Attached files
| file | filename |
|---|---|
| EX-32.2 - EX-32.2 - NMF SLF I, Inc. | nmfslfi-9302020xex322.htm |
| EX-32.1 - EX-32.1 - NMF SLF I, Inc. | nmfslfi-9302020xex321.htm |
| EX-31.2 - EX-31.2 - NMF SLF I, Inc. | nmfslfi-9302020xex312.htm |
| EX-31.1 - EX-31.1 - NMF SLF I, Inc. | nmfslfi-9302020xex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________________________
FORM 10-Q
_________________________________________________________________________________
| ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the Quarter Ended September 30, 2020
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
_________________________________________________________________________________
| Commission File Number | Exact name of registrant as specified in its charter, addresses of principal executive offices, telephone numbers and states or other jurisdictions of incorporation or organization | I.R.S. Employer Identification Number | ||||||||||||
| 000-56123 | NMF SLF I, Inc. 787 Seventh Avenue, 48th Floor New York, New York 10019 Telephone: (212) 720-0300 State of Incorporation: Maryland | 83-3291673 | ||||||||||||
_________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: None
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| None | N/A | N/A | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | ||||||||
| Common Stock, par value $0.001 | ||||||||
_________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | ||||||||||
Non-accelerated filer ý | Smaller reporting company o | ||||||||||
Emerging growth company ý | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
_________________________________________________________________________________
The number of the registrant's common stock shares outstanding as of November 13, 2020 was 28,443,289. As of September 30, 2020, there was no established public market for the registrant's common stock.
1
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
| PAGE | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NMF SLF I, Inc.
Statements of Assets and Liabilities
(in thousands, except shares and per share data)
(unaudited)
| September 30, 2020 | December 31, 2019 | ||||||||||
| Assets | |||||||||||
| Non-controlled/non-affiliated investments at fair value (cost of $264,502 and $0, respectively) | $ | 278,991 | $ | — | |||||||
| Cash and cash equivalents | 38,397 | 1 | |||||||||
| Interest receivable | 1,618 | — | |||||||||
| Receivable from unsettled securities sold | 486 | — | |||||||||
| Deferred offerings costs | — | 164 | |||||||||
| Other assets | 89 | 22 | |||||||||
| Total assets | $ | 319,581 | $ | 187 | |||||||
| Liabilities | |||||||||||
| Borrowings | |||||||||||
| Wells Subscription Line | $ | — | $ | — | |||||||
| Deferred financing costs (net of accumulated amortization of $126 and $0, respectively) | (295) | — | |||||||||
| Net borrowings | (295) | — | |||||||||
| Payable for unsettled securities purchased | 9,447 | — | |||||||||
| Distribution payable | 5,973 | — | |||||||||
| Management fee payable | 230 | — | |||||||||
| Payable to affiliates | 45 | 332 | |||||||||
| Interest payable | 16 | — | |||||||||
| Accrued organizational and offering expenses | — | 488 | |||||||||
| Other liabilities | 261 | 54 | |||||||||
| Total liabilities | 15,677 | 874 | |||||||||
| Commitments and contingencies (See Note 8) | |||||||||||
| Net Assets | |||||||||||
| Common stock, par value $0.001, 500,000,000 shares authorized, 28,443,289 and 100 shares issued and outstanding, respectively | 28 | — | |||||||||
| Paid in capital in excess of par | 288,507 | 1 | |||||||||
| Accumulated undistributed (overdistributed) earnings | 15,369 | (688) | |||||||||
| Total net assets | $ | 303,904 | $ | (687) | |||||||
| Total liabilities and net assets | $ | 319,581 | $ | 187 | |||||||
| Number of shares outstanding | 28,443,289 | 100 | |||||||||
| Net asset value per share | $ | 10.68 | $ | (6,873.06) | |||||||
The accompanying notes are an integral part of these financial statements.
3
NMF SLF I, Inc.
Statements of Operations
(in thousands, except shares and per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019(1) | ||||||||||||||||||||
| Investment income | |||||||||||||||||||||||
| Interest income | $ | 5,771 | $ | — | $ | 9,830 | $ | — | |||||||||||||||
| Fee income | 359 | — | 1,022 | — | |||||||||||||||||||
| Total investment income | 6,130 | — | 10,852 | — | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Management fee | 919 | — | 2,484 | — | |||||||||||||||||||
| Professional fees | 152 | — | 429 | — | |||||||||||||||||||
| Interest and other financing expenses | 152 | — | 354 | — | |||||||||||||||||||
| Other general and administrative expenses | 79 | — | 232 | — | |||||||||||||||||||
| Administrative expenses | 67 | — | 141 | — | |||||||||||||||||||
| Organizational expenses | — | 12 | 20 | 594 | |||||||||||||||||||
| Total expenses | 1,369 | 12 | 3,660 | 594 | |||||||||||||||||||
| Less: management fees waived (See Note 5) | (689) | — | (2,047) | — | |||||||||||||||||||
| Net expenses | 680 | 12 | 1,613 | 594 | |||||||||||||||||||
| Net investment income (loss) | 5,450 | (12) | 9,239 | (594) | |||||||||||||||||||
| Net realized gains on investments | 511 | — | 1,032 | — | |||||||||||||||||||
| Net change in unrealized appreciation of investments | 2,947 | — | 14,489 | — | |||||||||||||||||||
| Net realized and unrealized gains | 3,458 | — | 15,521 | — | |||||||||||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | 8,908 | $ | (12) | $ | 24,760 | $ | (594) | |||||||||||||||
| Earnings (loss) per share (basic & diluted) | $ | 0.37 | $ | (121.76) | $ | 1.39 | $ | (5,937.98) | |||||||||||||||
| Weighted average shares of common stock outstanding - basic & diluted (2)(See Note 10) | 23,831,686 | 100 | 17,762,235 | 100 | |||||||||||||||||||
(1)For the nine months ended September 30, 2019, amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
(2)For the nine months ended September 30, 2020 and September 30, 2019, the Company's weighted average number of shares outstanding is based on the period from February 18, 2020 (commencement of operations) to September 30, 2020 and the period from April 15, 2019 (issuance of initial shares) to September 30, 2019, respectively.
