NEW MOUNTAIN FINANCE CORPORATION The information in management's discussion and analysis of financial condition and results of operations relates toNew Mountain Finance Corporation , including its wholly-owned direct and indirect subsidiaries (collectively, "we", "us", "our", "NMFC" or the "Company").
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, on the industries in which we invest;
•the impact of interest rate volatility, including the decommissioning of LIBOR and rising interest rates, on our business and our portfolio companies;
•our future operating results, our business prospects, 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
•actual and potential conflicts of interest with theInvestment Adviser andNew Mountain Capital Group , L.P. (together withNew Mountain Capital, L.L.C. and its affiliates, "New Mountain Capital ") whose ultimate owners includeSteven B. Klinsky , other current and former New Mountain Capital professionals and related vehicles and a minority investor.; and •the risk factors set forth in Item 1A.-Risk Factors contained in our Annual Report on Form 10-K for the year endedDecember 31, 2022 and in this Quarterly Report on Form 10-Q. 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 our Annual Report on Form 10-K for the year endedDecember 31, 2022 and in this Quarterly Report on Form 10-Q. 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 theU.S. 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.
Overview
We are aDelaware corporation that was originally incorporated onJune 29, 2010 and completed our initial public offering ("IPO") onMay 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"). Since our IPO, and throughMarch 31, 2023 , we raised approximately$945.6 million in net proceeds from additional offerings of our common stock. The Investment Adviser is a wholly-owned subsidiary ofNew 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, credit and net lease investment strategies. The Investment Adviser manages our day-to-day operations and provides us with investment advisory and management services. The Investment Adviser also manages other funds that 108
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may have investment mandates that are similar, in whole or in part, to ours.New Mountain Finance Administration, L.L.C. (the "Administrator"), a wholly-owned subsidiary ofNew Mountain Capital , provides the administrative services necessary to conduct our day-to-day operations.
We have established the following wholly-owned direct and indirect subsidiaries:
•New Mountain Finance Holdings, L.L.C. ("NMF Holdings ") and New Mountain Finance
DB, L.L.C. ("NMFDB"), whose assets are used to secure NMF Holdings' credit
facility and NMFDB's credit facility, respectively;
•New Mountain Finance SBIC, L.P. ("SBIC I") and New Mountain Finance SBIC II,
L.P. ("SBIC II"), who have received licenses from the U.S. Small Business
Administration ("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") and their general partners, New Mountain Finance SBIC
G.P., L.L.C. ("SBIC I GP") and New Mountain Finance SBIC II G.P., L.L.C. ("SBIC
II GP"), respectively;
•NMF Ancora Holdings, Inc. ("NMF Ancora"), NMF QID NGL Holdings, Inc. ("NMF
QID"), NMF YP Holdings, Inc. ("NMF YP"), NMF Permian Holdings, LLC ("NMF
Permian"), NMF HB, Inc. ("NMF HB"), NMF TRM, LLC ("NMF TRM"), NMF Pioneer, Inc.
("NMF Pioneer") and NMF OEC, Inc. ("NMF OEC"), which serve as tax blocker
corporations by holding 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
but 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; and
•New Mountain Finance Servicing, L.L.C. ("NMF Servicing"), which serves as the
administrative agent on certain investment transactions.
New Mountain Net Lease Corporation ("NMNLC") is a majority-owned consolidated
subsidiary of ours, which acquires commercial real estate properties that are
subject to "triple net" leases has elected to be treated, and intends to comply
with the requirements to continue to qualify annually, as a real estate
investment trust, or REIT, within the meaning of Section 856(a) of the Code.
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, primarily consisting of senior secured loans, and select
junior capital positions, to growing businesses in defensive industries that
offer attractive risk-adjusted returns. 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. 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 March 31, 2023 , our top five industry
concentrations were software, business services, healthcare, investment funds
(which includes our investments in our joint ventures) and education.
As of March 31, 2023 , our net asset value was approximately $1,326.7 million and
our portfolio had a fair value, as determined in good faith by the board of
directors, of approximately $3,270.3 million in 111 portfolio companies, with a
weighted average yield to maturity at cost for income producing investments
("YTM at Cost") of approximately 10.9% and a weighted average yield to maturity
at cost for all investments ("YTM at Cost for Investments") of approximately
9.8%. The 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 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"), Sterling Overnight
Interbank Average Rate ("SONIA"), Secured Overnight Financing Rate ("SOFR") and
Euro Interbank Offered Rate ("EURIBOR") 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, SONIA, SOFR and EURIBOR contracts by the individual companies in our
portfolio or other factors.
Recent Developments
On April 25, 2023 , our board of directors declared a second quarter 2023
distribution of $0.32 per share and a supplemental distribution related to Q1
earnings of $0.03 per share, each payable on June 30, 2023 to holders of record
as of June 16, 2023 .
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OnApril 25, 2023 ,Alice W. Handy notified our board of directors that she was resigning as a director, effective immediately. In submitting her resignation,Ms. Handy did not express any disagreement on any matter relating to our operations, policies or practices.The Nominating and Corporate Governance Committee of our board of directors has been actively searching forMs. Handy's successor in accordance with its policies and procedures, and expects to appoint a new director in the near future.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States ("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, NMFDB, SBIC I, SBIC I GP, SBIC II, SBIC II GP, NMF Ancora, NMF QID, NMF YP, NMF Permian, NMF HB, NMF TRM, NMF Pioneer and NMF OEC and our majority-owned consolidated subsidiary, NMNLC. 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 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, we look at the number of quotes readily available and perform the following procedures:
i.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.
We will evaluate the reasonableness of the quote, and if the quote is determined
to not be representative of fair value, we will use one or more of the
methodologies outlined below to determine fair value;
ii.Investments for which one quote is received from a pricing service are
validated internally. The investment professionals of the Investment Adviser
analyze the market quotes obtained using an array of valuation methods (further
described below) to validate the fair value. If the Investment Adviser is unable
to sufficiently validate the quote internally and if the investment's par value
or its fair value exceeds the materiality threshold, the investment is valued
similarly to those assets with no readily available quotes (see (3) below).
(3)Investments for which quotations are not readily available through exchanges,
pricing services, brokers, or dealers are valued through a multi-step valuation
process:
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a.Each portfolio company or investment is initially valued by the investment professionals of the Investment Adviser responsible for the credit monitoring;
b.Preliminary valuation conclusions will then be documented and discussed with our senior management;
c.If an investment falls into (3) above for four consecutive quarters and if the investment's par value or its fair value exceeds the materiality threshold, then at least once each fiscal year, the valuation for each portfolio investment for which we do not have a readily available market quotation will be reviewed by an independent valuation firm engaged by our board of directors; and d.When deemed appropriate by our management, an independent valuation firm may be engaged to review and value investment(s) of a portfolio company, without any preliminary valuation being performed by the Investment Adviser. The investment professionals of the Investment Adviser will review and validate the value provided. For investments in revolving credit facilities and delayed draw commitments, the cost basis of the funded investments purchased is offset by any costs/netbacks received for any unfunded portion on the total balance committed. The fair value is also adjusted for the price appreciation or depreciation on the unfunded portion. As a result, the purchase of a commitment not completely funded may result in a negative fair value until it is called and funded. The values assigned to investments are based upon available information and do not necessarily represent amounts which might ultimately be realized, since such amounts depend on future circumstances and cannot be reasonably determined until the individual positions are liquidated. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period and the fluctuations could be material.
