Fitch Affirms New Mountain Finance Corporation at 'BBB-'; Outlook Stable

Published: 2025-07-01 04:59:09 ET NMFC

Published on 07/01/2025 at 04:59

Fitch Ratings has affirmed New Mountain Finance Corporation's (NMFC) Long-Term Issuer Default Rating (IDR) and unsecured debt rating at 'BBB-'.

Fitch has also affirmed NMFC's senior secured debt rating at 'BBB'. The Rating Outlook is Stable.

Today's rating actions have been taken as part of a broader review of a group of business development companies (BDCs), which included eight publicly rated firms. For more information on the peer review, please see 'Fitch Ratings Completes Peer Review of 8 US BDCs,' available at www.fitchratings.com.

Key Rating Drivers

Affiliation with New Mountain Capital: The rating affirmation reflects NMFC's access to deal flow and investment resources, strengthened by its affiliation with New Mountain Capital Group, L.P., solid historical credit performance, experienced management team, increasing exposure to first-lien investments, solid funding flexibility, and demonstrated access to the debt and equity markets over time.

Rating Constraints: Rating constraints include a greater proportion of non-cash income compared to peers, higher-than-peer exposure to second-lien and equity investments. This also includes New Mountain Net Lease Corporation and off-balance sheet joint ventures, which could experience more valuation volatility than first lien debt investments, particularly in times of stress; and higher-than-peer leverage including Small Business Association (SBA) borrowings.

Competitive Underwriting Environment: Rating constraints for BDCs include the market impact on leverage, dependence on access to the capital markets to fund growth and limited ability to retain capital. Fitch believes BDCs will face a competitive underwriting environment, weaker earnings and dividend coverage metrics, and deterioration in asset quality metrics throughout 2025.

Below-Average First Lien Exposure: NMFC's investment portfolio mix has shifted more towards first-lien positions in recent years but still remains below the rated peer average. As of March 31, 2025 (1Q25), first-lien investments accounted for 64.3% of the portfolio at fair value, which is an increase from 56.9% at 1Q24 and 37.5% at YE 2017. Fitch would view a further rotation into first-lien positions favorably.

Non-Accruals Decline: NMFC's non-accrual investments accounted for 1.7% of the debt portfolio at value and 3.1% at cost at 1Q25, both of which were down from a year prior but remained above the rated peer averages. NMFC's net realized gains were 1.2% of the average portfolio at value in 1Q25, which compared favorably to rated BDC peers and was an improvement from 1.4% of realized losses in 2024. Fitch believes elevated rates and the challenging macroeconomic backdrop will pressure credit performance, which could yield additional amendment requests, Payment-in-kind (PIK) income and increased non-accruals.

Earnings Headwinds: NMFC's net investment income (NII) amounted to 4.4% of the average portfolio at cost in 1Q25 (annualized), which was below the rated peer average and down from 4.9% a year ago. Higher interest rates had boosted BDCs' earnings in recent years, but NII yields declined following interest rate cuts in 2024 and spread compression. Fitch believes the potential for additional rate cuts and non-accruals will further pressure NII.

Above Average Total Leverage: Total leverage, measured by par debt to equity, was 1.35x at 1Q25 and above the rated peer average. Excluding SBA borrowings, NMFC's statutory leverage was 1.15x, or 1.09x net of cash at 1Q25, within the firm's targeted range of 1.0x-1.25x. The statutory leverage implied an asset coverage cushion of 19.8%, within Fitch's 'bbb' category capitalization and leverage benchmark range of 11%-33%. Fitch expects the firm to manage leverage with an appropriate cushion to account for potential credit issues and valuation volatility.

Solid Funding Flexibility: Unsecured debt accounted for 68.9% of NMFC's outstanding debt at 1Q25, which was above the rated peer average and within Fitch's 'bbb' category benchmark range of 35%-100%. NMFC has a combined $459 million of notes maturing within the next twelve months. Fitch expects the firm to remain opportunistic when accessing the unsecured debt markets to manage its debt maturity profile while maintaining a meaningful unsecured funding component.

Decline in Dividend Coverage: NII coverage of declared dividends was 100.1% in 1Q25, down from 102.9% in 2024. NMFC maintains a dividend support program, which will continue through the end of 2026. During this time, the investment advisor has pledged to waive NMFC's incentive fee, if necessary to support its regular dividend, which Fitch views favorably.

Greater Reliance on Noncash Income: PIK income amounted to 19.1% of interest and dividend income in 1Q25, which was meaningfully above the peer average. NMFC has historically had higher than peer levels of non-cash income due to management's comfort for including PIK in select deals at origination. NMFC's cash earnings coverage of the dividend was 57.2% 1Q25, which was below the peer average. Cash dividend coverage would be higher when adjusting for cash realizations of non-cash income accruals, which is not publicly reported. Failure to reduce reliance on non-cash income would be viewed negatively.

Stable Outlook: The Stable Outlook reflects Fitch's expectations for a continued focus on senior debt investments, maintenance of an appropriate cushion relative to the asset coverage requirement, unsecured debt at or above 35% of total debt, and sufficient liquidity.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

An inability to reduce PIK, and/or demonstrate further collections of accrued PIK income in cash or an inability to improve cash-based NII coverage of the dividend would be negative for ratings. Additionally, a sustained decline in unsecured debt to below 35% of total debt, a sustained increase in leverage above the targeted range, a sustained increase in non-accrual levels, meaningful realized losses, a material change in the firm's risk profile, including a decline in first-lien positions or a shift in focus toward subordinated debt and/or equity investments without a commensurate decline in leverage could also yield negative rating momentum.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Strong and differentiated credit performance of recent vintages, which will be evaluated in combination with the consistency of NMFC's operating performance, asset quality metrics, investment valuations, and underlying portfolio metrics could yield positive rating momentum. Additionally, a sustained improvement in cash earnings and dividend coverage metrics, the maintenance of the asset coverage cushion commensurate with the risk profile of the portfolio, sufficient liquidity and the maintenance of unsecured debt of at least 40% of total debt outstanding would be necessary for positive rating momentum. Although not envisioned, a material reduction in leverage that was not accompanied by an offsetting increase in the portfolio risk profile could also contribute to positive rating momentum.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The senior secured debt rating of 'BBB', which is one notch above NMFC's Long-Term IDR, reflects Fitch's view of good recovery prospects in a stress scenario due to its funding mix and available asset coverage.

The alignment of the unsecured debt rating with the Long-Term IDR reflects average recovery prospects under a stress scenario, as NMFC is subject to a 150% asset coverage limitation and has a meaningful unsecured funding component.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The secured and unsecured debt ratings are primarily linked to the Long-Term IDR and are expected by Fitch to move in tandem, although the notching could change if there is a shift in funding mix or reduction in reduction in available asset coverage, which Fitch believes impacts the recovery prospects of the instruments in a stress scenario.

ADJUSTMENTS

The Standalone Credit Profile (SCP) has been assigned in line with the implied SCP.

The Capitalization & Leverage score has been assigned below the implied score due to the following adjustment reason(s): Risk profile and business model (negative).

The Funding, Liquidity & Coverage score has been assigned below the implied score due to the following adjustment reason(s): Funding flexibility (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.