The accompanying notes are an integral part of these financial statements.
4
NMF SLF I, Inc.
Statements of Changes in Net Assets
(in thousands, except shares and per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019(1) | ||||||||||||||||||||
| Increase (decrease) in net assets resulting from operations: | |||||||||||||||||||||||
| Net investment income (loss) | $ | 5,450 | $ | (12) | $ | 9,239 | $ | (594) | |||||||||||||||
| Net realized gains on investments | 511 | — | 1,032 | — | |||||||||||||||||||
| Net change in unrealized appreciation of investments | 2,947 | — | 14,489 | — | |||||||||||||||||||
| Net increase (decrease) in net assets resulting from operations | 8,908 | (12) | 24,760 | (594) | |||||||||||||||||||
| Capital transactions | |||||||||||||||||||||||
| Net proceeds from shares of common stock sold | 78,750 | — | 288,749 | 1 | |||||||||||||||||||
| Offering costs | (19) | — | (215) | — | |||||||||||||||||||
| Distributions declared to stockholders from net investment income | (5,973) | — | (8,703) | — | |||||||||||||||||||
| Total net increase in net assets resulting from capital transactions | 72,758 | — | 279,831 | 1 | |||||||||||||||||||
| Net increase (decrease) in net assets | 81,666 | (12) | 304,591 | (593) | |||||||||||||||||||
| Net assets at the beginning of the period | 222,238 | (581) | (687) | — | |||||||||||||||||||
| Net assets at the end of the period | $ | 303,904 | $ | (593) | $ | 303,904 | $ | (593) | |||||||||||||||
| Capital share activity | |||||||||||||||||||||||
| Shares of common stock sold | 7,443,289 | — | 28,443,189 | 100 | |||||||||||||||||||
(1)For the nine months ended September 30, 2019, amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
The accompanying notes are an integral part of these financial statements.
5
NMF SLF I, Inc.
Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended | |||||||||||
| September 30, 2020 | September 30, 2019(1) | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | 24,760 | $ | (594) | |||||||
| Adjustments to reconcile net (increase) decrease in net assets resulting from operations to net cash (used in) provided by operating activities: | |||||||||||
| Net realized gains on investments | (1,032) | — | |||||||||
| Net change in unrealized appreciation of investments | (14,489) | — | |||||||||
| Amortization of purchase discount | (1,962) | — | |||||||||
| Amortization of deferred financing costs | 126 | — | |||||||||
| Non-cash investment income | (31) | — | |||||||||
| (Increase) decrease in operating assets: | |||||||||||
| Purchase of investments and delayed draw facilities | (283,001) | — | |||||||||
| Proceeds from sales and paydowns of investments | 22,335 | — | |||||||||
| Cash paid for purchase of drawn portion of revolving credit facilities | (1,234) | — | |||||||||
| Cash paid on drawn revolving credit facilities | (2,219) | — | |||||||||
| Cash received for purchase of undrawn portion of revolving credit or delayed draw facilities | 897 | — | |||||||||
| Cash repayments on drawn revolvers | 1,745 | — | |||||||||
| Interest receivable | (1,618) | — | |||||||||
| Receivable from unsettled securities sold | (486) | — | |||||||||
| Deferred offering costs | 164 | (125) | |||||||||
| Other assets | (67) | — | |||||||||
| Increase (decrease) in operating liabilities: | |||||||||||
| Payable for unsettled securities purchased | 9,447 | — | |||||||||
| Interest payable | 16 | — | |||||||||
| Management fee payable | 230 | — | |||||||||
| Accrued organizational and offering expenses | (488) | 626 | |||||||||
| Payable to affiliates | (287) | 93 | |||||||||
| Other liabilities | 207 | — | |||||||||
| Net cash flows used in operating activities | (246,987) | — | |||||||||
| Cash flows from financing activities | |||||||||||
| Distributions | (2,730) | — | |||||||||
| Net proceeds from issuance of common stock | 288,749 | 1 | |||||||||
| Proceeds from Wells Subscription Line | 92,000 | — | |||||||||
| Repayment of Wells Subscription Line | (92,000) | — | |||||||||
| Offering costs paid | (215) | — | |||||||||
| Deferred financing costs paid | (421) | — | |||||||||
| Net cash flows provided by financing activities | 285,383 | 1 | |||||||||
| Net increase in cash and cash equivalents | 38,396 | 1 | |||||||||
| Cash and cash equivalents at the beginning of the period | 1 | — | |||||||||
| Cash and cash equivalents at the end of the period | $ | 38,397 | $ | 1 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash interest paid | $ | 188 | $ | — | |||||||
| Non-cash financing activities: | |||||||||||
| Distribution declared and payable | 5,973 | — | |||||||||
| Accrual for offering costs | — | 125 | |||||||||
(1)For the nine months ended September 30, 2019, amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
The accompanying notes are an integral part of these financial statements.
