 2018, SLP III had unfunded commitments in the form of delayed draws of $8,811.
Below is a summary of SLP III's portfolio, along with a listing of the individual investments in SLP III's portfolio as of December 31, 2018:
First lien investments (1)
Weighted average interest rate on first lien investments (2)
Number of portfolio companies in SLP III
Largest portfolio company investment (1)
Total of five largest portfolio company investments (1)
December 31, 2018
383,289
6.50%
39
18,958
85,938
(1)
(2)
Reflects principal amount or par value of investment.
Computed as the all in interest rate in effect on accruing investments divided by the total principal amount of investments.
133
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The following table is a listing of the individual investments in SLP III's portfolio as of December 31, 2018:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
Funded Investments - First lien
Access CIG, LLC
Affordable Care Holding Corp.
Bracket Intermediate Holding Corp.
Brave Parent Holdings, Inc.
CentralSquare Technologies, LLC
Certara Holdco, Inc.
CHA Holdings, Inc.
CommerceHub, Inc.
CRCI Longhorn Holdings, Inc.
Dentalcorp Perfect Smile ULC
Dentalcorp Perfect Smile ULC
Drilling Info Holdings, Inc.
Financial & Risk US Holdings, Inc.
GOBP Holdings, Inc.
Greenway Health, LLC
Heartland Dental, LLC
HIG Finance 2 Limited
Idera, Inc.
J.D. Power (fka J.D. Power and Associates)
Market Track, LLC
Ministry Brands, LLC
Ministry Brands, LLC
National Intergovernmental Purchasing Alliance
Company
Navex Topco, Inc.
Navicure, Inc.
Netsmart Technologies, Inc.
Newport Group Holdings II, Inc.
NorthStar Financial Services Group, LLC
OEConnection LLC
Outcomes Group Holdings, Inc.
Pelican Products, Inc.
Peraton Corp. (fka MHVC Acquisition Corp.)
Premise Health Holding Corp.
Quest Software US Holdings Inc.
Sierra Enterprises, LLC
SSH Group Holdings, Inc.
University Support Services LLC (St. George's
University Scholastic Services LLC)
VT Topco, Inc.
VT Topco, Inc.
Wirepath LLC
WP CityMD Bidco LLC
YI, LLC
Total Funded Investments
Business Services
Healthcare Services
Healthcare Services
Software
Software
Healthcare I.T.
Business Services
Software
Business Services
Healthcare Services
Healthcare Services
Business Services
Business Services
Retail
Software
Healthcare Services
Business Services
Software
Business Services
Business Services
Software
Software
Business Services
Software
Healthcare Services
Healthcare I.T.
Business Services
Software
Business Services
Healthcare Services
Business Products
Federal Services
Healthcare Services
Software
Food & Beverage
Education
Education
Business Services
Business Services
Distribution & Logistics
Healthcare Services
Healthcare Services
6.46% (L + 3.75%)
2/27/2025
$
7.25% (L + 4.75%)
10/24/2022
7.00% (L + 4.25%)
9/5/2025
6.52% (L + 4.00%)
4/18/2025
6.27% (L + 3.75%)
8/29/2025
6.30% (L + 3.50%)
8/15/2024
7.30% (L + 4.50%)
4/10/2025
6.27% (L + 3.75%)
5/21/2025
5.89% (L + 3.50%)
6.27% (L + 3.75%)
6.27% (L + 3.75%)
8/8/2025
6/6/2025
6/6/2025
6.77% (L + 4.25%)
7/30/2025
6.27% (L + 3.75%)
10/1/2025
6.55% (L + 3.75%)
10/22/2025
6.56% (L + 3.75%)
2/16/2024
6.27% (L + 3.75%)
4/30/2025
6.06% (L + 3.50%)
12/20/2024
7.03% (L + 4.50%)
6/28/2024
6.27% (L + 3.75%)
6.87% (L + 4.25%)
9/7/2023
6/5/2024
6.52% (L + 4.00%)
12/2/2022
6.52% (L + 4.00%)
12/2/2022
6.55% (L + 3.75%)
5/23/2025
5.78% (L + 3.25%)
9/5/2025
6.27% (L + 3.75%)
11/1/2024
6.27% (L + 3.75%)
4/19/2023
6.54% (L + 3.75%)
9/12/2025
6.10% (L + 3.50%)
5/25/2025
6.53% (L + 4.00%)
11/22/2024
6.28% (L + 3.50%)
10/24/2025
5.88% (L + 3.50%)
5/1/2025
8.06% (L + 5.25%)
4/29/2024
6.55% (L + 3.75%)
7/10/2025
6.78% (L + 4.25%)
5/16/2025
6.02% (L + 3.50%)
11/11/2024
6.77% (L + 4.25%)
7/30/2025
6.03% (L + 3.50%)
7/17/2025
6.55% (L + 3.75%)
6.55% (L + 3.75%)
6.71% (L + 4.00%)
6.30% (L + 3.50%)
8/1/2025
8/1/2025
8/5/2024
6/7/2024
6.80% (L + 4.00%)
11/7/2024
$
1,216
1,025
14,963
14,925
15,000
1,275
997
14,925
14,963
11,940
1,686
17,591
8,000
15,000
14,821
17,329
1,995
2,294
5,985
4,827
4,596
600
14,925
14,963
2,985
10,437
4,988
14,925
1,830
6,500
4,975
15,588
13,862
15,000
2,481
14,963
$
1,216
1,030
14,890
14,874
14,964
1,280
997
14,856
14,891
11,912
1,685
17,507
7,980
14,963
14,831
17,249
1,985
2,289
5,985
4,821
4,576
597
14,912
14,890
2,985
10,437
4,963
14,856
1,843
6,484
4,963
15,517
13,796
14,930
2,478
14,927
1,185
1,005
14,813
14,421
14,648
1,255
995
14,515
14,588
11,701
1,652
17,525
7,512
14,625
14,450
16,593
1,939
2,248
5,835
4,633
4,596
600
14,552
14,102
2,925
10,307
4,875
14,628
1,789
6,394
4,726
15,199
13,689
14,535
2,463
14,588
3,790
7,980
1,004
17,477
14,887
4,965
374,478
3,772
7,961
1,004
17,477
14,887
4,983
$ 373,443
$
3,759
7,882
992
17,215
14,608
4,935
365,497
$
134
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
Unfunded Investments - First lien
Dentalcorp Perfect Smile ULC
Drilling Info Holdings, Inc.
Heartland Dental, LLC
Ministry Brands, LLC
Premise Health Holding Corp.
University Support Services LLC (St. George's
University Scholastic Services LLC)
VT Topco, Inc.
Total Unfunded Investments
Total Investments
Healthcare Services
Business Services
Healthcare Services
Software
Healthcare Services
Education
Business Services
—
—
—
—
—
—
—
6/6/2020
$
7/30/2020
4/30/2020
10/18/2019
7/10/2020
7/17/2019
8/1/2020
$
$
$
1,308
1,367
1,586
1,267
1,103
(3 ) $
(7 )
—
(6 )
(3 )
1,187
993
8,811
383,289
—
(2 )
(21 ) $
$
$
$ 373,422
(26 )
(11 )
(67 )
—
(14 )
(10 )
(12 )
(140 )
365,357
(1)
(2)
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, 2018.
Represents the fair value in accordance with Accounting Standards Codification Topic 820, Fair Value Measurement and Disclosures ("ASC 820"). The
Company's board of directors does not determine the fair value of the investments held by SLP III.
135
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
Below is certain summarized financial information for SLP III as of December 31, 2018 and for the year ended December 31, 2018:
Selected Balance Sheet Information:
Investments at fair value (cost of $373,422)
Cash and other assets
Total assets
Credit facility
Deferred financing costs
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
Net decrease in members' capital
(1)
SLP III commenced operations on April 25, 2018.
December 31, 2018
365,357
9,138
374,495
280,300
(2,831 )
2,600
4,415
284,484
90,011
374,495
Year Ended
December 31, 2018(1)
9,572
207
9,779
5,402
509
5,911
3,868
9
(8,065 )
(4,188 )
$
$
$
$
$
$
$
For the year ended December 31, 2018, the Company earned approximately $3,040 of dividend income related to SLP III, which is included
in dividend income. As of December 31, 2018 approximately $2,080 of dividend income related to SLP III was included in interest and dividend
receivable.
The Company has determined that SLP III 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 ("ASC 810") 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 III.
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 this rule. As of December 31, 2018, the following companies were considered a significant unconsolidated subsidiary
under Regulation S-X Rule 4-08(g). Based on the requirements under Regulation S-X 4-08(g), the summarized consolidated financial information of
these portfolio companies are shown below.
136
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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. As
of December 31, 2018, the Company and SkyKnight have committed and contributed $79,400 and $20,600, respectively, of equity to SLP II. The
Company’s investment in SLP II is disclosed on the Company’s Consolidated Schedule of Investments as of December 31, 2018 and December 31,
2017.
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 LIBOR plus 1.75% per annum. Effective April 1, 2018, SLP II's revolving credit facility bears interest at a
rate of LIBOR plus 1.60% per annum. As of December 31, 2018 and December 31, 2017, SLP II had total investments with an aggregate fair value of
approximately $336,869 and $382,534, respectively, and debt outstanding under its credit facility of $243,170 and $266,270, respectively. As of
December 31, 2018 and December 31, 2017, none of SLP II's investments were on non-accrual. Additionally, as of December 31, 2018 and
December 31, 2017, SLP II had unfunded commitments in the form of delayed draws of $5,858 and $4,863, respectively. Below is a summary of SLP
II's portfolio, along with a listing of the individual investments in SLP II's portfolio as of December 31, 2018 and December 31, 2017:
First lien investments (1)
Weighted average interest rate on first lien investments (2)
Number of portfolio companies in SLP II
Largest portfolio company investment (1)
Total of five largest portfolio company investments (1)
December 31, 2018
December 31, 2017
348,577
6.84 %
31
17,150
80,766
386,100
6.05 %
35
17,369
81,728
(1)
(2)
Reflects principal amount or par value of investment.
Computed as the all in interest rate in effect on accruing investments divided by the total principal amount of investments.
137
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The following table is a listing of the individual investments in SLP II's portfolio as of December 31, 2018:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
Funded Investments - First lien
Access CIG, LLC
ADG, LLC
Beaver-Visitec International Holdings, Inc.
Brave Parent Holdings, Inc.
CentralSquare Technologies, LLC
CHA Holdings, Inc.
CommerceHub, Inc.
Drilling Info Holdings, Inc.
Greenway Health, LLC
GOBP Holdings, Inc.
Idera, Inc.
J.D. Power (fka J.D. Power and Associates)
Keystone Acquisition Corp.
LSCS Holdings, Inc.
LSCS Holdings, Inc.
Market Track, LLC
Medical Solutions Holdings, Inc.
