KBRA Assigns Rating to New Mountain Finance Corporation's $300 Million 6.875% Senior Unsecured Notes Due 2029
KBRA assigns a BBB- rating to New Mountain Finance Corporation's (NASDAQ:NMFC) ("New Mountain" or "the company") $300 million 6.875% senior unsecured notes due February 1, 2029. The rating Outlook is Stable. The proceeds will primarily be used to redeem the $116.5 million of outstanding notes due April 2024 and to paydown a revolving credit facility.
Key Credit Considerations
The rating and Stable Outlook are supported by New Mountain Finance Corporation's ties to New Mountain Capital's ("NMC") $45+ billion AUM comprised $36 billion of private equity, $10 billion of credit, and $2 billion of net lease along with SEC exemptive relief to co-invest among affiliated NMC companies. As of September 30, 2023, NMFC had a $3.1 billion diversified investment portfolio at fair value, comprised of 110 companies across 16 industries, mostly first lien senior secured (54%, in addition to 8% senior loan fund) and second lien senior secured (17%) middle market loans, with a weighted average EBITDA of $147 million in predominantly non-cyclical defensive industries. The top three portfolio sectors, excluding joint ventures (JVs), include Enterprise Software 26.4%, Business Services 17.4%, and Healthcare Services 17.2%. Also supporting the rating is the company's solid access to the capital markets with a diversified funding mix of secured bank facilities, unsecured senior debt, convertible notes, SBA debentures, and equity. At 3Q23, approximately 50% of NMFC's total debt outstanding was comprised of senior unsecured notes but is further increased with two debt issuances post quarter-end, boosting unsecured debt to total debt outstanding on a pro-forma basis to ~70%. The high percentage of unsecured debt to total debt provides solid unencumbered collateral for the benefit of the unsecured noteholders. As of September 30, 2023, the company's leverage (debt/equity) was 1.20x (NMFC reported a reduction to 1.14x, as of December 31, 2023), which is within the company's target range of 1.0x to 1.25x. Asset coverage is sufficient at 183% when considering its 150% regulatory asset coverage, providing the company the ability to withstand additional market volatility in a less favorable economic environment. Moreover, the company's liquidity is adequate with $263.5 million in available bank credit and $83 million of cash with upcoming unsecured debt maturities over the next two years of $116.5 million and unfunded commitments of $172.8 million. Liquidity is further enhanced with the $300 million of notes issued with the proceeds used to pay down its revolving credit facility and to redeem its April 2024 notes. The rating also considers the company's strong and experienced management team that has a sound track record within the private debt middle markets. The company has benefited from the rising interest rate environment due to its highly asset sensitive balance sheet with 89% floating rate loans.
These strengths are counterbalanced by potential risks related to NMFC's business as a business development company (BDC), illiquid nature of the assets, retained earnings constraints as a Regulated Investment Company (RIC), and a lower proportion of first lien debt investments relative to the company's higher-rated peers, as well as an uncertain macro environment. The company has a high percentage (~21%) of investments that fall outside of senior secured debt and include two JVs which were comprised mainly of first lien, broadly syndicated senior secured loans, and a real estate investment trust (REIT) that focuses on industrial real estate properties and NNN leases. On September 30, 2023, NMFC had seven companies on non-accrual status, comprising 1.5% and 5.2% of the total investments at fair value and cost, respectively. Many of the non-accruals are in the Business Services space.
Incorporated in 2010 as a Delaware corporation, New Mountain Finance Corporation is a closed-end, publicly traded BDC, regulated under the Investment Company Act of 1940, which, among other things, must distribute to its shareholders at least 90% of the company's income. The company's stock trades on the NASDAQ under the symbol NMFC with a market capitalization of $1.3 billion at the end of 3Q23. The company is headquartered in New York.
Rating Sensitivities
The ratings for New Mountain are unlikely to be upgraded in the intermediate term. The Outlook could be changed to Positive if the company's credit metrics trend positively, including prudent leverage, an increase in first lien senior secured investments, lower non-accruals, and improved asset coverage. The Outlook for NMFC's ratings could be revised to Negative, or the rating could be downgraded if there is a significant downturn in the U.S. economy that has a negative impact on New Mountain's earnings performance, asset quality, and leverage. Unexpected asset quality deterioration, a rise in leverage metrics, or a significant change in senior management could also pressure the ratings.
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Methodologies
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
Doc ID: 1003015
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