6
| Portfolio Company, Location and Industry(1) | Type of Investment | Interest Rate (4) | Acquisition Date | Maturity/Expiration Date | Principal Amount or Par Value | Cost | Fair Value | Percent of Net Assets | ||||||||||||||||||||||||||||||||||||||||||
| Non-Controlled/Non-Affiliated Investments | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Funded Debt Investments - Canada | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dentalcorp Health Services ULC** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien | 4.75% (L + 3.75%/M) | 4/8/2020 | 6/6/2025 | $ | 4,164 | $ | 3,212 | $ | 3,951 | 1.30 | % | ||||||||||||||||||||||||||||||||||||||
| Project Boost Purchaser, LLC** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Services | First lien | 3.65% (L + 3.50%/M) | 5/4/2020 | 6/1/2026 | 1,980 | 1,691 | 1,931 | 0.64 | % | |||||||||||||||||||||||||||||||||||||||||
| Total Funded Debt Investments - Canada | $ | 6,144 | $ | 4,903 | $ | 5,882 | 1.94 | % | ||||||||||||||||||||||||||||||||||||||||||
| Funded Debt Investments - United Kingdom | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shine Acquisition Co. S.à.r.l / Boing US Holdco Inc.** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer Services | First lien | 4.25% (L + 3.25%/M) | 4/15/2020 | 10/3/2024 | $ | 1,409 | $ | 1,240 | $ | 1,384 | 0.46 | % | ||||||||||||||||||||||||||||||||||||||
| Total Funded Debt Investments - United Kingdom | $ | 1,409 | $ | 1,240 | $ | 1,384 | 0.46 | % | ||||||||||||||||||||||||||||||||||||||||||
| Funded Debt Investments - United States | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Apptio, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 8.25% (L + 7.25%/S) | 4/20/2020 | 1/10/2025 | $ | 25,000 | $ | 23,730 | $ | 25,375 | 8.35 | % | ||||||||||||||||||||||||||||||||||||||
| Frontline Technologies Group Holindings, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 6.75% (L + 5.75%/Q) | 4/20/2020 | 9/18/2023 | 17,253 | 16,405 | 17,253 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2) | 6.75% (L + 5.75%/Q) | 4/20/2020 | 9/18/2023 | 7,619 | 7,245 | 7,619 | ||||||||||||||||||||||||||||||||||||||||||||
| 24,872 | 23,650 | 24,872 | 8.18 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| iCIMS, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 7.50% (L + 6.50%/S) | 4/20/2020 | 9/12/2024 | 20,025 | 19,014 | 20,036 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2) | 7.50% (L + 6.50%/S) | 4/20/2020 | 9/12/2024 | 3,905 | 3,708 | 3,907 | ||||||||||||||||||||||||||||||||||||||||||||
| 23,930 | 22,722 | 23,943 | 7.88 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Instructure, Inc. ** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 8.00% (L + 7.00%/Q) | 3/24/2020 | 3/24/2026 | 16,622 | 16,525 | 16,520 | 5.44 | % | |||||||||||||||||||||||||||||||||||||||||
| GS Acquisitionco, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 6.75% (L + 5.75%/S) | 2/6/2020 | 5/24/2024 | 15,409 | 15,324 | 15,409 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Drawn | 6.75% (L + 5.75%/S) | 2/6/2020 | 5/24/2024 | 1,038 | 1,033 | 1,038 | ||||||||||||||||||||||||||||||||||||||||||||
| 16,447 | 16,357 | 16,447 | 5.41 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Diligent Corporation | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 7.25% (L + 6.25%/S) | 8/4/2020 | 8/4/2025 | 15,088 | 14,904 | 15,290 | 5.03 | % | |||||||||||||||||||||||||||||||||||||||||
| Astra Acquisition Corp. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien | 6.50% (L + 5.50%/M) | 2/26/2020 | 3/1/2027 | 13,439 | 13,344 | 13,506 | 4.44 | % | |||||||||||||||||||||||||||||||||||||||||
| CentralSquare Technologies, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien | 3.90% (L + 3.75%/M) | 4/1/2020 | 8/29/2025 | 13,686 | 11,469 | 12,338 | 4.06 | % | |||||||||||||||||||||||||||||||||||||||||
| MRI Software LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 6.50% (L + 5.50%/Q) | 1/31/2020 | 2/10/2026 | 11,045 | 10,994 | 11,077 | 3.64 | % | |||||||||||||||||||||||||||||||||||||||||
| Market Track, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Services | First lien (2) | 5.25% (L + 4.25%/Q) | 5/13/2020 | 6/5/2024 | 10,850 | 9,430 | 10,684 | 3.52 | % | |||||||||||||||||||||||||||||||||||||||||
| Bracket Intermediate Holding Corp. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien | 4.55% (L + 4.25%/Q) | 3/30/2020 | 9/5/2025 | 9,696 | 8,289 | 9,526 | 3.13 | % | |||||||||||||||||||||||||||||||||||||||||
| Xactly Corporation | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 8.25% (L + 7.25%/S) | 6/5/2020 | 7/29/2022 | 9,449 | 9,034 | 9,449 | 3.11 | % | |||||||||||||||||||||||||||||||||||||||||
| Bullhorn, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 6.75% (L + 5.75%/Q) | 9/11/2020 | 9/30/2026 | 9,307 | 9,238 | 9,307 | 3.06 | % | |||||||||||||||||||||||||||||||||||||||||
7
NMF SLF I, Inc.