GAAP fair value measurement guidance classifies the inputs used in measuring fair value into three levels as follows:
Level I-Quoted prices (unadjusted) are available in active markets for identical
investments and we have the ability to access such quotes as of the reporting
date. The type of investments which would generally be included in Level I
include active exchange-traded equity securities and exchange-traded
derivatives. As required by Accounting Standards Codification Topic 820, Fair
Value Measurements and Disclosures ("ASC 820"), we, to the extent that we hold
such investments, do not adjust the quoted price for these investments, even in
situations where we hold a large position and a sale could reasonably impact the
quoted price.
Level II-Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level I. Level II inputs include the following:
•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
•Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including foreign exchange forward contracts); and
•Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level III-Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment.
The inputs used to measure fair value may fall into different levels. In all instances when the inputs fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level of input that is significant to the fair value measurement in its entirety. As such, a Level III fair value measurement may include inputs that are both observable and unobservable. Gains and losses for such assets categorized within the Level III table below may include changes in fair value that are attributable to both observable inputs and unobservable inputs. The inputs into the determination of fair value require significant judgment or estimation by management and consideration of factors specific to each investment. 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.
See Item 1.-Financial Statements and Supplementary Data-Note 4. Fair Value in
this Quarterly Report on Form 10-Q for additional information on fair value
hierarchy as of
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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 EBITDA or revenue 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 or revenue
multiples to the portfolio company's latest twelve month ("LTM") EBITDA or
revenue, or projected EBITDA or revenue to calculate the enterprise value of the
portfolio company. Significant increases or decreases in the EBITDA or revenue
multiples 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.
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
combination of a yield calibration approach and a comparable investment
approach. The yield calibration approach 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. The
comparable investment approach utilizes an average yield-to maturity of a
selected set of high-quality, liquid investments to determine a comparable
investment discount rate. Significant increases or decreases in the discount
rate would result in a decrease or increase in the fair value measurement.
See Item 1.-Financial Statements and Supplementary Data-Note 4. Fair Value in
this Quarterly Report on Form 10-Q for additional information on unobservable
inputs used in the fair value measurement of our Level III investments as of
March 31, 2023 .
NMFC Senior Loan Program III LLC ("SLP III") was formed as aDelaware limited liability company and commenced operations onApril 25, 2018 . SLP III is structured as a private joint venture investment fund between us andSkyKnight 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 untilApril 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 ofMarch 31, 2023 , we and SkyKnight II have committed and contributed 112
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OnMay 2, 2018 , SLP III entered into its revolving credit facility withCitibank, N.A ., which matures onJanuary 8, 2026 . EffectiveJuly 8, 2021 , the reinvestment period was extended toJuly 8, 2024 . As of the most recent amendment onJuly 8, 2021 , during the reinvestment period the credit facility bears interest at a rate of LIBOR plus 1.60% and after the reinvestment period it will bear interest at a rate of LIBOR plus 1.90%. EffectiveNovember 23, 2020 , SLP III's revolving credit facility has a maximum borrowing capacity of$525.0 million . As ofMarch 31, 2023 andDecember 31, 2022 , SLP III had total investments with an aggregate fair value of approximately$651.1 million and$639.3 million , respectively, and debt outstanding under its credit facility of$498.0 million and$512.1 million , respectively. As ofMarch 31, 2023 andDecember 31, 2022 , none of SLP III's investments were on non-accrual. Additionally, as ofMarch 31, 2023 andDecember 31, 2022 , SLP III had unfunded commitments in the form of delayed draws of$2.0 million and$2.9 million , respectively.
Below is a summary of SLP III's portfolio as of
(in thousands) March 31, 2023 December 31, 2022 First lien investments (1)$ 694,046 $ 690,017 Weighted average interest rate on first lien investments (2) 9.09 % 8.51 % Number of portfolio companies in SLP III 86 83 Largest portfolio company investment (1)$ 18,149 $ 18,197 Total of five largest portfolio company investments (1)$ 85,727 $ 85,948
(1)Reflects principal amount or par value of investment. (2)Computed as the all in interest rate in effect on accruing investments divided by the total principal amount of investments.
See Item 1.-Financial Statements and Supplementary Data-Note 3. Investments in this Quarterly Report on Form 10-Q for a listing of the individual investments in SLP III's portfolio as ofMarch 31, 2023 andDecember 31, 2022 and additional information on certain summarized financial information for SLP III as ofMarch 31, 2023 andDecember 31, 2022 and for the three months endedMarch 31, 2023 andMarch 31, 2022 .
NMFC Senior Loan Program IV LLC ("SLP IV") was formed as aDelaware limited liability company onApril 6, 2021 , and commenced operations onMay 5, 2021 . SLP IV is structured as a private joint venture investment fund between us andSkyKnight Income Alpha, LLC ("SkyKnight Alpha") and operates under the First Amended and Restated Limited Liability Company Agreement ofNMFC Senior Loan Program IV LLC (the "SLP IV Agreement"). Upon the effectiveness of the SLP IV Agreement datedMay 5, 2021 , the members contributed their respective membership interests inNMFC Senior Loan Program I LLC ("SLP I") andNMFC Senior Loan Program II LLC ("SLP II") to SLP IV. Immediately following the contribution of their membership interests, SLP I and SLP II became wholly-owned subsidiaries of SLP IV. 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 IV, which has equal representation from us and SkyKnight Alpha. SLP IV has a five year investment period and will continue in existence untilMay 5, 2028 . The investment period may be extended for up to one year pursuant to certain terms of the SLP IV Agreement. SLP IV is capitalized with equity contributions which were transferred and contributed from its members. As ofMarch 31, 2023 , we and SkyKnight Alpha have transferred and contributed$112.4 million and$30.6 million , respectively, of their membership interests in SLP I and SLP II to SLP IV. Our investment in SLP IV is disclosed on our Consolidated Schedule of Investments as ofMarch 31, 2023 andDecember 31, 2022 . OnMay 5, 2021 , SLP IV entered into a$370.0 million revolving credit facility withWells Fargo Bank, National Association which matures onMay 5, 2026 . As of the most recent amendment onApril 28, 2023 , the facility bears interest at a rate of SOFR plus 1.70%. Prior to the amendment onApril 28, 2023 , the facility bore interest at a rate of LIBOR plus 1.60% per annum. As ofMarch 31, 2023 andDecember 31, 2022 , SLP IV had total investments with an aggregate fair value of approximately$477.7 million and$473.8 million , respectively, and debt outstanding under its credit facility of$355.9 million and$365.5 million , respectively. As ofMarch 31, 2023 andDecember 31, 2022 , none of SLP IV's investments were on non-accrual. Additionally, as ofMarch 31, 2023 andDecember 31, 2022 , SLP IV had unfunded commitments in the form of delayed draws of$1.0 million and$2.0 million , respectively. 113
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Below is a summary of SLP IV's consolidated portfolio as of
(in thousands) March 31, 2023 December 31, 2022 First lien investments (1)$ 509,213 $ 510,372 Weighted average interest rate on first lien investments (2) 9.13 % 8.54 % Number of portfolio companies in SLP IV 75 74 Largest portfolio company investment (1)$ 21,924 $ 21,982 Total of five largest portfolio company investments (1)$ 93,539 $ 93,734
(1)Reflects principal amount or par value of investment. (2)Computed as the all in interest rate in effect on accruing investments divided by the total principal amount of investments.
See Item 1.-Financial Statements and Supplementary Data-Note 3. Investments in this Quarterly Report on Form 10-Q for a listing of the individual investments in SLP IV's consolidated portfolio as ofMarch 31, 2023 andDecember 31, 2022 and additional information on certain summarized financial information for SLP IV as ofMarch 31, 2023 andDecember 31, 2022 and for the three months endedMarch 31, 2023 andMarch 31, 2022 .