Ministry Brands, LLC
Ministry Brands, LLC
Ministry Brands, LLC
NorthStar Financial Services Group, LLC
Peraton Corp. (fka MHVC Acquisition Corp.)
Poseidon Intermediate, LLC
Premise Health Holding Corp.
Project Accelerate Parent, LLC
PSC Industrial Holdings Corp.
Quest Software US Holdings Inc.
Salient CRGT Inc.
Sierra Acquisition, Inc.
SSH Group Holdings, Inc.
Wirepath LLC
WP CityMD Bidco LLC
YI, LLC
Zywave, Inc.
Total Funded Investments
Unfunded Investments - First lien
Access CIG, LLC
CHA Holdings, Inc.
Drilling Info Holdings, Inc.
Ministry Brands, LLC
Premise Health Holding Corp.
Total Unfunded Investments
Total Investments
Business Services
Healthcare Services
Healthcare Products
Software
Software
Business Services
Software
Business Services
Software
Retail
Software
Business Services
Healthcare Services
Healthcare Services
Healthcare Services
Business Services
Healthcare Services
Software
Software
Software
Software
Federal Services
Software
Healthcare Services
Business Services
Industrial Services
Software
Federal Services
Food & Beverage
Education
Distribution & Logistics
Healthcare Services
Healthcare Services
Software
Business Services
Business Services
Business Services
Software
Healthcare Services
6.46% (L + 3.75%)
2/27/2025
$
7.63% (L + 4.75%)
9/28/2023
6.62% (L + 4.00%)
8/21/2023
6.52% (L + 4.00%)
4/18/2025
6.27% (L + 3.75%)
8/29/2025
7.30% (L + 4.50%)
4/10/2025
6.27% (L + 3.75%)
5/21/2025
6.77% (L + 4.25%)
7/30/2025
6.56% (L + 3.75%)
2/16/2024
6.55% (L + 3.75%)
10/22/2025
7.03% (L + 4.50%)
6/28/2024
6.27% (L + 3.75%)
9/7/2023
8.05% (L + 5.25%)
5/1/2024
6.86% (L + 4.25%)
3/17/2025
6.89% (L + 4.25%)
3/17/2025
6.87% (L + 4.25%)
6/5/2024
6.27% (L + 3.75%)
6/14/2024
6.52% (L + 4.00%)
12/2/2022
6.52% (L + 4.00%)
12/2/2022
6.52% (L + 4.00%)
12/2/2022
6.10% (L + 3.50%)
5/25/2025
8.06% (L + 5.25%)
4/29/2024
6.78% (L + 4.25%)
8/15/2022
6.55% (L + 3.75%)
7/10/2025
6.64% (L + 4.25%)
1/2/2025
6.21% (L + 3.75%)
10/11/2024
6.78% (L + 4.25%)
5/16/2025
8.27% (L + 5.75%)
2/28/2022
6.02% (L + 3.50%)
11/11/2024
6.77% (L + 4.25%)
7/30/2025
6.71% (L + 4.00%)
8/5/2024
6.30% (L + 3.50%)
6/7/2024
6.80% (L + 4.00%)
11/7/2024
7.52% (L + 5.00%)
11/17/2022
—
—
—
—
—
2/27/2019
10/10/2019
7/30/2020
10/18/2019
7/10/2020
$
$
$
$
8,825
16,862
14,664
15,422
15,000
10,805
2,488
12,242
14,775
2,500
12,492
14,962
5,332
5,321
1,374
11,820
4,432
2,116
600
12,285
7,463
10,342
14,729
1,386
14,887
10,395
15,000
13,509
3,713
8,978
14,963
10,823
15,064
17,150
342,719
1,108
2,143
1,230
1,267
110
5,858
348,577
$
8,785
16,740
14,492
15,369
14,964
10,760
2,476
12,190
14,718
2,494
12,388
14,920
5,289
5,312
1,371
11,772
4,413
2,109
597
12,238
7,428
10,301
14,727
1,380
14,821
10,307
14,930
13,418
3,696
8,956
14,963
10,801
15,053
17,091
$ 341,269
$
$
$
$
—
(11)
(5)
(6)
—
(22) $
$
$
$ 341,247
8,605
16,609
14,517
14,902
14,648
10,774
2,419
12,196
14,406
2,438
12,242
14,588
5,226
5,294
1,367
11,347
4,343
2,116
600
12,285
7,313
10,084
14,644
1,369
14,663
10,161
14,535
13,306
3,685
8,753
14,738
10,620
14,971
17,150
336,914
(28)
(6)
(10)
—
(1)
(45)
336,869
(1)
(2)
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, 2018.
Represents the fair value in accordance with ASC 820. The Company's board of directors does not determine the fair value of the investments held by SLP II.
138
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The following table is a listing of the individual investments in SLP II's portfolio as of December 31, 2017:
Portfolio Company and Type of Investment
Industry
Interest Rate (1)
Maturity Date
Principal Amount or
Par Value
Cost
Fair
Value (2)
Funded Investments - First lien
ADG, LLC
ASG Technologies Group, Inc.
Beaver-Visitec International Holdings, Inc.
DigiCert, Inc.
Emerald 2 Limited
Evo Payments International, LLC
Explorer Holdings, Inc.
Globallogic Holdings Inc.
Greenway Health, LLC
Idera, Inc.
J.D. Power (fka J.D. Power and Associates)
Keystone Acquisition Corp.
Market Track, LLC
McGraw-Hill Global Education Holdings, LLC
Medical Solutions Holdings, Inc.
Ministry Brands, LLC
Ministry Brands, LLC
Navex Global, Inc.
Navicure, Inc.
OEConnection LLC
Pathway Partners Vet Management Company LLC
Pathway Partners Vet Management Company LLC
Peraton Corp. (fka MHVC Acquisition Corp.)
Poseidon Intermediate, LLC
Project Accelerate Parent, LLC
PSC Industrial Holdings Corp.
Quest Software US Holdings Inc.
Salient CRGT Inc.
Severin Acquisition, LLC
Shine Acquisitoin Co. S.à.r.l / Boing US Holdco Inc.
Sierra Acquisition, Inc.
TMK Hawk Parent, Corp.
University Support Services LLC (St. George's University
Scholastic Services LLC)
Vencore, Inc. (fka SI Organization, Inc., The)
WP CityMD Bidco LLC
YI, LLC
Zywave, Inc.
Total Funded Investments
Unfunded Investments - First lien
Pathway Partners Vet Management Company LLC
TMK Hawk Parent, Corp.
YI, LLC
Total Unfunded Investments
Total Investments
Healthcare Services
Software
Healthcare Products
Business Services
Business Services
Business Services
Healthcare Services
Business Services
Software
Software
Business Services
Healthcare Services
Business Services
Education
Healthcare Services
Software
Software
Software
Healthcare Services
Business Services
Consumer Services
Consumer Services
Federal Services
Software
Business Services
Industrial Services
Software
Federal Services
Software
Consumer Services
Food & Beverage
Distribution & Logistics
Education
Federal Services
Healthcare Services
Healthcare Services
Software
6.32% (L + 4.75%)
9/28/2023
$
6.32% (L + 4.75%)
7/31/2024
6.69% (L + 5.00%)
8/21/2023
6.13% (L + 4.75%)
10/31/2024
5.69% (L + 4.00%)
5/14/2021
5.57% (L + 4.00%)
12/22/2023
5.13% (L + 3.75%)
5/2/2023
6.19% (L + 4.50%)
6/20/2022
5.94% (L + 4.25%)
2/16/2024
6.57% (L + 5.00%)
6/28/2024
5.94% (L + 4.25%)
9/7/2023
6.94% (L + 5.25%)
5/1/2024
5.94% (L + 4.25%)
6/5/2024
5.57% (L + 4.00%)
5/4/2022
5.82% (L + 4.25%)
6/14/2024
6.38% (L + 5.00%)
12/2/2022
6.38% (L + 5.00%)
12/2/2022
5.82% (L + 4.25%)
11/19/2021
5.11% (L + 3.75%)
11/1/2024
5.69% (L + 4.00%)
11/22/2024
5.82% (L + 4.25%)
10/10/2024
5.82% (L + 4.25%)
10/10/2024
6.95% (L + 5.25%)
4/29/2024
5.82% (L + 4.25%)
8/15/2022
5.94% (L + 4.25%)
1/2/2025
5.71% (L + 4.25%)
10/11/2024
6.92% (L + 5.50%)
10/31/2022
7.32% (L + 5.75%)
2/28/2022
6.32% (L + 4.75%)
7/30/2021
4.88% (L + 3.50%)
10/3/2024
5.68% (L + 4.25%)
11/11/2024
4.88% (L + 3.50%)
8/28/2024
5.82% (L + 4.25%)
7/6/2022
6.44% (L + 4.75%)
11/23/2019
5.69% (L + 4.00%)
6/7/2024
5.69% (L + 4.00%)
11/7/2024
6.61% (L + 5.00%)
11/17/2022
Consumer Services
Distribution & Logistics
Healthcare Services
—
—
—
$
10/10/2019
$
3/28/2018
11/7/2018
$
$
$
17,034
7,481
14,812
10,000
1,266
17,369
2,940
9,677
14,925
12,619
13,357
5,386
11,940
9,850
6,965
2,138
7,768
14,897
15,000
15,000
6,963
291
10,448
14,881
15,000
10,500
9,899
14,433
14,888
15,000
3,750
1,671
$
16,890
7,446
14,688
9,951
1,211
17,292
2,917
9,611
14,858
12,499
13,308
5,336
11,884
9,813
6,932
2,128
7,735
14,724
14,926
14,925
6,929
290
10,399
14,877
14,925
10,398
9,775
14,310
14,827
14,964
3,731
1,667
16,779
7,547
14,813
10,141
1,267
17,492
2,973
9,755
15,074
12,556
13,407
5,424
11,940
9,844
7,043
2,138
7,768
14,971
15,000
14,981
6,980
292
10,526
14,955
15,038
10,500
10,071
14,559
14,813
15,108
3,789
1,686
1,875
10,686
14,963
8,240
17,325
381,237
1,875
10,673
14,928
8,204
17,252
$ 379,098
$
2,728
75
2,060
4,863
386,100
$
(14 ) $
—
(9 )
(23 ) $
$
$
$ 379,075
1,900
10,835
15,009
8,230
17,325
382,529
7
1
(3 )
5
382,534
139
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
(1)
(2)
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, 2017.
Represents the fair value in accordance with ASC 820. The Company's board of directors does not determine the fair value of the investments held by SLP II.
