NEW MOUNTAIN FINANCE CORPORATION
Fitch Ratings has assigned an expected rating of 'BBB-(EXP)' to
The transaction is expected to settle on
Key Rating Drivers
NMFC's ratings reflect its solid historical credit performance, experienced management team, shift toward first-lien investments in recent years, demonstrated access to the debt and equity markets over time, improving funding diversity, and access to deal flow and investment resources, given its affiliation with
Rating constraints include a greater reliance on non-cash income; higher-than-peer exposure to second-lien and equity investments, including
Rating constraints for business development companies (BDCs) more broadly include the market impact on leverage, given the need to fair-value the portfolio each quarter, dependence on access to the capital markets to fund portfolio growth and a limited ability to retain capital due to dividend distribution requirements. Fitch believes BDCs will experience weaker asset quality metrics in 2024 amid macroeconomic headwinds and elevated debt service burdens and slower growth prospects at portfolio companies.
The Stable Rating Outlook reflects Fitch's expectations for a continued focus on senior debt investments, solid asset quality metrics, access to sufficient liquidity, appropriate cushion relative to the asset coverage requirement, solid dividend coverage and the maintenance of unsecured debt at or above 35% of total debt.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A sustained decline in unsecured debt to below 35% of total debt, sustained increase in leverage above the targeted range, sustained increase in non-accrual levels, meaningful realized losses, a material change in the firm's risk profile, including a decline in first-lien positions or a shift in focus toward subordinated debt and/or equity investments without a commensurate decline in leverage would be negative for ratings.
Additionally, a sustained increase in non-cash income at or above the current level, net of collections, and/or weaker cash-based NII coverage of the dividend could also yield negative rating momentum.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Strong and differentiated credit performance of recent vintages, which will be evaluated in combination with the consistency of NMFC's operating performance, asset quality metrics, investment valuations, and underlying portfolio metrics, could yield positive rating momentum.
Additionally, an improvement in cash earnings and dividend coverage metrics, maintenance of the asset coverage cushion commensurate with the risk profile of the portfolio, sufficient liquidity and a sustained increase in unsecured debt to at least 40% of total debt outstanding, would be positive for ratings. Although not envisioned, a material reduction in leverage that was not accompanied by an offsetting increase in the portfolio risk profile could also contribute to positive rating momentum.
DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS
The expected rating on the proposed unsecured debt is equalized with the ratings assigned to NMFC's existing senior unsecured debt as the new notes will rank equally in the capital structure. The equalization of NMFC's unsecured ratings with the secured debt rating reflects Fitch's expectation that proceeds from the issuance will be used to repay secured debt outstanding, thus increasing the amount of unsecured funding in the capital structure.
DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES
The expected and existing unsecured debt ratings are primarily linked to the Long-Term Issuer Default Rating (IDR) and are expected to move in tandem. However, a reduction in unsecured debt as a proportion of total debt could result in the unsecured debt rating being notched down from the IDR.
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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