New Mountain Finance Share Offering Today Illustrates Multiple Risks Inherent In BDC Stocks

Oct. 23, 2014 1:10 PM ETNMFC2 Comments
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Long Only, Value, Contrarian, Bonds

Contributor Since 2009

Effective 1/9/17, I will only be posting at my old website where I started to publish investment blogs back in October 2008. There will be no ads at that website. 


New Mountain Finance (NMFC) is an externally managed BDC.

During the recent swoon in BDC prices, NMFC declined to an intra-day low of $13.93 per share (10/15/14: NMFC Historical Prices). Since that low, the stock had been clawing its way back and closed at $14.9 yesterday (10/22/2014).

The last reported net asset value per share was $14.65 as of 6/30/14. 10-Q

The shares had just crept back over that reported net asset value per share number a few days ago.

It did not take the external managers and the Board of Directors long to announce a share offering after net asset value took a very brief peek at a premium market price. (Press Release Thursday 10/23/14: New Mountain Finance Corporation Announces Pricing of 5,000,000 Shares of Common Stock

NMFC granted the underwriters an over-allotment option of up to an additional 750,000 shares.

The shares were priced to the public at $14.53. While that number is below the 6/30/14 net asset value per share number, the company released a preliminary estimate of NAV per share as of 10/22/14 at $14.35, which reflects development's in NMFC's portfolio since 6/30/14 including "a partial write-down related to UniTek Global Services . . ." 8-K That company intends to file a pre-packaged bankruptcy. The price to the underwriters will be lower. A recent filing pegged the net proceeds to NMFC at $14.35 per share. Prospectus

UniTek Global Services Website

UniTek is a publicly traded company: UniTek Global Services Reaches Agreement on Comprehensive Debt Restructuring (NASDAQ:UNTK)

This investment represented 5.02% of net assets as of 6/30/14:


10-Q at page 7

So that was a less than "optimal" investment as I am fond of saying. And, all or some part of that junk did not even pay current interest but what is known as PIK (that is, interest payments with more bonds rather than in cash, or what our Left Brain calls "Pretend Interest Payments") The company finesses the payment issue with an asterisk, creating an ambiguity when the asterisk led me to this statement: "All or portion of interest contains payment-in-kind".

I found later in the day after first publishing this comment the following more detailed description by Main Street Capital. I can not say anything about the equivalence.

Q/E 6/30/14 10-Q at page 21 MAIN was valuing that loan at greater than the principal amount of $10.189M. MAIN's purchase cost was identified at $9.561M

UniTek discusses generally the BK plan in a Press Release:

Basically, the current equity owners are being wiped out and the lenders will take control of the company after agreeing to a significant debt haircut.

The foregoing illustrates a number of problems about externally managed BDCs. This investment was obviously highly speculative. The company has to acknowledge in its risk disclosures that the "incentive fee may induce the investment advisor to make speculative investments". Page 31

Some or all of the interest payments were not even in cash. The company takes a good sized hit to NAV per share and then sells a boatload of stock to replenish its assets. The external managers receive a base fee of 1.75% applied to assets, plus an incentive fee. Pages 30-31 Last Filed 10-Q I suppose that there must be a need to keep assets growing even when NAV per share is shrinking.

I just discussed these problems in connection with my Instablog published yesterday: Added 50 AINV At $7.94 - South Gent | Seeking Alpha

Due to my trading strategy for externally managed BDCs, I did recently sell my highest cost lot at $15.37: Item # 8 Sold Highest Cost NMFC Lot at $15.37 (9/20/14 Post) The total return on that lot was 12.79%; and the price was at a 4.98% Premium to the $14.65 NAV reported as of 6/30/14, close enough to my bogey of 5% for a pare or an elimination.

I am down to 150 shares: Item # 3 Added 50 NMFC at $14.2-Roth IRA (4/26/14 Post)(bought after New Mountain announced earlier this year an underwritten stock offering of 3.5M shares at $14.57); Item # 5 Bought 100 NMFC at $14.28-Taxable Account (6/22/13 Post).

I am not pleased.

Disclosure: The author is long NMFC.

Additional disclosure: Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.

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