Below is certain summarized financial information for SLP II as of December 31, 2018 and December 31, 2017 and for the years ended
December 31, 2018, December 31, 2017 and December 31, 2016:
Selected Balance Sheet Information:
Investments at fair value (cost of $341,247 and $379,075, respectively)
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
December 31, 2018
December 31, 2017
$
$
$
$
$
336,869 $
7,620
344,489 $
243,170 $
(1,374)
—
3,250
2,869
247,915
96,574 $
344,489 $
382,534
8,065
390,599
266,270
(1,966)
15,964
3,500
2,891
286,659
103,940
390,599
Selected Statement of Operations Information:
2018
2017
2016(1)
Year Ended December 31,
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 (depreciation) appreciation of investments
Net increase in members' capital
$
$
$
24,654
199
24,853
10,474
681
11,155
13,698
$
22,551
351
22,902
8,356
697
9,053
13,849
782
(7,837)
6,643
$
2,281
(822)
15,308
$
7,463
572
8,035
3,558
650
4,208
3,827
599
4,281
8,707
(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 years ended December 31, 2018, December 31, 2017 and December 31, 2016, the Company earned approximately $11,124, $12,406 and
$3,533, respectively, of dividend income related to SLP II, which is included in dividend income. As of December 31, 2018 and December 31, 2017,
approximately $2,581 and $2,779, respectively, 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
140
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
company subsidiary. Furthermore, ASC 810 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.
UniTek Global Services, Inc. ("Unitek")
UniTek is a full service provider of technical services to customers in the wireline telecommunications, satellite television and broadband
cable industries in the U.S. and Canada. UniTek’s customers are primarily telecommunication services, satellite television, and broadband cable
providers, their contractors, and municipalities and related agencies. UniTek’s customers utilize its services to engineer, build and maintain their
network infrastructure 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 Uniitek as of December 31, 2018 and December 31, 2017 and for the years ended
December 31, 2018, December 31, 2017 and December 31, 2016:
Balance Sheet:
Current assets
Non-current assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Total equity
Summary of Operations:
Net Sales
Cost of goods sold
Gross Profit
Other expenses
Net income from continuing operations before extraordinary items
Profit (loss) from discontinued operations
Net income (loss)
December 31, 2018
December 31, 2017
$
$
$
$
$
99,062 $
144,948
244,010 $
35,837 $
113,959
149,796 $
94,214 $
86,105
132,323
218,428
52,872
93,068
145,940
72,488
Year Ended December 31,
2018
2017
2016
$
$
$
315,526
257,767
57,759
59,702
(1,943)
(223)
(2,166) $
$
284,823
223,513
61,310
57,110
4,200
(9,090)
(4,890) $
279,929
214,938
64,991
51,708
13,283
(9,801)
3,482
Investment risk factors—First and second lien debt that the Company invests in is 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.
141
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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.
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. 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. 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.
The following table summarizes the levels in the fair value hierarchy that the Company's portfolio investments fall into as of December 31,
2018:
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
1,173,459
662,556
65,297
440,641
2,341,953
$
$
— $
—
—
—
— $
185,931
355,741
25,210
—
566,882
$
$
987,528
306,815
40,087
440,641
1,775,071
142
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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,
2017:
First lien
Second lien
Subordinated
Equity and other
Total investments
Total
Level I
Level II
Level III
$
$
693,563
682,950
70,257
378,890
1,825,660
$
$
—
—
—
16
16
$
$
136,866
239,868
43,156
—
419,890
$
$
556,697
443,082
27,101
378,874
1,405,754
The following table summarizes the changes in fair value of Level III portfolio investments for the year ended December 31, 2018, 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, 2018:
Fair value, December 31, 2017
Total gains or losses included in earnings:
Net realized (losses) gains on investments
Net change in unrealized (depreciation)
appreciation 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, 2018
Unrealized (depreciation) appreciation for
the period relating to those Level III
assets that were still held by the Company
at the end of the period:
$
$
Total
First Lien
Second Lien
Subordinated
Equity and
other
$
1,405,754
$
556,697
$
443,082
$
27,101
$
378,874
(4,368)
357
(14,704)
—
(5,467)
(4,466)
(4,523)
(3,752)
9,979
7,274
970,532
634,700
150,896
21,817
163,119
(632,804)
113,612
(72,188)
1,775,071
$
(278,371)
106,564
(27,953)
987,528
$
(230,749)
7,048
(44,235)
306,815
$
(5,079)
—
—
40,087
$
(118,605)
—
—
440,641
(1,032) $
(3,232) $
(4,064) $
(3,752) $
10,016
Includes reorganizations and restructurings.
(1)
(2) As of December 31, 2018, 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.
143
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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, 2017, 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, 2017:
Fair value, December 31, 2016
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 (1)
Proceeds from sales and paydowns of
investments (1)
Transfers into Level III(2)
Transfers out of Level III(2)
Fair value, December 31, 2017
Unrealized appreciation (depreciation) for
the period relating to those Level III
assets that were still held by the Company
at the end of the period:
$
$
Total
First Lien
Second Lien
Subordinated
Equity and
other
$
1,066,878
$
530,601
$
324,177
$
24,653
$
187,447
(41,086 )
(13,848 )
(27,195 )
—
(43 )
39,690
740,395
(380,700 )
39,902
(59,325 )
1,405,754
$
12,326
284,239
(229,144 )
—
(27,477 )
556,697
$
31,897
256,932
(150,783 )
39,902
(31,848 )
443,082
$
(1,305 )
(3,228 )
3,753
—
—
—
27,101
$
195,471
(773 )
—
—
378,874
1,478
$
2,115
$
4,163
$
(1,305 ) $
(3,495 )
Includes reorganizations and restructurings.
(1)
(2) As of December 31, 2017, 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 period 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, 2018
and December 31, 2017. Transfers into Level III occur as quotations obtained through pricing services are deemed not 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:
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
144
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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, 2018 and December 31, 2017, 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 these were
reasonable ranges 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,
2018 and December 31, 2017, the Company used the discount ranges set forth in the table below to value investments in its portfolio companies.
145
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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, 2018 were as
follows:
Type
Fair Value as of
December 31, 2018
Approach
Unobservable Input
Low
High
Weighted
Average
Range
First lien
$
797,985 Market & income approach
Second lien
Subordinated
Equity and
other
129,837 Market quote
59,706 Other
102,963 Market & income approach
203,852 Market quote
40,087 Market & income approach
439,977 Market & income approach
664 Black Scholes analysis
$
1,775,071
EBITDA multiple
Revenue multiple
Discount rate
Broker quote
N/A(1)
EBITDA multiple
Discount rate
Broker quote
EBITDA multiple
Discount rate
EBITDA multiple
Discount rate
Expected life in years
Volatility
Discount rate
2.0x
3.5x
7.0%
N/A
N/A
8.5x
10.0%
N/A
5.0x
10.9%
0.4x
6.5%
7.3
37.9%
2.9%
32.0x
6.5x
15.3%
N/A
N/A
15.0x
19.7%
N/A
13.0x
21.4%
18.0x
25.8%
7.3
37.9%
2.9%
12.1x
5.8x
9.6%
N/A
N/A
11.1x
12.8%
N/A
10.2x
16.3%
10.3x
13.5%
7.3
37.9%
2.9%
(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.
146
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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, 2017 were as
follows:
Type
Fair Value as of
December 31, 2017
Approach
Unobservable Input
Low
High
Weighted
Average
Range
First lien
$
458,543 Market & income approach
Second lien
Subordinated
98,154 Market quote
220,597 Market & income approach
215,098 Market quote
7,387 Other
27,101 Market & income approach
Equity and other
377,785 Market & income approach
1,089 Black Scholes analysis
$
1,405,754
EBITDA multiple
Revenue multiple
Discount rate
Broker quote
EBITDA multiple
Discount rate
Broker quote
N/A(1)
EBITDA multiple
Revenue multiple
Discount rate
EBITDA multiple
Revenue multiple
Discount rate
Expected life in years
Volatility
Discount rate
2.0x
3.5x
6.5 %
N/A
8.0x
7.9 %
N/A
N/A
4.5x
0.5x
7.9 %
2.5x
0.5x
7.0 %
8.3
39.4 %
2.4 %
20.0x
8.0x
11.2 %
N/A
16.0x
12.5 %
N/A
N/A
11.8x
1.0x
14.9 %
18.0x
1.0x
23.6 %
8.3
39.4 %
2.4 %
11.8x
6.1x
9.2 %
N/A
11.4x
10.8 %
N/A
N/A
9.0x
0.8x
12.8 %
9.9x
0.8x
14.5 %
8.3
39.4 %
2.4 %
(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, the NMFC Credit Facility
and the DB Credit Facility (as defined in Note 7. Borrowings) are representative of market. The carrying values of the Holdings Credit Facility,
NMFC Credit Facility and DB Credit Facility approximate fair value as of December 31, 2018, as the facilities are continually monitored and examined
by both the borrower and the lender and are considered Level III. The carrying value of the SBA-guaranteed debentures, the 2016 Unsecured
Notes, the 2017A Unsecured Notes, the 2018A Unsecured Notes and the 2018B Unsecured Notes (as defined in Note 7. Borrowings) approximate
fair value as of December 31, 2018 based on a comparison of market interest rates for the Company's borrowings and similar entities and are
considered Level III. The fair value of the Convertible Notes and the 5.75% Unsecured Notes (as defined in Note 7. Borrowings) as of December 31,
2018 was $270,131 and $50,933, respectively, 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, 2018 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.
147
Table of Contents
Note 5. Agreements
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The Company entered into an investment advisory and management agreement (the “Investment Management Agreement”) with the
Investment Adviser which was most recently re-approved by the Company's board of directors on February 6, 2019. 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
New Mountain Finance SPV Funding, L.L.C. Loan and Security Agreement, as amended and restated, dated October 27, 2010 (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 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 NMF Holdings Loan and Security Agreement, as amended
and restated, dated May 19, 2011, and formed the Holdings Credit Facility on December 18, 2014 (as defined in Note 7. Borrowings). The amendment
merged the credit facilities and combined the amount of borrowings previously available. 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, 2018,
December 31, 2017 and December 31, 2016 was approximately $525,658, $281,174 and $297,323, respectively. The Investment Adviser cannot recoup
management fees that the Investment Adviser has previously waived. For the years ended December 31, 2018, December 31, 2017 and December 31,
2016, management fees waived were approximately $6,709, $5,642 and $4,824, 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, 2018), but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the
case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities),
accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital
gains, realized capital losses or unrealized capital appreciation or depreciation.
Under GAAP, NMFC's IPO did not step-up the cost basis of the Predecessor Operating Company's existing investments to fair market
value at the IPO date. Since the total value of the Predecessor Operating Company's investments at the time of the IPO was greater than the
investments' cost basis, a larger amount of amortization of purchase or original issue discount, as well as different amounts in realized gain and
unrealized appreciation, may be recognized under GAAP in each period than if the step-up had occurred. This will remain until such predecessor
investments are sold, repaid or mature in the future. The Company tracks the transferred (or fair market) value of each of its investments as of the
time of the IPO and, for purposes of the incentive fee calculation, adjusts Pre-Incentive Fee Net Investment Income to reflect the amortization of
purchase or original issue discount on the Company's investments as if each investment was purchased at the date of the IPO, or stepped up to fair
market value. This is defined as "Pre-Incentive Fee Adjusted Net Investment Income". The Company also uses the transferred (or fair market) value
of each of its investments as of the time of the IPO to adjust capital gains ("Adjusted Realized Capital Gains") or losses ("Adjusted
148
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
Realized Capital Losses") and unrealized capital appreciation ("Adjusted Unrealized Capital Appreciation") and unrealized capital depreciation
("Adjusted Unrealized Capital Depreciation"). As of December 31, 2017, all predecessor investments have been sold or matured.