Schedule of Investments (Continued)
September 30, 2020
(in thousands)
(unaudited)
| Portfolio Company, Location and Industry(1) | Type of Investment | Interest Rate (4) | Acquisition Date | Maturity/Expiration Date | Principal Amount or Par Value | Cost | Fair Value | Percent of Net Assets | ||||||||||||||||||||||||||||||||||||||||||
| Kaseya Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 8.09% (L + 4.00% + 3.00% PIK/S)* | 6/29/2020 | 5/2/2025 | $ | 8,615 | $ | 8,350 | $ | 8,701 | ||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Drawn | 7.50% (L + 6.50%/S) | 6/29/2020 | 5/2/2025 | 336 | 330 | 336 | ||||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Drawn | 8.06% (L + 4.00% + 3.00% PIK/S)* | 6/29/2020 | 5/2/2025 | 189 | 197 | 191 | ||||||||||||||||||||||||||||||||||||||||||||
| 9,140 | 8,877 | 9,228 | 3.04 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Kele Holdco, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution & Logistics | First lien (2) | 7.00% (L + 6.00%/M) | 2/20/2020 | 2/20/2026 | 6,292 | 6,263 | 6,386 | 2.10 | % | |||||||||||||||||||||||||||||||||||||||||
| Salient CRGT Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal Services | First lien (2) | 7.50% (L + 6.50%/S) | 4/1/2020 | 2/28/2022 | 5,730 | 4,944 | 5,648 | 1.86 | % | |||||||||||||||||||||||||||||||||||||||||
| Coyote Buyer, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Chemicals & Materials | First lien (2) | 7.00% (L + 6.00%/Q) | 3/13/2020 | 2/6/2026 | 5,498 | 5,473 | 5,471 | 1.80 | % | |||||||||||||||||||||||||||||||||||||||||
| Advisor Group Holdings, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer Services | First lien | 5.15% (L + 5.00%/M) | 1/31/2020 | 7/31/2026 | 4,963 | 4,951 | 4,815 | 1.58 | % | |||||||||||||||||||||||||||||||||||||||||
| Mavis Tire Express Services Corp. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Retail | First lien | 3.47% (L + 3.25%/Q) | 4/6/2020 | 3/20/2025 | 4,852 | 4,023 | 4,613 | 1.52 | % | |||||||||||||||||||||||||||||||||||||||||
| Recorded Future, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2) | 7.25% (L + 6.25%/S) | 8/3/2020 | 7/3/2025 | 4,167 | 4,095 | 4,168 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Drawn | 7.25% (L + 6.25%/S) | 8/3/2020 | 7/3/2025 | 333 | 328 | 333 | ||||||||||||||||||||||||||||||||||||||||||||
| 4,500 | 4,423 | 4,501 | 1.48 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| HS Purchaser, LLC / Help/Systems Holdings, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien | 5.75% (L + 4.75%/Q) | 2/21/2020 | 11/19/2026 | 4,158 | 3,573 | 4,100 | 1.35 | % | |||||||||||||||||||||||||||||||||||||||||
| Symplr Software, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Information Technology | First lien (2) | 6.23% (L + 6.00%/Q) | 9/14/2020 | 11/28/2025 | 3,979 | 3,939 | 3,979 | 1.31 | % | |||||||||||||||||||||||||||||||||||||||||
| EyeCare Partners, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien | 3.90% (L + 3.75%/M) | 4/16/2020 | 2/18/2027 | 4,034 | 3,301 | 3,816 | 1.26 | % | |||||||||||||||||||||||||||||||||||||||||
| Geo Parent Corporation | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Services | First lien (2) | 5.40% (L + 5.25%/M) | 5/29/2020 | 12/19/2025 | 2,985 | 2,871 | 2,985 | 0.98 | % | |||||||||||||||||||||||||||||||||||||||||
| MED ParentCo, LP | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien | 4.40% (L + 4.25%/M) | 4/30/2020 | 8/31/2026 | 2,387 | 2,061 | 2,276 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (3) - Drawn | 4.40% (L + 4.25%/M) | 4/30/2020 | 8/31/2026 | 419 | 363 | 399 | ||||||||||||||||||||||||||||||||||||||||||||
| 2,806 | 2,424 | 2,675 | 0.88 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Convey Health Solutions, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien (2) | 10.00% (L + 9.00%/Q) | 4/8/2020 | 9/4/2026 | 2,488 | 2,453 | 2,587 | 0.85 | % | |||||||||||||||||||||||||||||||||||||||||
| Bluefin Holding, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | Second Lien (2) | 7.90% (L + 7.75%/M) | 6/9/2020 | 9/6/2027 | 2,500 | 2,368 | 2,500 | 0.81 | % | |||||||||||||||||||||||||||||||||||||||||
| Spring Education Group, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Education | First lien | 4.47% (L + 4.25%/Q) | 3/23/2020 | 7/30/2025 | 2,486 | 1,827 | 2,357 | 0.78 | % | |||||||||||||||||||||||||||||||||||||||||
| Vectra Co. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Products | First lien | 3.40% (L + 3.25%/M) | 3/26/2020 | 3/10/2025 | 1,997 | 1,675 | 1,939 | 0.64 | % | |||||||||||||||||||||||||||||||||||||||||
| Heartland Dental, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien | 3.65% (L + 3.50%/M) | 4/8/2020 | 4/30/2025 | 1,990 | 1,537 | 1,841 | 0.61 | % | |||||||||||||||||||||||||||||||||||||||||
| MH Sub I, LLC (Micro Holding Corp.) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien | 3.65% (L + 3.50%/M) | 3/23/2020 | 9/13/2024 | 1,490 | 1,196 | 1,459 | 0.48 | % | |||||||||||||||||||||||||||||||||||||||||
| EAB Global, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Education | First lien | 4.75% (L + 3.75%/M) | 3/24/2020 | 11/15/2024 | 1,489 | 1,216 | 1,451 | 0.48 | % | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
8
NMF SLF I, Inc.
