KBRA Assigns Rating to New Mountain Finance Corporation's $300 Million Senior Unsecured Notes Due 2027

KBRA assigns a rating of BBB- to New Mountain Finance Corporation's (“NMFC” or “the company”) $300 million, 6.20% senior unsecured notes due 2027. The rating Outlook is Stable. The proceeds will be used to repay secured debt and to provide sufficient liquidity for repayment of convertible notes coming due in October 2025.

Key Credit Considerations

The ratings and Stable Outlook are supported by New Mountain Finance Corporation’s ties to New Mountain Capital's ("NMC") $56 billion AUM, including a $12 billion credit platform that provides SEC exemptive relief to co-invest among affiliated NMC companies. As of June 30, 2024, NMFC had a $3.2 billion diversified investment portfolio at fair value, comprised of 123 companies across 13 industries, exclusive of investments in JVs, mostly first lien senior secured (62.8%, in addition to ~8% senior loan fund) and second lien senior secured (8.6%) middle and upper-middle market loans, with a weighted average EBITDA of $180 million in predominantly less cyclical defensive industries. The top three portfolio sectors are Software (28.4%), Business Services (17.5%), and Healthcare (15.7%). Also supporting the ratings is the company's diversified funding mix comprised of secured bank facilities, unsecured senior debt, convertible notes, and SBA debentures and solid access to the capital markets. At 2Q24, the ratio of unsecured debt to total debt outstanding was solid at approximately 64%. The high percentage of unsecured debt to total debt provides financial flexibility and less encumbered collateral for the benefit of the unsecured noteholders. As of June 30, 2024, the company’s gross and net leverage were 1.21x and 1.12x, respectively, which was within the company's target net leverage range of 1.0x to 1.25x. Asset coverage is adequate at 182.8% 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 available credit lines and cash of $619.7 million compared with $460 million of unsecured debt due within two years of June 30, 2024, and unfunded commitments of $278.3 million. The company intends to use a portion of the note proceeds for the repayment of its upcoming $260 million convertible notes due October 2025. A portion of the unfunded commitments are tied to covenants and transactions and are not expected to be drawn. The ratings also consider the company’s strong and experienced management team that has a sound track record within the private debt middle markets.

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 (~29%) of investments that fall outside of traditional senior secured debt and include common and preferred equity, a real estate investment trust (REIT) that focuses on industrial real estate properties and NNN leases, subordinated debt, and two JVs which were comprised mainly of first lien, broadly syndicated senior secured loans. As of June 30, 2024, NMFC had six portfolio companies and one collateralized agreement to re-sell on non-accrual status, comprising 1.4% and 3.9% of total investments at fair value and cost, respectively, with ~43% of non-accruals in a single portfolio company.

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

Rating Sensitivities

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

To access rating and relevant documents, click here.

Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• ESG Global Rating Methodology

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: 1005931

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