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.
For the years ended December 31, 2018, December 31, 2017 and December 31, 2016, incentive fees waived were approximately $0, $1,800 and
$0, respectively. The Investment Adviser cannot recoup incentive fees that the Investment Adviser has previously waived.
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.
149
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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, 2018,
December 31, 2017 and December 31, 2016.
Year Ended December 31,
2018
2017
2016
Management fee
Less: management fee waiver
Total management fee
Incentive fee, excluding accrued capital gains incentive fees
Less: incentive fee waiver
Total incentive fee
Accrued capital gains incentive fees(1)
$
$
$
$
$
38,530
(6,709)
31,821
26,508
—
26,508
—
$
$
$
32,694
(5,642)
27,052
25,101
(1,800)
23,301
—
$
27,551
(4,824)
22,727
22,011
—
22,011
—
(1) As of December 31, 2018, December 31, 2017 and December 31, 2016, 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.
As all predecessor investments have been sold or matured, no cost basis adjustment is necessary for the years ended December 31, 2018
and December 31, 2017.
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.
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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)
Total 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
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
(1)
(2)
(3)
(4)
(5)
(6)
Includes $4,270 in PIK interest from investments.
Includes $3,178 in PIK dividends for investments.
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, none of which was related to the capital gains
incentive fee accrual on a hypothetical liquidation basis.
Includes net realized gains (losses) on investments and net change in unrealized appreciation (depreciation) of investments from non-
controlled/non-affiliated investments, non-controlled/affiliated investments and controlled investments.
The Company has entered into the Administration Agreement with the Administrator under which the Administrator provides
administrative services. The Administrator maintains, or oversees the maintenance of, the Company's consolidated financial records, prepares
reports filed with the SEC, generally monitors the payment of the Company's expenses and oversees 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, the Administrator may, in its own discretion, submit to the Company for
reimbursement some or all of the expenses that the Administrator has incurred on behalf of the Company during any quarterly period. As a result,
the amount of expenses for which the Company will have to reimburse the Administrator may fluctuate in future quarterly periods and there can be
no assurance given as to when, or if, the Administrator may determine to limit the expenses that the Administrator submits to the Company for
reimbursement in the future. However, it is expected that the Administrator will continue to support part of the expense burden of the Company in
the near future and may decide to not calculate and charge through certain overhead related amounts as well as continue to cover some of the
indirect costs. The Administrator cannot recoup any expenses that the Administrator has previously waived. For the years ended December 31,
2018, December 31, 2017 and December 31, 2016, approximately $2,406, $1,558 and $1,641, respectively, of indirect administrative expenses were
included in administrative expenses of which $276, $415 and $725, respectively, of indirect administrative expenses were waived by the
Administrator. As of December 31, 2018 and December 31, 2017, $681 and $444, respectively, of indirect administrative expenses were included in
payable to affiliates.
151
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
As of December 31, 2018, December 31, 2017 and December 31, 2016, no expense waivers or 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 the 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.
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 or in part, to the Company’s investment mandates, including Guardian II. 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 December 18, 2017, the SEC issued an exemptive order (the “Exemptive
Order”), which superseded a prior order issued on June 5, 2017, which permits the Company to co-invest in portfolio companies with certain 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, subject to the conditions of the Exemptive Order. Pursuant to the Exemptive Order, the Company is permitted to co-invest with
its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company's independent directors make certain conclusions
in connection with a co-investment transaction, including, but not limited to, that (1) the terms of the potential co-investment transaction, including
the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the
Company or its stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of
the Company's stockholders and is consistent with its then-current investment objective and strategies.
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Table of Contents
Note 7. Borrowings
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
On March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) was signed into law, which included various changes to
regulations under the federal securities laws that impact BDCs. The SBCA included changes to the 1940 Act to allow BDCs to decrease their asset
coverage requirement to 150.0% from 200.0% under certain circumstances. On April 12, 2018, the Company's board of directors, including a
‘‘required majority’’ (as such term is defined in Section 57(o) of the 1940 Act) approved the application of the modified asset coverage requirements
set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCA, and recommended the submission of a proposal for stockholders to approve
the application of the 150.0% minimum asset coverage ratio to the Company at a special meeting of stockholders, which was held on June 8, 2018.
The stockholder proposal was approved by the required votes of the Company’s stockholders at such special meeting of stockholders, and thus
the Company became subject to the 150.0% minimum asset coverage ratio on June 9, 2018. As a result of the Company's exemptive relief received on
November 5, 2014, the Company is permitted to exclude its SBA-guaranteed debentures from the 150.0% asset coverage ratio that the Company is
required to maintain under the 1940 Act. The agreements governing the NMFC Credit Facility, the 2018 Convertible Notes and the Unsecured Notes
(as defined below) contain certain covenants and terms, including a requirement that the Company not exceed a debt-to-equity ratio of 1.65 to 1.00
at the time of incurring additional indebtedness and a requirement that the Company not exceed a secured debt ratio of 0.70 to 1.00 at any time. As
of December 31, 2018, the Company’s asset coverage ratio was 181.37%.
Holdings Credit Facility—On December 18, 2014, the Company entered into the Second Amended and Restated Loan and Security
Agreement 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 (as amended from time to time, the "Holdings Credit
Facility"). As of the most recent amendment on November 19, 2018, the maturity date of the Holdings Credit Facility is October 24, 2022, and the
maximum facility amount is the lesser of $695,000 and the actual commitments of the lenders to make advances as of such date.
As of December 31, 2018, the maximum amount of revolving borrowings available under the Holdings Credit Facility is $615,000. 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 Bank, National Association. 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 of 150.0%. 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.
As of the amendment entered into on April 1, 2018, 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 2.25% 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).
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Holdings Credit
Facility for the years ended December 31, 2018, December 31, 2017 and December 31, 2016.
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018
2017
2016
16,062
610
2,519
$
$
$
4.2%
5.0%
384,433
$
$
$
$
$
153
11,612
749
1,780
$
$
$
3.3%
4.1%
345,174
$
9,546
772
1,615
2.8%
3.5%
341,055
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the Holdings Credit Facility was $512,563,
$312,363 and $333,513, respectively, and NMF Holdings was in compliance with the applicable covenants in the Holdings Credit Facility on such
dates.
NMFC Credit Facility—The Senior Secured Revolving Credit Agreement, (as amended from time to time, and together with the related
guarantee and security agreement, the "NMFC Credit Facility"), dated June 4, 2014, 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. The NMFC Credit Facility is guaranteed by certain of the Company's domestic
subsidiaries and proceeds from the NMFC Credit Facility may be used for general corporate purposes, including the funding of portfolio
investments. As of the most recent amendment on July 5, 2018, the maturity date of the NMFC Credit Facility is June 4, 2022 and the NMFC Credit
Facility includes the financial covenants related to the asset coverage discussed above.
As of December 31, 2018, the maximum amount of revolving borrowings available under the NMFC Credit Facility was $135,000. The
Company is permitted to borrow at various advance rates depending on the type of portfolio investment, as outlined in the related 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).
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, 2018, December 31, 2017 and December 31, 2016.
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
$
$
5,408
93
480
4.6%
5.1%
117,719
$
$
$
$
2,010
257
391
3.6%
4.8%
54,853
$
2,011
183
378
3.0%
3.8%
66,876
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the NMFC Credit Facility was $60,000,
$122,500 and $10,000, respectively, and NMFC was in compliance with the applicable covenants in the NMFC Credit Facility on such dates.
DB Credit Facility—The Loan Financing and Servicing Agreement (the "DB Credit Facility") dated December 14, 2018, among NMFDB as
the borrower, Deutsche Bank AG, New York Branch ("Deutsche Bank") as the facility agent, Lender and other agent from time to time party thereto
and U.S. Bank National Association, as collateral agent and collateral custodian, is structured as a secured revolving credit facility and matures on
December 14, 2023.
As of December 31, 2018, the maximum amount of revolving borrowings available under the DB Credit Facility was $100,000. The Company
is permitted to borrow at various advance rates depending on the type of portfolio investment, as outlined in the Loan Financing and Servicing
Agreement. The DB Credit Facility is non-recourse to the Company and is collateralized by all of the investments of NMFDB on an investment by
investment basis. All fees associated with the origination of the DB 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 DB Credit Facility. The DB Credit Facility
contains
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Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
certain customary affirmative and negative covenants and events of default. The covenants are generally not tied to mark to market fluctuations in
the prices of NMFDB investments, but rather to the performance of the underlying portfolio companies.
The advances under the DB Credit Facility accrue interest at a per annum rate equal to the Applicable Margin plus the lender's Cost of
Funds Rate. The "Applicable Margin" is equal to 2.85% during the Revolving Period and then increases by 0.20% during an Event of Default. The
"Cost of Funds Rate" for a conduit lender is the lower of its commercial paper rate and the Base Rate plus 0.50%, and for any other lender is the
Base Rate. The "Base Rate" is the three-months LIBOR Rate but may become an alternative base rate based on Deutsche Bank's base lending rate if
certain LIBOR disruption events occur. The Company is also charged a non-usage fee, based on the unused facility amount multiplied by the
Undrawn Fee Rate (as defined in the Loan Financing and Servicing Agreement).
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the DB Credit Facility
for the years ended December 31, 2018, December 31, 2017 and December 31, 2016.
Year Ended December 31,
2018(1)
2017(2)
2016(2)
Interest expense
Non-usage fee
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
$
$
$
$
$
$
$
140
13
13
5.7 %
6.7 %
49,833
$
$
$
$
—
—
—
— %
— %
—
$
—
—
—
— %
— %
—
(1)
(2)
For the year ended December 31, 2018, amounts reported relate to the period from December 14, 2018 (commencement of the DB Credit
Facility) to December 31, 2018.
Not applicable as the DB Credit Facility commenced on December 14, 2018.
As of December 31, 2018, the outstanding balance on the DB Credit Facility was $57,000 and NMFDB was in compliance with the
applicable covenants in the DB Credit Facility on such dates.
NMNLC Credit Facility—The Revolving Credit Agreement (together with the related guarantee and security agreement, the “NMNLC
Credit Facility”), dated September 21, 2018, among NMNLC, as the Borrower, and KeyBank National Association, as the Administrative Agent and
Lender, is structured as a senior secured revolving credit facility and matures on September 23, 2019. The NMNLC Credit Facility is guaranteed by
the Company and proceeds from the NMNLC Credit Facility may be used for funding of additional acquisition properties.