Schedule of Investments (Continued)
September 30, 2020
(in thousands)
(unaudited)
| Portfolio Company, Location and Industry(1) | Type of Investment | Interest Rate (4) | Acquisition Date | Maturity/Expiration Date | Principal Amount or Par Value | Cost | Fair Value | Percent of Net Assets | ||||||||||||||||||||||||||||||||||||||||||
| Idera, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien | 5.00% (L + 4.00%/S) | 3/24/2020 | 6/28/2024 | $ | 992 | $ | 836 | $ | 981 | 0.32 | % | ||||||||||||||||||||||||||||||||||||||
| DG Investment Intermediate Holdings 2, Inc. (aka Convergint Technologies Holdings, LLC) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Business Services | First lien | 3.75% (L + 3.00%/M) | 4/30/2020 | 2/3/2025 | 987 | 869 | 948 | 0.31 | % | |||||||||||||||||||||||||||||||||||||||||
| Total Funded Debt Investments - United States | $ | 274,787 | $ | 258,725 | $ | 272,614 | 89.69 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total Funded Debt Investments | $ | 282,340 | $ | 264,868 | $ | 279,880 | 92.09 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total Funded Investments | $ | 264,868 | $ | 279,880 | 92.09 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Unfunded Debt Investments - United States | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Diligent Corporation | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 8/4/2020 | 2/4/2022 | $ | 3,656 | $ | (44) | $ | 49 | ||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Undrawn | — | 8/4/2020 | 8/4/2025 | 1,219 | (15) | — | ||||||||||||||||||||||||||||||||||||||||||||
| 4,875 | (59) | 49 | 0.02 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Kaseya Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 6/29/2020 | 5/3/2021 | 793 | (35) | 8 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Undrawn | — | 8/3/2020 | 3/4/2022 | 200 | (2) | 2 | ||||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Undrawn | — | 6/29/2020 | 5/2/2025 | 350 | (15) | — | ||||||||||||||||||||||||||||||||||||||||||||
| 1,343 | (52) | 10 | 0.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| MRI Software LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 1/31/2020 | 2/10/2022 | 445 | — | 1 | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Undrawn | — | 1/31/2020 | 2/10/2026 | 780 | (4) | — | ||||||||||||||||||||||||||||||||||||||||||||
| 1,225 | (4) | 1 | 0.00 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Recorded Future, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 8/3/2020 | 1/3/2021 | 333 | (6) | — | |||||||||||||||||||||||||||||||||||||||||||
| First lien (2)(3) - Undrawn | — | 8/3/2020 | 7/3/2025 | 167 | (3) | — | ||||||||||||||||||||||||||||||||||||||||||||
| 500 | (9) | — | — | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Xactly Corporation | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 6/5/2020 | 7/29/2022 | 551 | (24) | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| Kele Holdco, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution & Logistics | First lien (2)(3) - Undrawn | — | 2/20/2020 | 2/20/2026 | 701 | (3) | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| GS Acquisitionco, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 2/6/2020 | 5/24/2024 | 445 | (3) | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| Bullhorn, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 9/11/2020 | 9/30/2026 | 693 | (5) | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| Coyote Buyer, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Specialty Chemicals & Materials | First lien (2)(3) - Undrawn | — | 3/13/2020 | 2/6/2025 | 395 | (2) | (2) | (0.00) | % | |||||||||||||||||||||||||||||||||||||||||
| Instructure, Inc. ** | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (2)(3) - Undrawn | — | 3/24/2020 | 3/24/2026 | 1,294 | (7) | (8) | (0.00) | % | |||||||||||||||||||||||||||||||||||||||||
| MED ParentCo, LP | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien (3) - Undrawn | — | 4/30/2020 | 8/30/2021 | 179 | (26) | (8) | (0.00) | % | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
9
NMF SLF I, Inc.