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 ofMarch 31, 2023 . OnMarch 30, 2020 , an affiliate of the Investment Adviser purchased directly from NMNLC 105,030 shares of NMNLC's common stock at a price of$107.73 per share, which represented the net asset value per share of NMNLC at the date of purchase, for an aggregate purchase price of approximately$11.3 million . Immediately thereafter, NMNLC redeemed 105,030 shares of its common stock held by NMFC in exchange for a promissory note with a principal amount of$11.3 million and a 7.0% interest rate, which was repaid by NMNLC to NMFC onMarch 31, 2020 . Below is certain summarized property information for NMNLC as ofMarch 31, 2023 : Fair Value as Lease Total of Portfolio Company Tenant Expiration Date Location Square Feet March 31, 2023 (in thousands) (in thousands)NM NL Holdings LP / NM GP Holdco LLC Various Various Various Various$ 95,605 NM CLFX LP Victor Equipment Company 8/31/2033 TX 423 15,437 NM YI, LLC Young Innovations, Inc. 10/31/2039 IL / MO 212 9,581$ 120,623
Collateralized agreements or repurchase financings
We follow the guidance in Accounting Standards Codification Topic 860, Transfers
and Servicing-Secured Borrowing and Collateral ("ASC 860") when accounting for
transactions involving the purchases of securities under collateralized
agreements to resell (resale agreements). These transactions are treated as
collateralized financing transactions and are recorded at their contracted
resale or repurchase amounts, as specified in the respective agreements.
Interest on collateralized agreements is accrued and recognized over the life of
the transaction and included in interest income. As of March 31, 2023 and
December 31, 2022 , 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
$16.5 million and $16.5 million , respectively. The collateralized agreement to
resell is on non-accrual. The collateralized agreement to resell is guaranteed
by a private hedge fund, PPVA Fund, L.P. 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.
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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, PPVA Black Elk (Equity) LLC ,
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 U.S. Bankruptcy
Code in August 2015 . The Trustee alleged 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 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 March 31, 2023 and
December 31, 2022 , the SPP Agreement has a cost basis of $14.5 million and $14.5
million , respectively, and a fair value of $8.0 million and $8.0 million ,
respectively, 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 three months ended March 31, 2023 and
March 31, 2022 , we recognized PIK and non-cash interest from investments of
approximately $9.0 million and $8.5 million , respectively, and PIK and non-cash
dividends from investments of approximately $6.5 million and $5.1 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 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
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material element of our original investment strategy. Our portfolio monitoring
procedures are designed to provide a simple yet comprehensive analysis of our
portfolio companies based on their operating performance and underlying business
characteristics, which in turn forms the basis of its Risk Rating (as defined
below).
We use an investment risk rating system to characterize and monitor the credit
profile and expected level of returns on each investment in the portfolio. As
such, we assign each investment a composite score ("Risk Rating") based on two
metrics - 1) Operating Performance and 2) Business Characteristics:
•Operating Performance assesses the health of the investment in context of its
financial performance and the market environment it faces. The metric is
expressed in Tiers of "1" to "4", with "1" being the worst and "4" being the
best:
•Tier 1 - Severe business underperformance and/or severe market headwinds
•Tier 2 - Significant business underperformance and/or significant market headwinds
•Tier 3 - Moderate business underperformance and/or moderate market headwinds
•Tier 4 - Business performance is in-line with or above expectations
•Business Characteristics assesses the health of the investment in context of the underlying portfolio company's business and credit quality, the underlying portfolio company's current balance sheet, and the level of support from the equity sponsor. The metric is expressed as on a qualitative scale of "A" to "C", with "A" being the best and "C" being the worst. The Risk Rating for each investment is a composite of these two metrics. The Risk Rating is expressed in categories of Red, Orange, Yellow and Green, with Red reflecting an investment performing materially below expectations and Green reflecting an investment that is in-line with or above expectations. The mapping of the composite scores to these categories are below:
•Red - 1C (e.g., Tier 1 for Operating Performance and C for Business Characteristics)
•Orange - 2C and 1B •Yellow - 3C, 2B, and 1A
•Green - 4C, 3B, 2A, 4B, 3A, and 4A
The following table shows the Risk Rating of our portfolio companies as ofMarch 31, 2023 : (in millions) As of March 31, 2023 Risk Rating Cost Percent Fair Value Percent Red$ 62.3 1.9 %$ 17.6 0.5 % Orange 60.1 1.8 % 41.0 1.3 % Yellow 187.7 5.6 % 138.7 4.2 % Green 3,022.5 90.7 % 3,089.6 94.0 %$ 3,332.6 100.0 %$ 3,286.9 3286.9 100.0 % As ofMarch 31, 2023 , all investments in our portfolio had a Green Risk Rating with the exception of eight portfolio companies that had a Yellow Risk Rating, four portfolio companies that had an Orange Risk Rating and three portfolio companies that had a Red Risk Rating. During the first quarter of 2023, we placed our second lien term loan inADG, LLC ("ADG") on non-accrual status. As ofMarch 31, 2023 , our position in ADG on non-accrual status had an aggregate cost basis of$7.4 million , an aggregate fair value of$2.7 million and total unearned interest income of$0.3 million for the three months then ended. As ofMarch 31, 2023 , our ADG portfolio company has a Red Risk Rating. During the third quarter of 2022, we placed our first lien term loan and first lien delayed draw term loan positions inAnsira Holdings, Inc. ("Ansira") on non-accrual status. As ofMarch 31, 2023 , our first lien positions inAnsira on non-accrual status had an aggregate cost basis of$41.3 million , an aggregate fair value of$9.2 million and total unearned interest income of$2.5 million for the three months then ended. As ofMarch 31, 2023 , ourAnsira portfolio company has a Red Risk Rating. As ofMarch 31, 2023 , our aggregate principal amount of our second lien term loan inIntegro Parent Inc. ("Integro") was$12.0 million . During the second quarter of 2022, we placed an aggregate principal amount of$4.2 million of our second 116
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lien position on non-accrual status. As ofMarch 31, 2023 , our position in Integro on non-accrual status had an aggregate cost basis of$4.0 million , an aggregate fair value of$3.3 million and total unearned interest income of$0.2 million for the three months then ended. As ofMarch 31, 2023 , our Integro portfolio company has a Green Risk Rating. During the second quarter of 2022, we placed our second lien positions inNational HME, Inc. ("National HME") on non-accrual status. As ofMarch 31, 2023 , our second lien position inNational HME had an aggregate cost basis of$7.9 million , an aggregate fair value of$5.0 million and total unearned interest income of$0.4 million for the three months then ended. During the fourth quarter of 2022, we reversed$11.2 million of previously recorded PIK interest inNational HME and$1.5 million of previously recorded other income inNHME Holdings Corp. as we believe this PIK interest and other income will ultimately not be collectible. As ofMarch 31, 2023 , ourNational HME portfolio company has a Red Risk Rating. As ofMarch 31, 2023 , our aggregate principal amount of our subordinated position and first lien term loans inAmerican Achievement Corporation ("AAC") was$5.2 million and$30.8 million , respectively. During the first quarter of 2021, we placed an aggregate principal amount of$5.2 million of our subordinated position on non-accrual status. During the third quarter of 2021, we placed an aggregate principal amount of$13.2 million of our first lien term loans on non-accrual status. As ofMarch 31, 2023 , our positions in AAC on non-accrual status had an aggregate cost basis of$13.2 million , an aggregate fair value of$8.7 million and total unearned interest income of$0.5 million , for the three months then ended. As ofMarch 31, 2023 , our AAC portfolio company has an Orange Risk Rating. During the third quarter of 2021, we placed our second lien position inSierra Hamilton Holdings Corporation ("Sierra") on non-accrual status. As ofMarch 31, 2023 , our second lien position in Sierra had an aggregate cost basis of$0.0 million , an aggregate fair value of$0.0 million and total unearned interest income of$0.0 million for the three months then ended. As ofMarch 31, 2023 , our Sierra portfolio company has a Orange Risk Rating. During the first quarter of 2020, we placed our investment in our junior preferred shares ofUniTek Global Services, Inc. ("UniTek") on non-accrual status. As ofMarch 31, 2023 , our junior preferred shares of UniTek had an aggregate cost basis of$34.4 million , an aggregate fair value of$0.0 million and total unearned dividend income of$1.8 million for the three months then ended. During the third quarter of 2021, we placed an aggregate principal amount of$19.8 million of our investment in our senior preferred shares of UniTek on non-accrual status. As ofMarch 31, 2023 , our senior preferred shares of UniTek had an aggregate cost basis of$19.8 million , an aggregate fair value of approximately$10.1 million and total unearned dividend income of approximately$1.3 million , for the three months then ended. As ofMarch 31, 2023 , our UniTek portfolio company has a Green Risk Rating. During the first quarter of 2018, we placed our first lien positions inEducation Management II LLC on non-accrual status as the portfolio company announced its intention to wind down and liquidate the business. As ofMarch 31, 2023 , our Education Management Corporation had an aggregate cost basis of$1.0 million , an aggregate fair value of$0.0 million and total unearned interest income of$0.0 million for the three months then ended. As ofMarch 31, 2023 , our Education Management Corporation portfolio company has an Orange Risk Rating
During the year ended
Portfolio and Investment Activity
The fair value of our investments, as determined in good faith by our board of directors, was approximately$3,270.3 million in 111 portfolio companies atMarch 31, 2023 and approximately$3,221.2 million in 107 portfolio companies atDecember 31, 2022 .