The NMNLC 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 0.15% per annum (as defined in the Revolving Credit Agreement).
As of December 31, 2018, the maximum amount of revolving borrowings available under the NMNLC Credit Facility was $30,000. For the
year ended December 31, 2018, interest expense, non-usage fees and amortization of financing costs were $47, $11 and $28, respectively. As of
December 31, 2018, the outstanding balance on the NMNLC Credit Facility was $0 and NMNLC was in compliance with the applicable covenants in
the NMNLC Credit Facility on such date.
Convertible Notes
2014 Convertible Notes—On June 3, 2014, the Company closed a private offering of $115,000 aggregate principal amount of unsecured
convertible notes (the “2014 Convertible Notes”), pursuant to an indenture, dated June 3, 2014 (the “2014 Indenture”). The 2014 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 June 3, 2015, the restrictions under Rule 144A under the Securities Act were removed, allowing the 2014 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 2014 Convertible Notes. These additional 2014
155
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
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 2014 Convertible Notes that the Company issued on June 3, 2014.
The 2014 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 2014 Convertible Notes will mature on June 15, 2019 unless earlier converted or repurchased at
the holder’s option.
The Company may not redeem the 2014 Convertible Notes prior to maturity. No sinking fund is provided for the 2014 Convertible Notes. In
addition, if certain corporate events occur, holders of the 2014 Convertible Notes may require the Company to repurchase for cash all or part of their
2014 Convertible Notes at a repurchase price equal to 100.0% of the principal amount of the 2014 Convertible Notes to be repurchased, plus accrued
and unpaid interest through, but excluding, the repurchase date.
The 2014 Indenture contains certain covenants, including covenants requiring the Company to provide financial information to the holders
of the 2014 Convertible Notes 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 2014 Indenture.
2018 Convertible Notes—On August 20, 2018, the Company closed a registered public offering of $100,000 aggregate principal amount of
unsecured convertible notes (the “2018 Convertible Notes” and together with the 2014 Convertible Notes, the “Convertible Notes”), pursuant to an
indenture, dated August 20, 2018, as supplemented by a first supplemental indenture thereto, dated August 20, 2018 (together the “2018A
Indenture”). On August 30, 2018, in connection with the registered public offering, the Company issued an additional $15,000 aggregate principal
amount of the 2018 Convertible Notes pursuant to the exercise of an overallotment option by the underwriter of the 2018 Convertible Notes.
The 2018 Convertible Notes bear interest at an annual rate of 5.75%, payable semi-annually in arrears on February 15 and August 15 of
each year, commencing on February 15, 2019. The 2018 Convertible Notes will mature on August 15, 2023 unless earlier converted, repurchased or
redeemed pursuant to the terms of the 2018A Indenture. The Company may not redeem the 2018 Convertible Notes prior to May 15, 2023. On or
after May 15, 2023, the Company may redeem the 2018 Convertible Notes for cash, in whole or from time to time in part, at its option at a redemption
price, subject to an exception for redemption dates occurring after a record date but on or prior to the interest payment date, equal to the sum of
(i) 100% of the principal amount of the 2018 Convertible Notes to be redeemed, (ii) accrued and unpaid interest thereon to, but excluding, the
redemption date and (iii) a make-whole premium.
No sinking fund is provided for the 2018 Convertible Notes. Holders of 2018 Convertible Notes may, at their option, convert their 2018
Convertible Notes into shares of the Company’s common stock at any time on or prior to the close of business on the business day immediately
preceding the maturity date of the 2018 Convertible Notes. In addition, if certain corporate events occur, holders of the 2018 Convertible Notes may
require the Company to repurchase for cash all or part of their 2018 Convertible Notes at a repurchase price equal to 100.0% of the principal amount
of the 2018 Convertible Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the repurchase date.
The 2018A Indenture contains certain covenants, including covenants requiring the Company to provide certain financial information to
the holders of the 2018 Convertible Notes and the trustee if the Company ceases to be subject to the reporting requirements of the Exchange Act.
The 2018A Indenture also includes additional financial covenants related to asset coverage. These covenants are subject to limitations and
exceptions that are described in the 2018A Indenture.
156
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The following table summarizes certain key terms related to the convertible features of the Company’s Convertible Notes as
of December 31, 2018.
2014 Convertible Notes
2018 Convertible Notes
Initial conversion premium
Initial conversion rate(1)
Initial conversion price
Conversion premium at December 31, 2018
Conversion rate at December 31, 2018(1)(2)
Conversion price at December 31, 2018(2)(3)
Last conversion price calculation date
$
$
12.5%
62.7746
15.93
11.7%
$
63.2794
15.80
June 3, 2018
$
10.0%
65.8762
15.18
10.0%
65.8762
15.18
August 20, 2018
(1)
(2)
(3)
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, 2018 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.
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 for the 2014 Convertible Notes and $13.80 per share for the 2018
Convertible Notes. In no event will the total number of shares of common stock issuable upon conversion exceed 71.1893 per $1 principal amount of
the 2014 Convertible Notes or 72.4637 per $1 principal amount of the 2018 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,
if any, 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 following table summarizes the interest expense, amortization of financing costs and amortization of premium incurred on the
Convertible Notes for the years ended December 31, 2018, December 31, 2017 and December 31, 2016.
Interest expense
Amortization of financing costs
Amortization of premium
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018(1)
2017
2016
10,169
1,268
(111)
$
$
$
5.2%
5.7%
197,058
$
7,763
1,190
(111)
$
$
$
5.0%
5.7%
6,259
859
(28)
5.0%
5.7%
155,250
$
125,227
$
$
$
$
(1)
For the year ended December 31, 2018, amounts reported include interest and amortization of financing costs related to the 2018
Convertible Notes for the period from August 20, 2018 (issuance of the 2018 Convertible Notes) to December 31, 2018.
157
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Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the Convertible Notes was $270,250,
$155,250 and $155,250, respectively, and NMFC was in compliance with the terms of the 2014 Indenture and 2018A Indenture on such dates, as
applicable.
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
“2016 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 2016 Unsecured Notes to institutional investors in a private placement. On June 30, 2017, the Company issued
$55,000 in aggregate principal amount of five-year unsecured notes that mature on July 15, 2022 (the "2017A Unsecured Notes"), pursuant to the
NPA and a supplement to the NPA. On January 30, 2018, the Company issued $90,000 in aggregate principal amount of five year unsecured notes
that mature on January 30, 2023 (the "2018A Unsecured Notes") pursuant to the NPA and a second supplement to the NPA. On July 5, 2018, the
Company issued $50,000 in aggregate principal amount of five year unsecured notes that mature on June 28, 2023 (the "2018B Unsecured Notes")
pursuant to the NPA and a third supplement to the NPA (the "Third Supplement"). The NPA provides for future issuances of unsecured notes in
separate series or tranches.
The 2016 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. The 2017A Unsecured Notes bear interest at an annual rate of 4.760%, payable semi-annually on January
15 and July 15 of each year, which commenced on January 15, 2018. The 2018A Unsecured Notes bear interest at an annual rate of 4.870%, payable
semi-annually on February 15 and August 15 of each year, which commenced on August 15, 2018. The 2018B Unsecured Notes bear interest at an
annual rate of 5.360%, payable semi-annually on January 15 and July 15 of each year, which commences on January 15, 2019. These interest rates
are subject to increase in the event that: (i) subject to certain exceptions, the underlying unsecured notes or the Company ceases 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 underlying unsecured notes at par, in which case holders of the underlying unsecured notes who accept the offer
would not receive the increased interest rate. In addition, the Company is obligated to offer to prepay the underlying 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 under its governance 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 Third Supplement includes additional financial covenants related
to asset coverage as well as other terms.
On September 25, 2018, the Company closed a registered public offering of $50,000 in aggregate principal amount of five-year unsecured
notes that mature on October 1, 2023 (the "5.75% Unsecured Notes" and together with the 2016 Unsecured Notes, 2017A Unsecured Notes, 2018A
Unsecured Notes and 2018B Unsecured Notes, the "Unsecured Notes") pursuant to an indenture, dated August 20, 2018, as supplemented by a
second supplemental indenture thereto, dated September 25, 2018 (together, the "2018B Indenture"). On October 17, 2018, in connection with the
registered public offering, the Company issued an additional $1,750 aggregate principal amount of the 5.75% Unsecured Notes pursuant to the
exercise of an overallotment option by the underwriters of the 5.75% Unsecured Notes.
The 5.75% Unsecured Notes bear interest at an annual rate of 5.75%, payable quarterly on January 1, April 1, July 1 and October 1 of each
year, which commenced on January 1, 2019. The 5.75% Unsecured Notes will mature on October 1, 2023 unless earlier redeemed. The 5.75%
Unsecured Notes are listed on the New York Stock Exchange and trade under the trading symbol “NMFX.”
The Company may redeem the 5.75% Unsecured Notes, in whole or in part, at any time, or from time to time, at its option on or after
October 1, 2020, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a
redemption price of 100% of the outstanding principal amount thereof plus accrued and
158
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption.
No sinking fund is provided for the 5.75% Unsecured Notes and holders of the 5.75% Unsecured Notes have no option to have their 5.75%
Unsecured Notes repaid prior to the stated maturity date.
The 2018B Indenture contains certain covenants, including covenants requiring the Company to (i) comply with the asset coverage
requirements set forth in Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a)(1) of the 1940 Act as may be applicable to the Company
from time to time or any successor provisions, whether or not the Company continues to be subject to such provisions of the 1940 Act, but giving
effect, in either case, to any exemptive relief granted to the Company by the SEC and (ii) provide certain financial information to the holders of the
5.75% Unsecured Notes and the trustee if the Company ceases to be subject to the reporting requirements of the Exchange Act. The 2018B
Indenture also includes additional financial covenants related to asset coverage. These covenants are subject to limitations and exceptions that are
described in the 2018B Indenture.
The 2018B Indenture provides for customary events of default and further provides that the trustee or the holders of 25% in aggregate
principal amount of the outstanding 5.75% Unsecured Notes may declare such 5.75% Unsecured Notes immediately due and payable upon the
occurrence of any event of default after expiration of any applicable grace period.
The Unsecured Notes are unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness, if
any, that is expressly subordinated in right of payment to the Unsecured 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.
The following table summarizes the interest expense and amortization of financing costs incurred on the Unsecured Notes for the years
ended December 31, 2018, December 31, 2017 and December 31, 2016.