Schedule of Investments (Continued)
September 30, 2020
(in thousands)
(unaudited)
| Portfolio Company, Location and Industry(1) | Type of Investment | Interest Rate (4) | Acquisition Date | Maturity/Expiration Date | Principal Amount or Par Value | Cost | Fair Value | Percent of Net Assets | ||||||||||||||||||||||||||||||||||||||||||
| EyeCare Partners, LLC | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Healthcare Services | First lien (3) - Undrawn | — | 4/16/2020 | 2/18/2022 | $ | 946 | $ | (172) | $ | (51) | (0.02) | % | ||||||||||||||||||||||||||||||||||||||
| PaySimple, Inc. | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Software | First lien (3) - Undrawn | — | 9/21/2020 | 9/23/2021 | 22,000 | — | (880) | (0.29) | % | |||||||||||||||||||||||||||||||||||||||||
| Total Unfunded Debt Investments - United States | $ | 35,147 | $ | (366) | $ | (889) | (0.29) | % | ||||||||||||||||||||||||||||||||||||||||||
| Total Unfunded Debt Investments | $ | 35,147 | $ | (366) | $ | (889) | (0.29) | % | ||||||||||||||||||||||||||||||||||||||||||
| Total Non-Controlled/Non-Affiliated Investments | $ | 264,502 | $ | 278,991 | 91.80 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total Investments | $ | 264,502 | $ | 278,991 | 91.80 | % | ||||||||||||||||||||||||||||||||||||||||||||
(1)NMF SLF I, Inc. (the "Company") generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act.
(2)The fair value of the Company's investment is determined using unobservable inputs that are significant to the overall fair value measurement. See Note 4. Fair Value, for details.
(3)Par value amounts represent the drawn or undrawn (as indicated in type of investment) portion of revolving credit facilities or delayed draws. Cost amounts represent the cash received at settlement date net of the impact of paydowns and cash paid for drawn revolvers or delayed draws.
(4)All interest is payable in cash unless otherwise indicated. A majority of the variable rate debt investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (L), the Prime Rate (P) and the alternative base rate (Base) and which resets monthly (M), quarterly (Q), or semi-annually (S). For each investment the current interest rate provided reflects the rate in effect as of September 30, 2020.
* All or a portion of interest contains payment-in kind ("PIK") interest.
** Indicates assets that the Company deems to be "non-qualifying assets" under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70.0% of the Company's total assets at the time of acquisition of any additional non-qualifying assets. As of September 30, 2020, 7.44% of the Company's total assets are represented by investments at fair value that are considered non-qualifying assets.
The accompanying notes are an integral part of these financial statements.
10
NMF SLF I, Inc.
Schedule of Investments (Continued)
September 30, 2020
(in thousands)
(unaudited)
| September 30, 2020 | ||||||||
| Investment Type | Percent of Total Investments at Fair Value | |||||||
| First lien | 99.10 | % | ||||||
| Second lien | 0.90 | % | ||||||
| Total investments | 100.00 | % | ||||||
| September 30, 2020 | ||||||||
| Industry Type | Percent of Total Investments at Fair Value | |||||||
| Software | 71.72 | % | ||||||
| Healthcare Services | 8.72 | % | ||||||
| Business Services | 5.93 | % | ||||||
| Distribution & Logistics | 2.29 | % | ||||||
| Consumer Services | 2.22 | % | ||||||
| Federal Services | 2.02 | % | ||||||
| Specialty Chemicals & Materials | 1.96 | % | ||||||
| Retail | 1.65 | % | ||||||
| Healthcare Information Technology | 1.43 | % | ||||||
| Education | 1.36 | % | ||||||
| Business Products | 0.70 | % | ||||||
| Total investments | 100.00 | % | ||||||
| September 30, 2020 | ||||||||
| Interest Rate Type | Percent of Total Investments at Fair Value | |||||||
| Floating rates | 100.00 | % | ||||||
| Fixed rates | — | % | ||||||
| Total investments | 100.00 | % | ||||||
The accompanying notes are an integral part of these financial statements.
11
Notes to the Financial Statements of
NMF SLF I, Inc.
September 30, 2020
(in thousands, except share data)
(unaudited)
Note 1. Formation and Business Purpose
NMF SLF I, Inc. (the "Company"), formerly known as NMF Senior Loan Fund I, Inc., is a Maryland corporation formed on January 23, 2019. The Company is 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"). The Company intends to elect to be treated for United States ("U.S.") federal income tax purposes as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
New Mountain Finance Advisers BDC, L.L.C. (the "Investment Adviser") is a wholly-owned subsidiary of New Mountain Capital Group, L.P. (together with New Mountain Capital, L.L.C. and its affiliates, "New Mountain Capital") whose ultimate owners include Steven B. Klinsky and related other vehicles. The Investment Adviser manages the Company's day-to-day operations and provides it with investment advisory and management services. The Investment Adviser also manages other funds that may have investment mandates that are similar, in whole or in part, to the Company's. New Mountain Finance Administration, L.L.C. (the "Administrator"), a wholly-owned subsidiary of New Mountain Capital, provides the administrative services necessary to conduct the Company's day-to-day operations. The Administrator has hired a third-party sub-administrator to assist with the provision of administrative services.