The following table shows our portfolio and investment activity for the three
months ended
Three Months Ended
(in millions) March 31, 2023 March 31, 2022
New investments in 25 and 24 portfolio companies, respectively $ 94.2 $ 153.8
Debt repayments in existing portfolio companies 31.5 44.1
Sales of securities in 2 and 3 portfolio companies, respectively 36.2 49.2
Change in unrealized appreciation on 55 and 28 portfolio companies, respectively
45.3 29.7
Change in unrealized depreciation on 47 and 73 portfolio companies,
respectively (39.4) (39.6)
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Recent Accounting Standards Updates
See Item 1.-Financial Statements and Supplementary Data-Note 13. Recent Accounting Standards Updates for details on recent accounting standards updates.
Results of Operations for the Three Months EndedMarch 31, 2023 andMarch 31, 2022 Revenue Three Months Ended (in thousands) March 31, 2023 March 31, 2022 Total interest income$ 71,234 $ 47,878 Total dividend income 17,543 16,772 Other income 3,176 4,313 Total investment income$ 91,953 $ 68,963 Our total investment income increased by approximately$23.0 million , or 33%, for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 . For the three months endedMarch 31, 2023 , total investment income of approximately$92.0 million consisted of approximately$60.7 million in cash interest from investments, approximately$9.0 million in PIK and non-cash interest from investments, net amortization of purchase premiums and discounts of approximately$1.6 million , approximately$11.0 million in cash dividends from investments, approximately$6.5 million in PIK and non-cash dividends from investments and approximately$3.2 million in other income. The increase in interest income of approximately$23.4 million during the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 was primarily due to a higher effective interest rate of our portfolio on larger invested balances. The increase in dividend income for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 was primarily driven by an increase in PIK dividends and PIK dividends related to new investments, partially offset by a decrease in cash dividends from our investment in NMNLC. Other income during the three months endedMarch 31, 2023 , which represents fees that are generally non-recurring in nature, was primarily attributable to upfront, consent and amendment fees received from 14 different portfolio companies. Operating Expenses Three Months Ended (in thousands) March 31, 2023 March 31, 2022 Management fee$ 11,638 $ 11,553 Less: management fee waiver (1,063) (1,092) Total management fee 10,575 10,461 Incentive fee 9,597 7,477 Interest and other financing expenses 30,796 18,637 Administrative expenses 1,048 1,209 Professional fees 965 937 Other general and administrative expenses 488
477
Total expenses 53,469
39,198
Less: expenses waived and reimbursed -
(238)
Net expenses before income taxes 53,469
38,960
Income tax expense 96
95
Net expenses after income taxes$ 53,565 $ 39,055 Our total net operating expenses increased by approximately$14.5 million for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 . Our management fee, net of a management fee waiver, remained relatively flat and our incentive fee increased by approximately$2.1 million for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 . The increase in incentive fees was attributable to higher invested balances. Interest and other financing expenses increased by approximately$12.2 million during the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 , primarily due to higher LIBOR rates on our floating 118
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rate borrowings, higher interest expense on our 2022A Unsecured Notes, issued in the second quarter of 2022, and higher interest expense on our 2022 Convertibles Notes, issued in the fourth quarter of 2022 with an upsize in the first quarter of 2023. Higher interest expense was partially offset by lower interest expense on our 2017A Unsecured Notes, which were fully repaid in the third quarter of 2022, lower interest expense on our 2018A Unsecured Notes, which were fully repaid in the first quarter of 2023 and lower interest expense on the 2018 Convertible Notes, which were partially repaid in the fourth quarter of 2022 as a result of our tender offer to purchase$84.4 million aggregate principal amount of outstanding 2018 Convertible Notes. Our total professional fees, administrative expenses and total other general and administrative expenses for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 remained relatively flat. Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation) Three Months Ended (in thousands) March 31, 2023 March 31, 2022 Net realized gains on investments $ 665$ 19,172 Net realized gains on foreign currency 12 345
Net change in unrealized appreciation (depreciation) of investments
5,852 (9,933)
Net change in unrealized depreciation securities purchased under collateralized agreements to resell
- (2,021)
Net change in unrealized appreciation (depreciation) on foreign currency
26 (422)
Provision for taxes (131) (2)
Net realized and unrealized gains $ 6,424 $ 7,139
Our net realized and unrealized gains resulted in a net gain of approximately$6.4 million for the three months endedMarch 31, 2023 compared to net realized gains and unrealized losses resulting in a net gain of approximately$7.1 million for the same period in 2022. 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 three months endedMarch 31, 2023 was primarily driven by realized gains inHaven Midstream Holdings LLC and unrealized gains in UniTek, partially offset by realized losses inNational HME and unrealized losses inAnsira and ADG. The provision for income taxes was attributable to equity investments that are held as ofMarch 31, 2023 in eight of our corporate subsidiaries. The net gain for the three months endedMarch 31, 2022 was primarily driven by a realized gain inNM GLCR LP and unrealized appreciation inTVG-Edmentum Holdings, LLC, UniTek and Haven Midstream LLC which offset unrealized depreciation inNHME Holdings Corp. andIntegro Parent Inc. See Monitoring of Portfolio Investments above for more details regarding the health of our portfolio companies. 119
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Investment Income and Net Realized and Unrealized (Losses) Gains Related to
Non-Controlling Interest in
Three Months Ended
(in thousands) March 31, 2023 March 31, 2022
Total investment income $ 91,953 $ 68,963
Net expenses after income taxes 53,565 39,055
Net investment income 38,388 29,908
Less: Net investment income related to non-controlling interests in NMNLC
275 334
Net investment income related to NMFC $
38,113
Net change in realized gains on investments 665 19,172 Net change in realized gains on foreign currency 12 345
Less: Net change in realized gains on investments related to non-controlling interest in NMNLC
- 1,922
Net change in realized gains of investments related to NMFC $
677
Net change in unrealized appreciation (depreciation) of investments
5,852 (9,933)
Net change in unrealized depreciation of securities purchased under collateralized agreements to resell
- (2,021)
Net change in unrealized appreciation (depreciation) on foreign currency
26 (422)
Provision for taxes (131) (2)
Less: Net change in unrealized depreciation of investments related to non-controlling interest in NMNLC
(36) (1,401)
Net change in unrealized appreciation (depreciation) of investments related to NMFC
$
5,783
Liquidity, Capital Resources, Off-Balance Sheet Arrangements, Borrowings and Contractual Obligations
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