Interest expense
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018(1)
2017(2)
2016(3)
$
$
$
$
$
13,533
818
5.1 %
5.4 %
266,296
$
$
$
6,098
493
5.2 %
5.6 %
117,877
$
2,271
202
5.3 %
5.8 %
65,500
(1)
(2)
(3)
For the year ended December 31, 2018, amounts reported include interest and amortization of financing costs related to the 2018A
Unsecured Notes for the period from January 30, 2018 (issuance of the 2018A Unsecured Notes) to December 31, 2018, the 2018B
Unsecured Notes for the period from July 5, 2018 (issuance of the 2018B Unsecured Notes) to December 31, 2018 and the 5.75% Unsecured
Notes for the period from September 25, 2018 (issuance of the 5.75% Unsecured Notes) to December 31, 2018.
For the year ended December 31, 2017, amounts reported include interest and amortization of financing costs related to the 2017A
Unsecured Notes for the period from June 30, 2017 (issuance of the 2017A Unsecured Notes) to December 31, 2017.
For the year ended December 31, 2016 amounts reported include interest and amortization of financing costs for the period from May 6,
2016 (issuance of the 2016 Unsecured Notes) to December 31, 2016.
As of December 31, 2018, December 31, 2017 and December 31, 2016, the outstanding balance on the Unsecured Notes was $336,750,
$145,000 and $90,000, respectively, and the Company was in compliance with the terms of the NPA and the 2018B Indenture as of such dates, as
applicable.
SBA-guaranteed debentures—On August 1, 2014 and August 25, 2017, respectively, SBIC I and SBIC II received licenses from the SBA to
operate as SBICs.
159
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The SBIC licenses allow SBICs 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 I and SBIC II over
the Company's stockholders in the event SBIC I and SBIC II are 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. In June 2018, legislation amended the 1958 Act by increasing the individual leverage limit from $150,000 to $175,000, subject to SBA
approvals.
As of December 31, 2018 and December 31, 2017, SBIC I had regulatory capital of $75,000 and $75,000, respectively, and SBA-guaranteed
debentures outstanding of $150,000 and $150,000, respectively. As of December 31, 2018 and December 31, 2017, SBIC II had regulatory capital of
$42,500 and $2,500, respectively, and $15,000 and $0, respectively, of SBA-guaranteed debentures outstanding. 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 the Company's SBA-guaranteed debentures as of December 31, 2018.
Issuance Date
Fixed SBA-guaranteed debentures(1):
March 25, 2015
September 23, 2015
September 23, 2015
March 23, 2016
September 21, 2016
September 20, 2017
March 21, 2018
Fixed SBA-guaranteed debentures(2):
September 19, 2018
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
September 1, 2027
March 1, 2028
September 1, 2028
$
37,500
37,500
28,795
13,950
4,000
13,000
15,255
$
15,000
165,000
2.517%
2.829%
2.829%
2.507%
2.051%
2.518%
3.187%
3.548%
0.355%
0.355%
0.742%
0.742%
0.742%
0.742%
0.742%
0.222%
(1)
(2)
SBA-guaranteed debentures are held in SBIC I.
SBA-guaranteed debentures are held in SBIC II.
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, 2018, December 31, 2017 and December 31, 2016.
Interest expense
Amortization of financing costs
Weighted average interest rate
Effective interest rate
Average debt outstanding
Year Ended December 31,
2018
2017
2016
$
$
5,124
530
3.2%
3.6%
158,471
$
$
$
$
160
$
$
4,160
444
3.1%
3.5%
3,758
403
3.1%
3.5%
132,572
$
119,819
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The SBIC program is designed to stimulate the flow of private investor capital into eligible smaller businesses, as defined by the SBA.
Under SBA regulations, SBICs are 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 smaller businesses with certain characteristics or in certain industries and
requiring capitalization thresholds that limit distributions to the Company. SBICs are subject to an annual periodic examination by an SBA examiner
to determine the SBIC'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, 2018, December 31, 2017 and December 31,
2016, SBIC I was in compliance with SBA regulatory requirements and as of December 31, 2018 and December 31, 2017, SBIC II 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
distributions to its stockholders. Leverage is generally considered a speculative investment technique. The Company's ability to service any debt
incurred will depend largely on financial performance and will be subject to prevailing economic conditions and competitive pressures.
Note 8. Regulation
The Company has elected to be treated, and intends to comply with the requirements to continue to qualify annually, as a RIC under
Subchapter M of the Code. In order to continue to qualify 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, 2018, the Company had unfunded commitments on revolving credit facilities of
$43,539, no outstanding bridge financing commitments and other future funding commitments of $94,407. As of December 31, 2017, the Company
had unfunded commitments on revolving credit facilities of $23,716, no outstanding bridge financing commitments and other future funding
commitments of $53,712. The unfunded commitments on revolving credit facilities and delayed draws are disclosed on the Company's Consolidated
Schedules of Investments.
The Company also has revolving borrowings available under the Holdings Credit Facility, the NMFC Credit Facility, the DB Credit Facility
and the NMNLC Credit Facility as of December 31, 2018 and December 31, 2017. See Note 7. Borrowings, for details.
The Company may from time to time enter into financing commitment letters. As of December 31, 2018 and December 31, 2017, the
Company had commitment letters to purchase investments in the aggregate par amount of $27,536 and $13,907, respectively, which could require
funding in the future.
161
Table of Contents
As of December 31, 2018 and December 31, 2017, the Company owed $6,000 and $12,000, respectively, related to a settlement agreement
with a trustee of Black Elk Energy Offshore Operations, LLC. The Company began to make semi-annual payments of $3,000 in June 2018 with the
final payment due in December 2019.
As of December 31, 2018, the Company had unfunded commitments related to an equity investment in SLP III of $1,600 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, 2018,
December 31, 2017 and December 31, 2016, 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
Year Ended December 31,
2018
2017
2016
$
$
20,166
—
(20,166)
$
35,793
—
(35,793)
(1,435)
(21,572)
23,007
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, 2018,
December 31, 2017 and December 31, 2016 were estimated to be as follows:
Ordinary income (non-qualified)
Ordinary income (qualified)
Capital gains
Return of capital
Total
Year Ended December 31,
2018
2017
2016
$
$
51,573
35,000
—
16,815
103,388
$
$
72,150
—
—
28,755
100,905
$
$
79,415
—
—
9,349
88,764
As of December 31, 2018, December 31, 2017 and December 31, 2016, the costs of investments for the Company for tax purposes were
$2,330,134, $1,799,563 and $1,602,607, respectively.
Tax cost
Gross unrealized appreciation on investments
Gross unrealized depreciation on investments
Total investments at fair value
$
$
December 31, 2018(1)
2,330,134
79,589
(44,262)
2,365,461
December 31, 2017(1)
1,799,563
$
63,167
(11,858)
1,850,872
$
(1)
Includes securities purchased under collateralized agreement to resell.
At December 31, 2018, December 31, 2017 and December 31, 2016, 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.
162
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
As of December 31, 2018, December 31, 2017 and December 31, 2016, 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
Year Ended December 31,
2018
2017
2016
$
$
(66,505 ) $
12,551
—
23,834
(30,120 ) $
(70,701 ) $
11,521
—
39,928
(19,252 ) $
(39,517 )
2,072
—
(26,093 )
(63,538 )
The Company is subject to a 4.0% nondeductible U.S. 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, 2018, the
Company does not expect to incur any excise taxes. For the years ended December 31, 2017 and December 31, 2016, 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, 2018,
December 31, 2017 and December 31, 2016:
(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
$
Year Ended December 31,
2018
2017
2016
$
1.36
83.74 %
— %
33.85 %
— %
76.77 %
— %
16.26 %
$
1.36
71.50 %
— %
— %
— %
92.59 %
— %
28.50 %
1.36
89.46 %
— %
— %
— %
89.78 %
— %
10.54 %
(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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Note 11. Net Assets
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The table below illustrates the effect of certain transactions on the net asset accounts of the Company:
Common Stock
Shares
Par Amount
Treasury
Stock at
Cost
Paid in
Capital in Excess of
Par
Accumulated
Undistributed
Net Investment
Income
Accumulated
Undistributed
Net Realized
Gains (Losses)
Net
Unrealized
Appreciation
(Depreciation)
Total
Net Assets
64,005,387 $
640
$
— $
899,713
$
4,164 $
1,342
$
(68,951 ) $
836,908
5,750,000
(248,499 )
210,926
—
—
—
—
58
—
—
—
—
—
—
—
79,005
(2,948 )
2,488
—
—
—
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 )
—
—
69,717,814 $
698
$
(460 ) $
1,001,862
$
2,073 $
(36,947 ) $
(28,664 ) $
938,562
6,179,706
37,573
—
—
—
—
—
61
—
—
—
—
—
—
—
460
—
—
—
87,552
100
(81 )
(172 )
—
—
—
—
—
(100,905 )
—
—
—
—
—
—
—
—
—
—
87,613
560
(81 )
(172 )
(100,905 )
—
—
102,204
(39,734 )
46,928
109,398
—
(35,793 )
35,793
—
—
—
75,935,093 $
759
$
— $
1,053,468
$
39,165 $
(76,681 ) $
18,264 $ 1,034,975
171,279
—
—
2
—
—
—
—
2,327
—
—
(103,388 )
—
—
—
—
2,329
(103,388 )
—
—
106,032
(9,657 )
(24,022 )
72,353
Balance at
December 31, 2015
Issuances of common
stock
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
Issuances of common
stock
Reissuance of
common stock
Other
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, 2017
Issuances of common
stock
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, 2018
—
—
—
(20,166 )
20,166
—
—
—
76,106,372 $
761
$
— $
1,035,629
$
61,975 $
(86,338 ) $
(5,758 ) $ 1,006,269
164
Table of Contents
Note 12. Earnings Per Share
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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, 2018, December 31, 2017 and December 31, 2016:
Earnings per share—basic
Numerator for basic earnings per share:
Denominator for basic weighted average share:
Basic earnings per share:
Earnings per share—diluted
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
Diluted earnings per share
165
Year Ended December 31,
2018
2017
2016
$
$
$
$
$
72,353
76,022,375
0.95
72,353
8,135
80,488
76,022,375
12,605,366
88,627,741
0.91
$
$
$
$
$
109,398
74,171,268
1.47
109,398
6,210
115,608
74,171,268
9,824,127
83,995,395
1.38
$
$
$
$
$
111,678
64,918,191
1.72
111,678
5,007
116,685
64,918,191
7,945,196
72,863,387
1.60
Table of Contents
Note 13. Financial Highlights
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The following information sets forth the Company's financial highlights for the years ended December 31, 2018, December 31, 2017,
December 31, 2016, December 31, 2015 and December 31, 2014.
