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NMFC Reports NII Of $0.3101/Share Compared To A Dividend Of $0.34/Share

|Includes: New Mountain Finance (NMFC)

NMFC has a billion dollar portfolio. NMFC publishes portfolio debt/EBITDA metrics. Its dividend is covered by projected NII. Its historical NII projection accuracy has been excellent. Those are all attributes I really like.

On the other hand, it has historically done some flakey things in the reporting of its numbers. Its NAV is falling. Its dividend coverage is anemic. In the update files - I keep this warning as an intro to my data:

"Publicly traded NMFC was a portion of New Mountain LLC when it IPOed - and some the older stats below are for the total LLC. There were occasions where cap gains have been allocated to pre-IPO unit holders. And there are occasion where income was only allocated to pre-IPO unit holders. In sum, there is opportunity for there to be some error in these stats."

NMFC's reporting of NII was flakey till the beginning of 2015.

The Yahoo Finance historical NIIs:

Earnings History Sep 14 Dec 14 Mar 15 Jun 15
EPS Est 0.35 0.36 0.34 0.34
EPS Actual 0.35 0.34 0.34 0.35
Difference 0.00 -0.02 0.00 0.01
Surprise % 0.00% -5.60% 0.00% 2.90%

The actual and historical numbers:

NMFC Reports NII of $0.3101/share compared to a Dividend of $0.34/share Business Wire 08-05
The 'total' New Mountain Finance Corporation reported for Q2-15 Total Investment Income of $37.905 million or $0.5804/share and 'adjusted' Net Investment Income of $20.253 million or $0.3101/share. NMFC reported "adjusted NII" of $0.35/share. (I am guessing that number is based on 'shares outstanding' instead of 'diluted shares outstanding' - and I know of no reason why NMFC merits different treatment on that matter). The Net Increase in Net Assets Resulting from Operations was $20.264 million or $0.3102/share. NMFC's net asset value per share was $13.90.

  Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13

Total investment income 37.905 36.536 36.748 34.706 33.708 30.439 26.783
Net investment income 20.253 19.062 25.919 20.800 17.289 16.058 14.826
Adjusted Net investment income 20.253 19.062 19.200 18.100 18.500 17.800 16.400
Investments @ fair value 1.309 1.435 1.455 1.354 1.311 1.180 1.116
Wt Av Share Count 65.313 65.218 57.998 59.290 54.293 47.968 42.933
TII/share $0.5804 $0.5602 $0.65 $0.67 $0.65 $0.65 $0.60
NII/share before incentive fees     $0.46 $0.40 $0.34 $0.34 $0.33
NII/share after incentive fees $0.3101 $0.2922 $0.34 $0.35 $0.36 $0.37 $0.35
NAV/share $13.90 $13.89 $13.83 $14.33 $14.65 $14.53 $14.38
Wt Av Yield 10.8% 10.6% 10.7% 10.7% 10.7% 10.9% 11.0%
Portfolio company Debt/EBITDA 5.3x 5.0x 5.0x 4.7x 4.6x 4.8x  

Incentive fees subtracted from NII in the earnings release starting in Q1-15 - Q1 also the first Q with higher diluted shares

I do not mind sharing opinions when I have confidence in my numbers. For NMFC, my 'per share' numbers do not match with their numbers - and fails to match with Yahoo consensus numbers. As a result, I am not publishing an opinion on NMFC.

Added by edit AFTER the first comment:

There is one issue that concerns me in the above data - the change in portfolio company Debt/EBITA ratio. (1) The change is significant - and (2) the change is in the wrong direction. But NMFC is not alone in this trend. Below are the metrics from ARCC:

  Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14
Debt/EBITDA 5.1x 4.9x 5.1x 4.8x 4.8x 4.8x 4.7x 4.8x 4.6x 4.8x 4.6x 4.8x
Interest Coverage 2.8x 3.6x 2.7x 3.6x 2.9x 3.6x 3.0x 3.7x 3.0x 3.4x 2.8x 3.6x

I get some comfort in knowing that the change is mirrored in the ARCC portfolio. But the same not true in the Senior Secured Loan Portfolio held with the ARCC JV with GE (the JV or 'joint venture' began with GE - but Canada Pension Plan Investment Board or CPPIB has purchased GE's private equity business). The debt/EBITDA numbers for Garrison (NASDAQ:GARS) have not had this kind of change.

That is too low of a number (or too low of a sample size) of BDCs reporting that metric to make to judgment. This stinks. My fellow BDCs investors should be demanding the level of transparency that requires this level of exposure.

That said - the change in the Debt/EBITDA metrics for both ARCC and NMFC scares me. And it scares me to not know if this is happening to many other BDCs.

Disclosure: I am/we are long ARCC.