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. OnJune 8, 2018 our shareholders approved the application of the modified asset coverage requirements set forth in Section 61(a) of the 1940 Act, which resulted in the reduction from 200.0% to 150.0% of the minimum asset coverage ratio applicable to us as ofJune 9, 2018 . 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 (which means we can borrow$2 for every$1 of our equity). As a result of our exemptive relief received onNovember 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 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 ofMarch 31, 2023 , our asset coverage ratio was 177.6%. AtMarch 31, 2023 andDecember 31, 2022 , we had cash and cash equivalents of approximately$46.4 million and$71.2 million , respectively. Our cash used in operating activities during the three months endedMarch 31, 2023 andMarch 31, 2022 was approximately$3.5 million and$45.2 million , respectively. We expect that all current liquidity needs will be met with cash flows from operations and other activities. 120
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OnNovember 3, 2021 , we entered into an equity distribution agreement (the "Distribution Agreement") withB. Riley Securities, Inc. andRaymond James & Associates, Inc. (collectively, the "Agents"). The Distribution Agreement provides that we may issue and sell our shares from time to time through the Agents, up to$250.0 million worth of our common stock by means of at-the-market ("ATM") offerings. For the three months endedMarch 31, 2023 , we did not sell any shares of common stock under the Distribution Agreement. For the three months endedMarch 31, 2022 , we sold 1,511,836 shares of common stock under the Distribution Agreement and received total accumulated net proceeds of approximately$20.5 million , including$0.3 million of offering expenses from these sales. We generally use net proceeds from these ATM offerings to make investments, to pay down liabilities and for general corporate purposes. As ofMarch 31, 2023 , shares representing approximately$196.9 million of our common stock remains available for issuance and sale under the Distribution Agreement.
Off-Balance Sheet Agreements
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 ofMarch 31, 2023 andDecember 31, 2022 , we had outstanding commitments to third parties to fund investments totaling$216.2 million and$224.1 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
Borrowings
Holdings Credit Facility-OnOctober 24, 2017 , we entered into the Third Amended and Restated Loan and Security Agreement (as amended from time to time, the "Loan and Security Agreement") among us, as the Collateral Manager,NMF Holdings , as the Borrower,Wells Fargo Securities, LLC , as theAdministrative Agent andWells Fargo Bank, National Association , as the Lender and Collateral Custodian (the "Holdings Credit Facility"). As of the amendment onApril 20, 2021 , the maturity date of the Holdings Credit Facility isApril 20, 2026 , and the maximum facility amount is the lesser of$800.0 million and the actual commitments of the lenders to make advances as of such date. As ofMarch 31, 2023 , the maximum amount of revolving borrowings available under the Holdings Credit Facility is$730.0 million . Under the Holdings Credit Facility,NMF Holdings is permitted to borrow up to 25.0%, 45.0%, 67.5% or 70.0% of the purchase price of pledged assets, subject to approval byWells Fargo Bank, National Association . The Holdings Credit Facility is non-recourse to us and is collateralized by all of the investments ofNMF Holdings on an investment by investment basis. All fees associated with the origination, amending 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 ofNMF Holdings investments, but rather to the performance of the underlying portfolio companies. As of the most recent amendment onApril 28, 2023 , the Holdings Credit Facility bears interest at a rate of SOFR plus 1.70% for Broadly Syndicated Loans (as defined in the Seventh Amendment to the Loan and Security Agreement) and SOFR plus 2.20% per annum for all other investments. FromApril 20, 2021 toApril 27, 2023 , the Holdings Credit Facility bore interest at a rate of LIBOR plus 1.60% per annum for Broadly Syndicated Loans (as defined in the Fifth Amendment to the Loan and Security Agreement) and LIBOR plus 2.10% 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-UsageFee Rate (as defined in the Third Amended and Restated Loan and Security Agreement). As ofMarch 31, 2023 andDecember 31, 2022 , the outstanding balance on the Holdings Credit Facility was$614.7 million and$619.0 million , respectively, andNMF Holdings was in compliance with the applicable covenants in the Holdings Credit Facility on such dates. See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in this Quarterly Report on Form 10-Q for additional information on costs incurred on the Holdings Credit Facility for the three months endedMarch 31, 2023 andMarch 31, 2022 . 121
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NMFC Credit Facility-The Amended and Restated Senior Secured Revolving Credit Agreement, (as amended from time to time, and together with the related guarantee and security agreement, the "RCA"), datedJune 4, 2021 , among us, as the Borrower,Goldman Sachs Bank USA , as the Administrative Agent and Collateral Agent, andGoldman Sachs Bank USA ,Morgan Stanley Bank, N.A. ,Stifel Bank & Trust andMUFG Union Bank, N.A. , as Lenders (the "NMFC Credit Facility"), 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 onJune 4, 2021 , the maturity date of the NMFC Credit Facility isJune 4, 2026 . As ofMarch 31, 2023 , the maximum amount of revolving borrowings available under the NMFC Credit Facility was$198.5 million . We are permitted to borrow at various advance rates depending on the type of portfolio investment as outlined in the related RCA. All fees associated with the origination and amending 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. As of the most recent amendment onJune 4, 2021 , the NMFC Credit Facility generally bears interest at a rate of LIBOR, SONIA or EURIBOR plus 2.10% per annum or the prime rate plus 1.10% per annum, and charges a commitment fee, based on the unused facility amount multiplied by 0.375% per annum (as defined in the RCA). Prior toJune 4, 2021 , the NMFC Credit Facility bore interest at a rate of LIBOR plus 2.50% per annum or the prime rate plus 1.50% per annum, and charged a commitment fee based on the unused facility amount multiplied by 0.375% per annum (as defined in the RCA). As ofMarch 31, 2023 andDecember 31, 2022 , the outstanding balance on the NMFC Credit Facility was$87.9 million and$40.4 million , which included £22.9 million and £22.9 million, respectively, denominated in British Pound Sterling ("GBP") and €0.7 million and €0.7 million, respectively, denominated in Euro ("EUR") that have been converted toU.S. dollars. NMFC was in compliance with the applicable covenants in the NMFC Credit Facility on such dates. See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in this Quarterly Report on Form 10-Q for additional information on costs incurred on the NMFC Credit Facility for the three months endedMarch 31, 2023 andMarch 31, 2022 . Unsecured Management Company Revolver-The Uncommitted Revolving Loan Agreement (the "Uncommitted Revolving Loan Agreement"), datedMarch 30, 2020 , by and between us, as the Borrower, andNMF Investments III, L.L.C. , as Lender, an affiliate of the Investment Adviser (the "Unsecured Management Company Revolver"), is structured as a discretionary unsecured revolving credit facility. The proceeds from the Unsecured Management Company Revolver may be used for general corporate purposes, including the funding of portfolio investments. As of the most recent amendment onDecember 17, 2021 , the maturity date of the Unsecured Management Company Revolver isDecember 31, 2024 . As of the most recent amendment onDecember 17, 2021 , the Unsecured Management Company Revolver bears interest at a rate of 4.00% per annum. Prior toDecember 17, 2021 , the Unsecured Management Company Revolver bore interest at a rate of 7.00% per annum (as defined in the Uncommitted Revolving Loan Agreement). OnMay 4, 2020 , we entered into an Amended and Restated Uncommitted Revolving Loan Agreement withNMF Investments III, L.L.C. , which increased the maximum amounts of revolving borrowings available thereunder from$30.0 million to$50.0 million . As ofMarch 31, 2023 , the maximum amount of revolving borrowings available under the Unsecured Management Company Revolver was$50.0 million and no borrowings were outstanding. For the three months endedMarch 31, 2023 andMarch 31, 2022 , amortization of financing costs were each less than$50.0 thousand , respectively. DB Credit Facility-The Loan Financing and Servicing Agreement (the "LFSA") datedDecember 14, 2018 and as amended from time to time, 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 andU.S. Bank National Association , as collateral agent and collateral custodian (the "DB Credit Facility"), is structured as a secured revolving credit facility and matures onMarch 25, 2026 . As ofMarch 31, 2023 , the maximum amount of revolving borrowings available under the DB Credit Facility was$280.0 million . We are permitted to borrow at various advance rates depending on the type of portfolio investment, as outlined in the LFSA. 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 and amending 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. 122