Per share data(1):
Net asset value at the beginning of the period
Net investment income
Net realized and unrealized (losses) gains(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
2018
2017
2016
2015
2014
Year Ended December 31,
$
$
$
$
$
13.63
1.39
(0.44)
$
13.46
1.38
0.15
$
13.08
1.36
0.38
$
13.83
1.38
(0.77)
—
—
0.95
(1.36)
—
13.22
$
—
—
1.53
(1.36)
—
13.63
$
—
—
1.74
(1.36)
—
13.46
$
—
—
0.61
(1.36)
—
13.08
$
$
12.58
2.70%
7.16%
$
13.55
5.54%
11.77%
$
14.10
19.68%
13.98%
$
13.02
(4.00)%
4.32 %
14.38
1.10
(0.80)
0.44
0.19
0.93
(1.36)
(0.12)
13.83
14.94
9.66%
6.56%
76,106,372
76,022,375
1,026,313
75,935,093
74,171,268
1,011,562
69,717,814
64,918,191
863,193
64,005,387
59,715,290
832,805
$
$
$
57,997,890
51,846,164
749,732
$
10.33%
12.90%
12.22%
10.10%
10.23%
9.45%
10.21%
9.91%
9.27%
9.91 %
9.28 %
8.57 %
10.68%
7.65%
7.41%
(1)
(2)
(3)
(4)
(5)
(6)
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, 2018, December 31, 2017, December 31, 2016,
December 31, 2015 and December 31, 2014 were $0.00, $0.05, $0.02, $0.06 and $0.05, respectively.
For the year ended December 31, 2014, 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 year and a sale on the closing of the last business day of the
period. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at prices obtained under the Company's dividend
reinvestment plan.
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
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 year ended December 31, 2014 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.
166
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
The following information sets forth the financial highlights for the Company for the years ended December 31, 2018, December 31, 2017,
December 31, 2016, December 31, 2015 and December 31, 2014.
Average debt outstanding—Holdings Credit Facility(1)
$
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)
Average debt outstanding—DB Credit Facility(7)
Average debt outstanding—NMNLC Credit Facility(8)
Asset coverage ratio(9)
Portfolio turnover(10)
Year Ended December 31,
2018
2017
2016
2015
2014
$
384,433
—
197,058
158,471
266,296
117,719
49,833
3,570
181.37%
36.75%
$
345,174
—
155,250
132,572
117,877
54,853
—
—
240.76%
41.98%
$
341,055
—
125,227
119,819
65,500
66,876
—
—
259.34%
36.07%
$
394,945
—
115,000
71,921
—
60,477
—
—
234.05%
33.93%
243,693
208,377
115,000
29,167
—
11,227
—
—
226.70%
29.51%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
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 2014 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 2016 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.
For the year ended December 31, 2018, average debt outstanding represents the period from December 14, 2018 (commencement of the DB Credit Facility) to
December 31, 2018.
For the year ended December 31, 2018, average debt outstanding represents the period from September 21, 2018 (commencement of the NMNLC Credit Facility)
to December 31, 2018.
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.
167
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(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)
Total Net Realized Gains
(Losses) and Net Changes
in Unrealized Appreciation
(Depreciation) of
Investments(1)
Net Increase (Decrease)
in Net Assets Resulting
from Operations
Net Investment Income
Per Share
$
$
Total
Total Investment Income
Per Share
0.83
0.79
0.72
0.70
63,509 $
60,469
54,598
52,889
Total
27,458
27,117
25,721
25,736
Per Share
0.36 $
0.35
0.34
0.34
Total
(28,842) $
(357)
(2,588)
(1,892)
53,244 $
51,236
50,019
43,307
43,784 $
41,834
41,490
40,976
$
$
0.70
0.68
0.66
0.62
0.64
0.66
0.65
0.64
$
$
26,683
26,292
25,798
23,431
22,980
21,729
21,832
21,567
0.35 $
0.35
0.34
0.34
0.34 $
0.34
0.34
0.34
$
194
(1,516)
1,530
6,986
$
10,875
3,350
22,861
(13,516)
(0.38) $
—
(0.03)
(0.03)
$
—
(0.02)
0.02
0.10
$
0.16
0.05
0.36
(0.21)
Total
Per Share
(0.02)
0.35
0.31
0.31
(1,384) $
26,760
23,133
23,844
$
$
26,877
24,776
27,328
30,417
33,855
25,079
44,693
8,051
0.35
0.33
0.36
0.44
0.50
0.39
0.70
0.13
Quarter Ended
December 31, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
$
$
$
(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 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure
Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The standard will modify the disclosure
requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for annual reporting
periods beginning after December 15, 2019, including interim periods within that reporting period. The Company is permitted to early adopt any
removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The
Company has elected to early adopt ASU 2018-13 as of December 31, 2018.
Note 16. Subsequent Events
On January 8, 2019 and January 25, 2019, the Company entered into certain Joinder Supplements (the "Joinders") to add Old Second
National Bank and Sumitomo Mitsui Trust Bank, Limited, New York, respectively, as new lenders under the Holdings Credit Facility. After giving
effect to the Joinders, the aggregate commitments of the lenders under the Holdings Credit Facility equals $675,000. The Holdings Credit Facility
continues to have a revolving period ending on October 24, 2020, and will still mature on October 24, 2022.
On February 14, 2019, the Company completed a public offering of 4,312,500 shares of the Company's common stock (including 562,500
shares of common stock that were issued pursuant to the full exercise of the overallotment option granted to the underwriters to purchase
additional shares) at a public offering price of $13.57 per share. The Investment Adviser paid all of the underwriters' sales load of $0.42 per share
and an additional supplemental payment of $0.18 per share to the underwriters,
168
Table of Contents
Notes to the Consolidated Financial Statements of
New Mountain Finance Corporation (Continued)
December 31, 2018
(in thousands, except share data)
which reflects the difference between the public offering price of $13.57 per share and the net proceeds of $13.75 per share received by the Company
in this offering. All payments made by the Investment Adviser are not subject to reimbursement by the Company. The Company received total net
proceeds of approximately $59,297 in connection with this offering.
On February 22, 2019, the Company's board of directors declared a first quarter 2019 distribution of $0.34 per share payable on March 29,
2019 to holders of record as of March 15, 2019.
169
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, 2018 (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, 2018 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, 2018.
(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.
170
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
New Mountain Finance Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of New Mountain Finance Corporation and subsidiaries (the "Company") as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2018 of the Company and our report dated February 27, 2019, expressed
an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company's 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. 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
February 27, 2019
171
Table of Contents
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, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
172
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 2019 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 2019 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 2019 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 2019 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 2019 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 2019 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.
173
Table of Contents
PART IV
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
Consolidated Statements of Assets and Liabilities as of December 31, 2018 and December 31, 2017
Consolidated Statements of Operations for the years ended December 31, 2018, December 31, 2017 and December 31, 2016
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2018, December 31, 2017 and December 31, 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, December 31, 2017 and December 31, 2016
Consolidated Schedule of Investments as of December 31, 2018
Consolidated Schedule of Investments as of December 31, 2017
Notes to the Consolidated Financial Statements of New Mountain Finance Corporation
89
90
91
92
93
108
121
174
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
3.1(a)
3.1(b)
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
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
Description
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)
Indenture by and between New Mountain Finance Corporation, as Issuer, and U.S. Bank National Association, as Trustee, dated
August 20, 2018(20)
First Supplemental Indenture, dated August 20, 2018, relating to the 5.75% Convertible Notes Due 2023, by and between New
Mountain Finance Corporation and U.S. Bank National Association, as trustee(20)
Form of Global Note 5.75% Convertible Note Due 2023 (included as part of Exhibit (4.5))(20)
Second Supplemental Indenture, dated September 25, 2018, relating to the 5.75% Notes Due 2023, by and between New Mountain
Finance Corporation and U.S. Bank National Association, as trustee(21)
Form of Global Note 5.75% Note Due 2023 (included as part of Exhibit (4.7))(21)
Investment Advisory and Management Agreement by and between New Mountain Finance Corporation and New Mountain
Finance Advisers BDC, LLC(6)
Second Amended and Restated Administration Agreement(10)
Dividend Reinvestment Plan(2)
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)
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)
Limited Liability Company Agreement of NMFC Senior Loan Program II LLC, dated March 9, 2016(13)
Limited Liability Company Agreement for NMFC Senior Loan Program III LLC, dated April 25, 2018(18)
Third Amended and Restated Loan and Security Agreement, conformed through Amendment No. 2, dated as of November 19,
2018, by and among New Mountain Finance Corporation, as the collateral manager, New Mountain Finance Holdings, L.L.C., as
the borrower, Wells Fargo Bank, National Association, as the administrative agent, the lenders party thereto and Wells Fargo
Bank, National Association, as the collateral custodian(22)
Form of Joinder Supplement, dated as of December 13, 2018, by and among TIAA, FSB, New Mountain Finance Holdings, L.L.C.,
as the borrower, and Wells Fargo Bank, National Association, as the administrative agent(23)
Form of Joinder Supplement, dated as of January 8, 2019, by and among Old Second National Bank, New Mountain Finance
Holdings, L.L.C., as the borrower, and Wells Fargo Bank, National Association, as the administrative agent(24)
Form of Joinder Supplement, dated as of January 25, 2019, by and among Sumitomo Mitsui Trust Bank, Limited, New York, New
Mountain Finance Holdings, L.L.C., as the borrower, and Wells Fargo Bank, National Association, as the administrative agent(24)
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)
175
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Exhibit
Number
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
14.1
21.1
Description
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(9)
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(11)
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
Syndication Agent(12)
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
Syndication Agent(13)
Commitment Increase Agreement, dated January 25, 2018, 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
Syndication Agent(17)
Amendment No. 3, dated February 27, 2018 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(17)
Amendment No. 4, dated as of July 5, 2018, to the Senior Secured Revolving Credit Agreement dated June 4, 2014, by and among
New Mountain Finance Corporation, as borrower, Goldman Sachs Bank USA, as Administrative Agent and Syndication Agent
(19)
Amendment No. 5, dated as of December 12, 2018, to the Senior Secured Revolving Credit Agreement dated June 4, 2014, by and
among New Mountain Finance Corporation, as borrower, Goldman Sachs Bank USA, as Administrative Agent and Syndication
Agent
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(14)
Form of Amended and Restated Note Purchase Agreement relating to 4.760% Notes due 2022, dated June 30, 2017, by and
between New Mountain Finance Corporation and the purchasers party thereto(15)
Form of Amended and Restated Note Purchase Agreement relating to 4.870% Notes due 2023, dated January 30, 2018, by and
between New Mountain Finance Corporation and the purchasers party thereto(16)
Form of Amended and Restated Note Purchase Agreement relating to 5.360% Notes due 2023, dated July 5, 2018, by and between
New Mountain Finance Corporation and the purchasers party thereto(19)
Form of Loan Financing and Servicing Agreement, dated as of December 14, 2018, by and among New Mountain Finance DB,
L.L.C., New Mountain Finance Corporation, as equityholder and servicer, the lenders from time to time party thereto, Deutsche
Bank, as the facility agent, the other agents from time to time party thereto and U.S. Bank National Association, as collateral
agent and collateral custodian(23)
Form of Sale and Contribution Agreement, dated as of December 14, 2018, between New Mountain Finance Corporation, as seller,
and New Mountain Finance DB, L.L.C., as purchaser(23)
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 DB, L.L.C. (Delaware)
New Mountain Finance Servicing, L.L.C. (Delaware)
New Mountain Finance SBIC G.P., L.L.C. (Delaware)
New Mountain Finance SBIC II G.P., L.L.C. (Delaware)
New Mountain Finance SBIC, L.P. (Delaware)
New Mountain Finance SBIC II, L.P. (Delaware)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
176
Table of Contents
Exhibit
Number
31.2
32.1
32.2
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)
Description
(1)
Previously filed in connection with New Mountain Finance Corporation'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 January 5, 2015.