The Company conducted a private offering (the "Private Offering") of its common stock to investors in reliance on exemptions from the registration requirements of the U.S. Securities Act of 1933, as amended. At the closing of any Private Offering, each investor will make a capital commitment (a "Capital Commitment") to purchase common stock pursuant to a subscription agreement entered into with the Company. The Company commenced its loan origination and investment activities on the date it issued shares to persons not affiliated with the Investment Adviser (the "Initial Closing Date"), which occurred on February 18, 2020. The Company may conduct subsequent closings at times during its investment period (the "Investment Period"), which commenced on the Initial Closing Date and shall initially continue until the 48-month anniversary of the Initial Closing Date, subject to automatic extensions thereafter, each for an additional one year period, unless the holders of a majority of the Company's outstanding common stock elect to forego any such extension upon not less than ninety days prior written notice. Holders of a majority of the Company's outstanding common stock may also terminate the Investment Period as of any earlier anniversary of the Initial Closing Date upon not less than ninety days written notice. Each investor will be required to make capital contributions to purchase the Company's common stock each time a drawdown notice is issued based on such investor's Capital Commitment. Pursuant to the subscription agreement entered into with each investor, the Company shall commence the wind up of operations two years following the expiration of the Investment Period, subject to additional extensions, each for an additional one year period, upon approval of the holders of a majority of the Company's then outstanding common stock.
The Company's investment objective is to generate current income and capital appreciation primarily by investing in or originating debt investments in companies that the Investment Adviser believes are "defensive growth" companies in non-cyclical industry niches where the Investment Adviser has developed strong proprietary research and operational advantages. The Company makes investments through both primary originations and open-market secondary purchases. The Company predominantly targets loans to, and invests in, U.S. middle market businesses, a market segment the Company believes continues to be underserved by other lenders. The Company defines middle market businesses as those businesses with annual earnings before interest, taxes, depreciation, and amortization ("EBITDA") between $10,000 and $200,000. The 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. As of September 30, 2020, the Company's top five industry concentrations were software, healthcare services, business services, distribution & logistics and consumer services.
Note 2. Summary of Significant Accounting Policies
Basis of accounting—The Company's financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. ("GAAP"). The Company is an investment company following accounting and reporting guidance in Accounting Standards Codification Topic 946, Financial Services—Investment Companies ("ASC 946").
The Company's financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of operations and financial condition for the period(s) presented. All
12
intercompany transactions have been eliminated. Revenues are recognized when earned and expenses when incurred. The financial results of the Company's portfolio investments are not consolidated in the financial statements.
The Company's interim financial statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-Q and Article 6 of Regulation S-X. Accordingly, the Company's interim financial statements do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period's results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2020.
Investments—The Company applies fair value accounting in accordance with GAAP. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investments are reflected on the Company's Statements of Assets and Liabilities at fair value, with changes in unrealized gains and losses resulting from changes in fair value reflected in the Company's Statement of Operations as "Net change in unrealized appreciation (depreciation) of investments" and realizations on portfolio investments reflected in the Company's Statement of Operations as "Net realized gains (losses) on investments".
The Company's underlying assets are considered, for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any regulations promulgated thereunder, and Section 4975 of the Code, to be assets of certain employee benefit plans and other plans that purchase shares. Under such circumstances, the Company's investments and the activities of the Investment Adviser are subject to and, in certain cases, limited by, such laws.
The Company values its assets on a quarterly basis, or more frequently if required under the 1940 Act. In all cases, the Company's board of directors is ultimately and solely responsible for determining the fair value of the 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 its portfolio investments require a fair value determination. Security transactions are accounted for on a trade date basis. Because (i) "benefit plan investors", as defined in Section 3(42) of ERISA ("Benefit Plan Investors"), hold 25% or more of the Company's outstanding shares, and (ii) the Company's shares are not listed on a national securities exchange, an unaffiliated third-party ("Sub-Administrator"), has been engaged to independently value the Company's investments, in consultation with the Investment Adviser. The Company's quarterly valuation procedures, which are the procedures that will be followed by such Sub-Administrator, 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 personnel of the Sub-Administrator, in consultation with 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 Sub-Administrator is unable to sufficiently validate the quote(s) internally and if the investment's par value exceeds a certain 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, the personnel of the Sub-Administrator, in consultation with the investment professionals of the Investment Adviser, 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. If an IHS Markit Ltd. quote differs from the Thomson Reuters quote by +/- 5% or if the spread between the bid and ask for a quote is greater than 10%, the personnel of the Sub-Administrator, in consultation with the investment professionals of the Investment Adviser, will evaluate the reasonableness of the quote, and if the quote is determined to not be representative of fair value, the personnel of the Sub-Administrator, in consultation with the investment professionals of the Investment Adviser, will use one or more of the methodologies outlined below to determine fair value; and
ii.Investments for which one quote is received from a pricing service are validated by the Sub-Administrator, in consultation with the investment professionals at the Investment Adviser. The personnel of the Sub-Administrator, in consultation with 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. For assets where a supporting analysis is prepared, the Sub-Administrator will document the selection
13
and appropriateness of the indices selected for yield comparison and a conclusion documenting how the yield comparison analysis supports the proposed mark. The quarterly portfolio company monitoring reports which detail the qualitative and quantitative performance of the portfolio company will also be included. If the Sub-Administrator, in consultation with the investment professionals at the Investment Adviser, is unable to sufficiently validate the quote internally and if the investment's par value exceeds a certain 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:
a.Each portfolio company or investment is initially valued by Sub-Administrator, in consultation with the investment professionals of the Investment Adviser responsible for the credit monitoring; and
b.Preliminary valuation conclusions will then be documented and discussed with the Company's senior management.