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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. Prior toMarch 25, 2021 , the Applicable Margin was equal to 2.60% during the Revolving Period and then increases by 0.20% during an Event of Default. EffectiveMarch 25, 2021 , the Applicable Margin is equal to 2.35% 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 UndrawnFee Rate (as defined in the LFSA) and a facility agent fee of 0.25% per annum on the total facility amount. As ofMarch 31, 2023 andDecember 31, 2022 , the outstanding balance on the DB Credit Facility was$186.4 million and$186.4 million , respectively, and NMFDB was in compliance with the applicable covenants in the DB Credit Facility on such date. See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in this Quarterly Report on Form 10-Q for additional information on costs incurred on the DB Credit Facility for the three months endedMarch 31, 2023 andMarch 31, 2022 . NMNLC Credit Facility II-The Credit Agreement (together with the related guarantee and security agreement, the "NMNLC CA"), datedFebruary 26, 2021 , by and between NMNLC, as the Borrower, andCity National Bank , as the Lender (the "NMNLC Credit Facility II"), is structured as a senior secured revolving credit facility. As of the amendment onNovember 1, 2022 ,NM CLFX LP has been added as a co-borrower and the NMNLC CA will mature onNovember 1, 2024 . The NMNLC Credit Facility II is guaranteed by us and proceeds from the NMNLC Credit Facility II are able to be used for refinancing existing loans on the properties held. Prior to the amendment onDecember 7, 2021 , the NMNLC Credit Facility II bore interest at a rate of LIBOR plus 2.75% per annum, and charged a commitment fee, based on the unused facility amount multiplied by 0.05% per annum (as defined in the NMNLC CA). FromDecember 7, 2021 toNovember 1, 2022 , the NMNLC Credit Facility II bore interest at a rate of the SOFR plus 2.75% per annum with a 0.35% floor, and charges a commitment fee, based on the unused facility amount multiplied by 0.05% per annum (as defined in the NMNLC CA). As of the amendment onNovember 1, 2022 , the NMNLC Credit Facility II bears interest at a rate of SOFR plus 2.25%. Prior to the amendment onMarch 16, 2022 , the maximum amount of revolving borrowings available under the NMNLC Credit Facility II was$20 million . As of theMarch 16, 2022 amendment and effectiveMay 1, 2022 throughNovember 1, 2022 , the maximum amount of revolving borrowings available under the NMNLC Credit Facility II was$10 million . As of the amendment onNovember 1, 2022 , the maximum amount of revolving borrowings available under the NMNLC Credit Facility II is$27.5 million , of which$26.3 million is outstanding for all borrowers. As ofMarch 31, 2023 andDecember 31, 2022 , the outstanding balance on the NMNLC Credit Facility II was$3.1 million and$3.8 million , respectively, and NMNLC was in compliance with the applicable covenants in the NMNLC Credit Facility II on such date. See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in this Quarterly Report on Form 10-Q for additional information on costs incurred on the NMNLC Credit Facility II for the three months endedMarch 31, 2023 andMarch 31, 2022 . Convertible Notes 2018 Convertible Notes-OnAugust 20, 2018 , we closed a registered public offering of$100.0 million aggregate principal amount of unsecured convertible notes (the "2018 Convertible Notes"), pursuant to an indenture, datedAugust 20, 2018 , as supplemented by a first supplemental indenture thereto, datedAugust 20, 2018 (together the "2018A Indenture"). OnAugust 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. OnJune 7, 2019 , we closed a registered public offering of an additional$86.3 million aggregate principal amount of the 2018 Convertible Notes. These additional 2018 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 2018 Convertible Notes that we issued inAugust 2018 . The 2018 Convertible Notes bear interest at an annual rate of 5.75%, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year. The 2018 Convertible Notes will mature onAugust 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 toMay 15, 2023 . On or afterMay 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. 123
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OnNovember 4, 2022 , we launched a tender offer to purchase, upon the terms and subject to the conditions set forth in the Offer to Purchase, datedNovember 4, 2022 , up to$201.25 million aggregate principal amount of outstanding 2018 Convertible Notes for cash in an amount equal to$1,000 per$1,000 principal amount of 2018 Convertible Notes purchased (exclusive of accrued and unpaid interest on such notes) (the "Tender Offer"). The Tender Offer expired onDecember 6, 2022 . As of the expiration of the Tender Offer,$84.43 million aggregate principal amount of the 2018 Convertible Notes were validly tendered and not validly withdrawn pursuant to the Tender Offer. The Company accepted for purchase all of the 2018 Convertible Notes that were validly tendered and not validly withdrawn at the expiration of the Tender Offer. Following settlement of the Tender Offer onDecember 9, 2022 , approximately$116.8 million aggregate principal amount of the 2018 Convertible Notes remained outstanding. 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 Securities Exchange Act of 1934, as amended (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. 2022 Convertible Notes-OnNovember 2, 2022 , we closed a private offering of$200.0 million aggregate principal amount of unsecured convertible notes (the "2022 Convertible Notes"), pursuant to an indenture, datedAugust 20, 2018 , as supplemented by a third supplemental indenture thereto, datedNovember 2, 2022 (together the "2018C Indenture"). OnMarch 14, 2023 , in connection with the registered public offering, we issued an additional$60.0 million aggregate principal amount of the 2022 Convertible Notes. These additional 2022 Convertible Notes constitute a further issuance of, rank equally in right of payment with, and form a single series with the$200,000 aggregate principal amount of 2022 Convertible Notes that the we issued inNovember 2022 . The 2022 Convertible Notes bear interest at an annual rate of 7.50%, payable semi-annually in arrears onApril 15 andOctober 15 of each year, commencing onApril 15, 2023 . The 2022 Convertible Notes will mature onOctober 15, 2025 unless earlier converted, repurchased or redeemed pursuant to the terms of the 2018C Indenture. We may not redeem the 2022 Convertible Notes prior toJuly 15, 2025 . On or afterJuly 15, 2025 , we may redeem the 2022 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 2022 Convertible Notes to be redeemed, (ii) accrued and unpaid interest thereon to, but excluding, the redemption date and (iii) a make-whole premium.
