New Mountain Finance (Nasdaq: NMFC) is a high-quality business development company (“BDC”) that has recently experienced a stock price decline.
The dip is due to the business development firm’s investment portfolio being conservative, the portfolio being healthy and having floating rate exposure. Now’s your chance to buy or double New Mountain Finance.
With inflation remaining high at 8.3% in August, New Mountain Finance is undoubtedly a business development company whose unearned income is worth considering the fall.
A secure and well-managed business development company
New Mountain Finance is a safety-focused business development firm with a primary and secondary focus. In the second quarter, First Liens accounted for 56% of BDC’s portfolio investments, while Second Liens, which is slightly riskier than First Liens but offers higher returns, accounted for 18% of the portfolio investments.
Secured assets accounted for 74% of all portfolio investments. Other products in which New Mountain Finance invests include common and preferred shares representing a 12% stake in BDC.
New Mountain Finance’s total investment in Q2 2022 was $3.3 billion.
New Mountain Finance’s portfolio value increased $43.2 million in the third quarter. This is primarily due to a significant number of new formulations. The business development firm launched his six new first liens in portfolio companies and his one new investment in preferred stock. Total originations were $220.4 million, up from $153.7 million in the first quarter.
Unfortunately, New Mountain Finance’s accruals increased in the second quarter. A total of 7 out of 107 investments have not occurred. This indicates that the particular borrower is in financial trouble and is not making regular interest payments.
The overall value-at-risk was $45 million (up from $30 million last quarter) and the non-occurrence rate was 1.4%.
Non-accrual investments accounted for 0.9% of total investment in the first quarter. So credit quality has declined somewhat, but not by much yet.
Floating rate exposure
New Mountain Finance has invested aggressively in variable rate loans, promising more interest income if the Fed raises interest rates further.
So far in 2022, the market has seen two 75 basis point rate hikes, with more likely. With August inflation remaining high at his 8.3%, the central bank believes he is likely to make another big rate hike at the end of September. This would be a positive development for New Mountain Finance, whose portfolio consists of his 89% floating rate loans.
This rise in floating interest rates may help the New Mountain Finance dividend range indicator in the future. BDC’s dividend coverage has remained fairly stable at around 100-101% since the company’s IPO in 2011, but higher net investment income from resetting loan rates in a rising interest rate environment has improved coverage. and may contribute to a higher margin of safety.
New Mountain Finance’s net asset value was $13.42 per share as of June 30, 2022, down 1.0%, or $0.14, from the prior quarter. Long-term records show that BDC’s net asset value has fallen nearly 5% over the decade since its IPO.
New Mountain Finance is trading at a 5% discount to its net worth based on its latest net worth. We recommend buying New Mountain Finance as long as the stock is trading at a discount to its book value.
Why New Mountain Finance’s Valuation Is Going Down
New Mountain Finance is a well-managed business development company with a portfolio that prioritizes safety while maintaining acceptable credit quality. However, deteriorating credit quality, bad debt losses, and changes in monetary policy by central banks can result in higher net asset value discount rates.
Your next opportunity to buy New Mountain Finance’s 9.4% dividend has arrived. Stocks have experienced unwarranted declines in recent days, but investors need to focus on what really matters here.
In the second quarter, New Mountain Finance paid a dividend on net investment income. The business development has significant floating rate exposure, meaning investors could see an increase in his NII if the central bank continues to raise interest rates.
Last but not least, I think New Mountain Finance’s stock valuation (5% discount on net asset value) is attractive.