(10) Previously filed in connection with New Mountain Finance Corporation's quarterly report on Form 10-Q filed on May 5, 2015.
(11) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on June 30, 2015.
(12) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on March 29, 2016.
(13) Previously filed in connection with New Mountain Finance Corporation's quarterly report on Form 10-Q filed on May 4, 2016.
(14) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on October 3, 2016.
(15) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on July 3, 2017.
(16) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on February 5, 2018.
(17) Previously filed in connection with New Mountain Finance Corporation’s annual report on Form 10-K filed on February 28, 2018.
(18) Previously filed in connection with New Mountain Finance Corporation's quarterly report on Form 10-Q filed on May 7, 2018.
(19) Previously filed in connection with New Mountain Finance Corporation’s report on Form 8-K filed on July 11, 2018.
(20) Previously filed in connection with New Mountain Finance Corporation's registration statement on Form N-2 Post-Effective Amendment
No. 3 (File No. 333-218040) filed on August 20, 2018.
177
Table of Contents
(21) Previously filed in connection with New Mountain Finance Corporation's registration statement on Form N-2 Post-Effective Amendment
No. 4 (File No. 333-218040) filed on September 25, 2018.
(22) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on November 27, 2018.
(23) Previously filed in connection with New Mountain Finance Corporation's report on Form 8-K filed on December 19, 2018.
(24) Previously filed in connection with New Mountain Finance Corporation's registration statement on Form N-2 Post-Effective Amendment
No. 5 (File No. 333-218040) filed on February 13, 2019.
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.
Item 16. Form 10-K Summary
None.
178
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 27, 2019.
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 27, 2019
Chief Financial Officer (Principal Financial and Accounting Officer)
February 27, 2019
Chairman of the Board of Directors
February 27, 2019
Executive Vice President, Chief Administrative Officer and Director
February 27, 2019
By:
/s/ ROBERT A. HAMWEE
Robert A. Hamwee
By:
/s/ SHIRAZ Y. KAJEE
Shiraz Y. Kajee
By:
/s/ STEVEN B. KLINSKY
Steven B. Klinsky
By:
/s/ ADAM B. WEINSTEIN
Adam B. Weinstein
By:
/s/ ROME G. ARNOLD III
Rome G. Arnold III
By:
/s/ ALFRED F. HURLEY, JR.
Alfred F. Hurley, Jr.
By:
/s/ DAVID OGENS
David Ogens
By:
/s/ KURT J. WOLFGRUBER
Kurt J. Wolfgruber
Director
Director
Director
Director
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179
Section 2: EX-10.25 (EXHIBIT 10.25)
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
Exhibit 10.25
AMENDMENT NO. 5
AMENDMENT NO. 5 (this “Amendment”) dated as of December 12, 2018, among NEW MOUNTAIN FINANCE CORPORATION
(the “Borrower”), the Lenders party hereto and GOLDMAN SACHS BANK USA, in its capacity as Administrative Agent (the “Agent”) under the
Credit Agreement referred to below.
The Borrower is party to the Senior Secured Revolving Credit Agreement, dated as of June 4, 2014, among the Borrower, the
Lenders party thereto, the Agent, and Goldman Sachs Bank USA, as Syndication Agent (as amended, amended and restated, modified or otherwise
supplemented prior to the date hereof, the “Credit Agreement”).
The Borrower and the Lenders wish now to amend the Credit Agreement in certain respects, and accordingly, the parties hereto
hereby agree as follows:
Section 1.
Definitions. Except as otherwise defined in this Amendment, terms defined in the Credit Agreement as
amended hereby and together with all amended exhibits and updated schedules and appendices thereto are used herein as defined therein.
Section 2.
Amendment. Subject to the satisfaction of the conditions precedent specified in Section 5 below, and
effective as of the Fifth Amendment Effective Date, the Credit Agreement is hereby amended as follows:
(a) Section 1.01 is amended by amended and restating the definition of “Covered Debt Amount” as follows:
“Covered Debt Amount” means, on any date, the sum of (x) all of the Revolving Credit Exposures of all Lenders on such date plus
(y) the aggregate amount of Other Covered Indebtedness on such date minus (z) the LC Exposures fully Cash Collateralized on
such date pursuant to Section 2.05(k).
(b) Section 1.01 is amended by amending and restating the definition of “Other Covered Indebtedness” as follows:
“Other Covered Indebtedness” means, collectively, Secured Longer-Term Indebtedness and Secured Shorter-Term Indebtedness;
provided that “Other Covered Indebtedness” shall not include any Indebtedness secured by a Lien on Portfolio Investments
permitted under Section 6.02(e).
(c) Section 1.01 is amended by deleting the definition of “Significant Unsecured Indebtedness Event” in its entirety.
(d) Section 1.01 is amended by amending and restating the definition of “Unsecured Longer Term Indebtedness” as follows:
“Unsecured Longer-Term Indebtedness” means any Indebtedness of an Obligor (which may be Guaranteed by Subsidiary
Guarantors) that (a) has no amortization prior to, and a final maturity date not earlier than, six months after the Final Maturity Date
(after giving effect to any extensions of the Final Maturity Date at the time of incurrence of such Indebtedness but not after) (it
being understood that none of: (w) the conversion features under convertible notes; (x) the triggering and/or settlement thereof
or (y) any cash payment made in respect thereof, shall constitute “amortization” for purposes of this clause (a)), (b) is incurred
pursuant to documentation that is substantially comparable to market terms for substantially similar debt of other similarly
situated borrowers as reasonably determined in good faith by the Borrower (other than financial covenants and events of default
(other than events of default customary in indentures or similar instruments that have no analogous provisions in this Agreement
or credit agreements generally), which need not be substantially comparable to market terms for substantially similar debt but
shall be no more restrictive upon the Borrower and its Subsidiaries, while the Commitments or Loans are outstanding, than those
set forth in this Agreement, it being understood that put rights or repurchase or redemption obligations arising out of
circumstances that would constitute a “fundamental change” or a “change of control repurchase event” (as such terms are
customarily defined in convertible note offerings and note offerings, as applicable) or be Events of Default under this Agreement
shall not be deemed to be more restrictive for purposes of this definition) or is incurred pursuant to documentation that is
substantially
comparable to the terms of any Indebtedness set forth on Schedule 3.11 and (c) is not secured by any assets of any Obligor.
(e) Section 5.14 of the Credit Agreement is hereby deleted in its entirety.
Section 3.
Representations and Warranties. The Borrower represents and warrants to each Lender, the Agent,
the Swingline Lender and the Issuing Bank that on the Fifth Amendment Effective Date (a) the representations and warranties of the Borrower set
forth in Article III of the Credit Agreement and in the other Loan Documents are true and correct in all material respects (or, in the case of any
portion of the representations and warranties already subject to a materiality qualifier, true and correct in all respects) on and as of the Fifth
Amendment Effective Date, or as to any such representation or warranty that refers to a specific date, as of such specific date and (b) no Default or
Event of Default has occurred and is continuing on the Fifth Amendment Effective Date.
Section 4.
Conditions Precedent. The amendments to the Credit Agreement set forth in Section 2 of this
Amendment shall not become effective until the date (the “Fifth Amendment Effective Date”) on which the conditions below are satisfied, each of
which shall be reasonably satisfactory to the Agent:
Lenders.
(a)
(b)
Execution. The receipt by the Agent of counterparts of this Amendment executed by the Borrower and the Required
Fees and Expenses. The payment by the Borrower, to the extent invoiced at least two Business Days prior to the
required payment date, of the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to the Agent, in
connection with the negotiation, preparation, execution and delivery of this Amendment.
The Agent shall notify the Borrower and the Lenders of the Fifth Amendment Effective Date promptly upon its occurrence, and
such notice shall be conclusive and binding.
Section 5.
Reference to and Effect on the Credit Agreement. On and after the Fifth Amendment Effective Date,
each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof” or words of like import referring to the Credit Agreement, shall
mean and be a reference to the Credit Agreement as amended by this Amendment. The Credit Agreement and each of the other Loan Documents, as
specifically amended by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed.
This Amendment shall be deemed to be a “Loan Document” for all purposes of the Credit Agreement (as amended hereby) and the other Loan
Documents. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as an amendment
or waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents, nor constitute an amendment
or waiver of any provision of any of the Loan Documents.
Section 6.
Miscellaneous. This Amendment may be executed in any number of counterparts, all of which taken
together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment by signing any such
counterpart. Delivery of an executed counterpart of a signature page to this Amendment by electronic transmission shall be effective as delivery of
a manually executed counterpart to this Amendment. This Amendment shall be governed by, and construed in accordance with, the law of the State
of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above
written.
NEW MOUNTAIN FINANCE CORPORATION
/s/ Shiraz Kajee
By:
Name: Shiraz Kajee
Title: Authorized Signatory
GOLDMAN SACHS BANK USA,
as Agent and a Lender
/s/ Ryan Durkin
By:
Name: Ryan Durkin
Title: Authorized Signatory
STIFEL BANK & TRUST,
as a Lender
/s/ Joseph L. Sooter, Jr.
By:
Name: Joseph L. Sooter, Jr.
Title: Senior Vice President
MORGAN STANLEY BANK, N.A.,
as a Lender
/s/ Emanuel Ma
By:
Name: Emanuel Ma
Title: Authorized Signatory
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Section 3: EX-31.1 (EXHIBIT 31.1)
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
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;
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)
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;
b) 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;
c)
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
d) 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)
b)
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
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 27th day of February 2019
/s/ ROBERT A. HAMWEE
Robert A. Hamwee
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Section 4: EX-31.2 (EXHIBIT 31.2)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
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;
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)
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;
b) 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;
c)
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
d) 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)
b)
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
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 27th day of February 2019
/s/ SHIRAZ Y. KAJEE
Shiraz Y. Kajee
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Section 5: 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)
In connection with the Annual Report on Form 10-K for the period ended December 31, 2018 (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.
EXHIBIT 32.1
/s/ ROBERT A. HAMWEE
Name: Robert A. Hamwee
Date:
February 27, 2019
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Section 6: 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)
In connection with the Annual Report on Form 10-K for the period ended December 31, 2018 (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.
EXHIBIT 32.2
/s/ SHIRAZ Y. KAJEE
Name: Shiraz Y. Kajee
Date:
February 27, 2019
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