The following table summarizes certain key terms related to the convertible
features of our 2018 Convertible Notes and 2022 Convertible Notes (together, the
"Convertible Notes") as of
2018 Convertible Notes 2022 Convertible Notes
Initial conversion premium(1) 10.0 % 14.7 %
Initial conversion rate(2) 65.8762 70.4225
Initial conversion price $ 15.18 $ 14.20
Conversion premium at March 31, 2023 10.0 % 14.7 %
Conversion rate at March 31, 2023(1)(2) 65.8762 70.6582
Conversion price at March 31, 2023(2)(3) $ 15.18 $ 14.15
Last conversion price calculation date August 20, 2022 March 17, 2023
(1)Conversion rates denominated in shares of common stock per $1.0 thousand
principal amount of our Convertible Notes converted.
(2)Represents conversion rate and conversion price, as applicable, taking into
account certain de minimis adjustments that will be made on the conversion date.
(3)The conversion price in effect at March 31, 2023 on the 2018 Convertible
Notes 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 price in effect
at March 31, 2023 on the 2022 Convertible Notes was calculated on March 17,
2023 .
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The conversion rate will be subject to adjustment upon certain events, such as stock splits and combinations, mergers, spin-offs, increases in dividends in excess of$0.34 per share per quarter for the 2018 Convertible Notes and$0.30 per share per quarter for the 2022 Convertible Notes and certain changes in control. Certain of these adjustments, including adjustments for increases in dividends, are subject to a conversion price floor of$13.80 per share for the 2018 Convertible Notes and$12.38 per share for the 2022 Convertible Notes. In no event will the total number of shares of common stock issuable upon conversion exceed 72.4637 per$1 principal amount of the 2018 Convertible Notes and 80.7754 per$1 principal amount of the 2022 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 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 1. - Financial Statements - Note 11. Earnings Per Share, the issuance is considered part of the if-converted method for calculation of diluted earnings per share. As ofMarch 31, 2023 andDecember 31, 2022 , the outstanding balance on the 2018 Convertible Notes was$116.8 million and$116.8 million , respectively. As ofMarch 31, 2023 andDecember 31, 2022 , the outstanding balance on the 2022 Convertible Notes was$260.0 million and$200.0 million , respectively. NMFC was in compliance with the terms of the 2018A Indenture and 2018C Indenture on such date. See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in this Quarterly Report on Form 10-Q for additional information on costs incurred on the Convertible Notes for the three months endedMarch 31, 2023 andMarch 31, 2022 . Unsecured Notes OnJune 30, 2017 , we issued$55.0 million in aggregate principal amount of five-year unsecured notes that matured onJuly 15, 2022 (the "2017A Unsecured Notes"), pursuant to an amended and restated note purchase agreement, datedSeptember 30, 2016 (the "NPA"), and a supplement to the NPA. OnJuly 15, 2022 , we caused notices to be issued to holders of our 2017A Unsecured Notes regarding the exercise of our option to repay all of our$55.0 million in aggregate principal amount of issued and outstanding 2017A Unsecured Notes, which was repaid onJuly 14, 2022 . OnJanuary 30, 2018 , we issued$90.0 million in aggregate principal amount of five year unsecured notes that matured onJanuary 30, 2023 (the "2018A Unsecured Notes") pursuant to the NPA and a second supplement to the NPA. OnJanuary 30, 2023 , we caused notices to be issued to holders of our 2018A Unsecured Notes regarding the exercise of our option to repay all of our$90.0 million in aggregate principal amount of issued and outstanding 2018A Unsecured Notes, which was repaid onJanuary 27, 2023 . OnJuly 5, 2018 , we issued$50.0 million in aggregate principal amount of five year unsecured notes that mature onJune 28, 2023 (the "2018B Unsecured Notes") pursuant to the NPA and a third supplement to the NPA (the "Third Supplement"). OnApril 30, 2019 , we issued$116.5 million in aggregate principal amount of five year unsecured notes that mature onApril 30, 2024 (the "2019A Unsecured Notes") pursuant to the NPA and a fourth supplement to the NPA (the "Fourth Supplement"). OnJanuary 29, 2021 , we issued$200.0 million in aggregate principal amount of five year unsecured notes that mature onJanuary 29, 2026 (the "2021A Unsecured Notes") pursuant to the NPA and a fifth supplement to the NPA (the "Fifth Supplement"). OnJune 15, 2022 , we issued$75.0 million in aggregate principal amount of five year unsecured notes that mature onJune 15, 2027 (the "2022A Unsecured Notes") pursuant to the NPA and a sixth supplement to the NPA (the "Sixth Supplement"). The NPA provides for future issuances of unsecured notes in separate series or tranches. The 2017A Unsecured Notes bore interest at an annual rate of 4.760%, payable semi-annually onJanuary 15 andJuly 15 of each year. The 2018A Unsecured Notes bore interest at an annual rate of 4.870%, payable semi-annually onFebruary 15 andAugust 15 of each year. The 2018B Unsecured Notes bear interest at an annual rate of 5.360%, payable semi-annually onJanuary 15 andJuly 15 of each year. The 2019A Unsecured Notes bear interest at an annual rate of 5.494%, payable semi-annually onApril 15 andOctober 15 of each year. The 2021A Unsecured Notes bear interest at an annual rate of 3.875%, payable semi-annually in arrears onJanuary 29 andJuly 29 of each year. The 2022A Unsecured Notes bear interest at an annual rate of 5.900%, payable semi-annually in arrears onJune 15 andDecember 15 of each year, which commenced onDecember 14, 2022 . 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. 125
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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, 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, Fourth Supplement, Fifth Supplement and Sixth Supplement all include additional financial covenants related to asset coverage as well as other terms. The 2017A Unsecured Notes, 2018A Unsecured Notes, 2018B Unsecured Notes, 2019A Unsecured Notes, 2021A Unsecured Notes and 2022A Unsecured Notes (together, 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.
As of
See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in this Quarterly Report on Form 10-Q for additional information on costs incurred on the Unsecured Notes for the three months endedMarch 31, 2023 andMarch 31, 2022 .
SBA-guaranteed debentures-On
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 and have a ten year maturity with interest payable semi-annually. The principal amount of SBA-guaranteed debentures 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 overU.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. InJune 2018 , legislation amended the 1958 Act by increasing the individual leverage limit from$150.0 million to$175.0 million , subject to SBA approvals. As ofMarch 31, 2023 andDecember 31, 2022 , 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 ofMarch 31, 2023 andDecember 31, 2022 , SBIC II had regulatory capital of$75.0 million and$75.0 million , respectively, and$150.0 million and$150.0 million , respectively, of SBA-guaranteed debentures outstanding. The SBA-guaranteed debentures incur upfront fees of 3.435%, which consists of a 1.00% commitment fee and a 2.435% issuance discount, which are amortized over the life of the SBA-guaranteed debentures. 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 SBIC program is designed to stimulate the flow of private investor capital into eligible small businesses, as defined by the SBA. Under SBA regulations, SBICs are subject to regulatory requirements, including making investments in SBA-eligible small businesses, investing at least 25.0% of its investment capital in eligible smaller enterprises (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 ofMarch 31, 2023 andDecember 31, 2022 , SBIC I and SBIC II were in compliance with SBA regulatory requirements. 126
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See Item 1.-Financial Statements and Supplementary Data-Note 7. Borrowings in
this Quarterly Report on Form 10-Q for additional information on our
SBA-guaranteed debentures as of
Contractual Obligations
A summary of our significant contractual payment obligations as of
Contractual Obligations Payments Due by Period
Less than More than
(in millions) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Holdings Credit Facility(1) $ 614.7 $ - $ - $ 614.7 $ -
Unsecured Notes(2) 441.5 50.0 316.5 75.0 -
Convertible Notes(3) 376.8 116.8 260.0 - -
SBA-guaranteed debentures(4) 300.0 - 117.7 32.3 150.0
DB Credit Facility(5) 186.4 - 186.4 - -
NMFC Credit Facility(6) 87.9 - - 87.9 -
NMNLC Credit Facility II(7) 3.1 - 3.1 - -
Total Contractual Obligations $ 2,010.4 $ 166.8 $ 883.7 $ 809.9 $ 150.0
(1)Under the terms of the $730.0 million Holdings Credit Facility, all
outstanding borrowings under that facility ($614.7 million as of March 31, 2023 )
must be repaid on or before April 20, 2026 . As of March 31, 2023 , there was
approximately $115.3 million of possible capacity remaining under the Holdings
Credit Facility.
(2)$50.0 million of the 2018B Unsecured Notes will mature on June 28, 2023
unless earlier repurchased, $116.5 million of the 2019A Unsecured Notes will
mature on April 30, 2024 unless earlier repurchased, $200.0 million of the 2021A
Unsecured Notes will mature on January 29, 2026 unless earlier repurchased and
$75.0 million of the 2022A Unsecured Notes will mature on June 15, 2027 unless
earlier repurchased.
(3)The 2018 Convertible Notes will mature on August 15, 2023 unless earlier
converted or repurchased at the holder's option or redeemed by us. The 2022
Convertible Notes will mature on October 15, 2025 unless earlier converted or
purchased at the holder's option or redeemed by us.
(4)Our SBA-guaranteed debentures will begin to mature on March 1, 2025 .
(5)Under the terms of the $280.0 million DB Credit Facility, all outstanding
borrowings under that facility ($186.4 million as of March 31, 2023 ) must be
repaid on or before March 25, 2026 . As of March 31, 2023 , there was
approximately $93.6 million of possible capacity remaining under the DB Credit
Facility.
(6)Under the terms of the $198.5 million NMFC Credit Facility, all outstanding
borrowings under that facility ($87.9 million , which included £22.9 million
denominated in GBP and €0.7 million denominated in EUR that have been converted
to U.S. dollars as of March 31, 2023 ) must be repaid on or before June 4, 2026 .
As of March 31, 2023 , there was approximately $110.6 million of available
capacity remaining under the NMFC Credit Facility.
(7)Under the terms of the NMNLC Credit Facility II, all outstanding borrowings
under that facility must be repaid on or before November 1, 2024 . As of
March 31, 2023 , the outstanding borrowings for all borrowers was $25.7 million ,
of which $3.1 million was outstanding for NMNLC.
We have entered into an investment management and advisory agreement (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 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.
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Distributions and Dividends
Distributions declared and paid to stockholders for the three months ended
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 two most recent fiscal years and the current fiscal year to date:
Per Share
Fiscal Year Ended Date Declared Record Date Payment Date Amount (1)
December 31, 2023
First Quarter January 24, 2023 March 17, 2023 March 31, 2023 $ 0.32
$ 0.32
December 31, 2022
Fourth Quarter November 2, 2022 December 16, 2022 December 30, 2022 $ 0.32
Third Quarter August 3, 2022 September 16, 2022 September 30, 2022 0.30
Second Quarter May 3, 2022 June 16, 2022 June 30, 2022 0.30
First Quarter February 23, 2022 March 17, 2022 March 31, 2022 0.30
$ 1.22
December 31, 2021
Fourth Quarter October 27, 2021 December 16, 2021 December 30, 2021 $ 0.30
Third Quarter July 29, 2021 September 16, 2021 September 30, 2021 0.30
Second Quarter April 30, 2021 June 16, 2021 June 30, 2021 0.30
First Quarter February 17, 2021 March 17, 2021 March 31, 2021 0.30
$ 1.20
(1)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,
2022 and December 31, 2021 , total distributions were $122.4 million and $116.5
million , respectively, of which the distributions were comprised of
approximately 70.59% and 90.99%, respectively, of ordinary income, 20.79% and
0.00%, respectively, of long-term capital gains and approximately 8.62% and
9.01%, 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 1- Financial Statements-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 ofNew 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 a fee waiver agreement (the "Fee Waiver Agreement") with the Investment Adviser, pursuant to which the Investment Adviser agreed to voluntarily reduce the base management fees payable to the Investment Adviser by us under the Investment Management Agreement beginning with the quarter endedMarch 31, 2021 through the quarter endingDecember 31, 2023 . See Item 1- Financial Statements-Note 5. Agreements for details. •We have entered into the Administration Agreement with the Administrator, a wholly-owned subsidiary ofNew Mountain Capital . The Administrator arranges our office space and provides office equipment and administrative 128
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services necessary to conduct our respective day-to-day operations pursuant to the Administration Agreement. We reimburse the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations to us under the Administration Agreement, which includes the fees and expenses associated with performing administrative, finance, and compliance functions, and the compensation of our chief financial officer and chief compliance officer and their respective staffs. Pursuant to the Administration Agreement and further restricted by us, the Administrator may, in its own discretion, submit to us for reimbursement some or all of the expenses that the Administrator has incurred on our behalf during any quarterly period. As a result, the amount of expenses for which we will have to reimburse the Administrator may fluctuate in future quarterly periods and there can be no assurance given as to when, or if, the Administrator may determine to limit the expenses that the 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 three months endedMarch 31, 2023 approximately$0.6 million of indirect administrative expenses were included in administrative expenses, of which approximately$0.0 million were waived by the Administrator. As ofMarch 31, 2023 , approximately$0.6 million of indirect administrative expenses were included in payable to affiliates. For the three months endedMarch 31, 2023 , the reimbursement to the Administrator represented approximately 0.02% of our gross assets. •We, the Investment Adviser and the Administrator have entered into a royalty-free Trademark License Agreement, as amended, withNew Mountain Capital , pursuant to whichNew 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", as well as the NMF logo.
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 and the Delaware General Corporation Law.
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. 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 theSEC and its staff, and consistent with the Investment Adviser's allocation procedures. OnOctober 8, 2019 , theSEC issued an exemptive order (the "Exemptive Order"), which superseded a prior order issued onDecember 18, 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. The Exemptive Order was amended onAugust 30, 2022 to permit us to complete follow-on investments in our existing portfolio companies with certain affiliates that are private funds if such private funds do not hold an investment in such existing portfolio company, subject to certain conditions. OnMarch 30, 2020 , an affiliate of the Investment Adviser purchased directly from NMNLC 105,030 shares of NMNLC's common stock at a price of$107.73 per share, which represented the net asset value per share of NMNLC at the date of purchase, for an aggregate purchase price of approximately$11.3 million . Immediately thereafter, NMNLC redeemed 105,030 shares of its common stock held by NMFC in exchange for a promissory note with a principal amount of$11.3 million and a 7.0% interest rate, which was repaid by NMNLC to NMFC onMarch 31, 2020 . OnMarch 30, 2020 , we entered into the Unsecured Management Company Revolver withNMF Investments III, L.L.C. , an affiliate of the Investment Adviser, with a$30.0 million maximum amount of revolver borrowings available and a maturity date ofDecember 31, 2022 . OnMay 4, 2020 , we entered into an Amended and Restated Uncommitted Revolving Loan Agreement withNMF Investments III, L.L.C. , which increased the maximum amounts of revolving borrowings available thereunder from$30.0 million to$50.0 million . OnDecember 17, 2021 , we entered into Amendment No. 1 to the Amended and Restated Uncommitted Revolving Loan Agreement withNMF Investments III, L.L.C. , which lowered the interest rate and extended the maturity date fromDecember 31, 2022 toDecember 31, 2024 . Refer to Borrowings for discussion of the Unsecured Management Company Revolver. 129
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