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 the Company's investments may fluctuate from period to period and the fluctuations could be material.
In the event Benefit Plan Investors do not hold 25% or more of the Company's outstanding shares, or the Company's shares are listed on a national securities exchange, then (i) personnel of the Investment Adviser will undertake the roles to be performed by the personnel of the Sub-Administrator, as described above and (ii) if an investment falls into category (3) above for four consecutive quarters and the investment's par value or its fair value exceeds a certain 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.
See Note 3. Investments, for further discussion relating to investments.
Cash and cash equivalents—Cash and cash equivalents include cash and short-term, highly liquid investments. The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near maturity that there is insignificant risk of changes in value. These securities have original maturities of three months or less. The Company did not hold any cash equivalents as of September 30, 2020 and December 31, 2019.
Revenue recognition
Sales and paydowns of investments: Realized gains and losses on investments are determined on the specific identification method.
Interest 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. The Company has loans in its portfolio that contain a payment-in-kind ("PIK") interest provision. PIK interest is accrued and recorded as income at the contractual rates, if deemed collectible. The PIK interest is added to the principal balance on the capitalization date and is generally due at maturity or when redeemed by the issuer. For the three and nine months ended September 30, 2020, the Company recognized PIK interest from investments of $82 and $82, respectively. For the three months ended September 30, 2019 and for the period from January 23, 2019 (inception) to September 30, 2019, the Company had not commenced investment operations and recognized no PIK interest.
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.
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Fee income: Fee 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. Fee income may also include fees from bridge loans. The Company 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 by the Company 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.
Interest and other financing expenses—Interest and other financing fees are recorded on an accrual basis by the Company. See Note 6. Borrowings, for details.
Deferred offering costs—The Company's deferred offering costs consists of fees and expenses incurred in connection with the offering of the Company's common stock. Upon the issuance of common stock, offering costs are charged as a direct reduction of net assets. Deferred offering costs are included on the Company's Statements of Assets and Liabilities and offering costs are included on the Statement of Changes in Net Assets. Any organizational and offering expenses paid by the Company in excess of $1,000 will be borne by the Investment Adviser and cannot be recouped by the Investment Adviser.
Deferred financing costs—The deferred financing costs of the Company consist of capitalized expenses related to the origination and amending of the Company's borrowings. The Company amortizes these costs into expense over the stated life of the related borrowing. See Note 6. Borrowings, for details.
Organizational expenses—Organizational expenses include costs and expenses incurred in connection with the formation and organization of the Company. All such amounts are expensed as incurred in the Statement of Operations. Any organizational and offering expenses paid by the Company in excess of $1,000 will be borne by the Investment Adviser and cannot be recouped by the Investment Adviser.
Income taxes—The Company intends to elect to be treated as a RIC under Subchapter M of the Code with the filing of its tax return for the year ending December 31, 2020, and thereafter intends to comply with the requirements to qualify and maintain its status as a RIC annually. As a RIC, the Company is not subject to U.S. federal income tax on the portion of taxable income and gains timely distributed to its stockholders.
To continue to qualify and be subject to tax as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90.0% of its investment company taxable income, as defined by the Code. Since U.S. federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes.
Differences between taxable income and the results of operations for financial reporting purposes may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes.
For U.S. federal income tax purposes, distributions paid to stockholders of the Company are reported as ordinary income, return of capital, long term capital gains or a combination thereof.
The Company will be subject to a 4.0% nondeductible federal excise tax on certain undistributed income unless the Company distributes, in a timely manner as required by the Code, an amount at least equal to the sum of (1) 98.0% of its respective net ordinary income earned for the calendar year and (2) 98.2% of its respective capital gain net income for the one-year period ending October 31 in the calendar year.
Earnings per share—The Company's earnings per share ("EPS") amounts have been computed based on the weighted-average number of shares outstanding for the period. Basic EPS is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average number of shares outstanding during the period of computation. Diluted EPS is computed by dividing net increase (decrease) in net assets resulting from operations by the weighted average number of shares assuming all potential shares had been issued, and its related net impact to net assets accounted for, and the additional shares were dilutive.
Distributions—Distributions to the Company's stockholders are recorded on the record date as set by the Company's board of directors. The Company intends to make distributions to its stockholders that will be sufficient to enable the Company to qualify and maintain its status as a RIC. The Company intends to distribute approximately all of its net investment income on a quarterly basis and substantially all of its taxable income on an annual basis, except that the Company may retain certain net capital gains for reinvestment.
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Use of estimates—The preparation of the Company's financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Company's financial statements and the reported amounts of revenues and expenses during the reporting periods. Changes in the economic environment, financial markets, and other metrics used in determining these estimates could cause actual results to differ from the estimates used, and the differences could be material.
Note 3. Investments
At September 30, 2020, the Company's investments consisted of the following:
Investment Cost and Fair Value by Type
| Cost | Fair Value | ||||||||||
| First lien | $ | 262,134 | $ | 276,491 | |||||||
| Second lien | 2,368 | 2,500 | |||||||||
| Total investments | $ | 264,502 | $ | 278,991 | |||||||
Investment Cost and Fair Value by Industry
| Cost | Fair Value | ||||||||||
| Software | $ | 193,077 | $ | 200,065 | |||||||
| Healthcare Services | 21,018 | 24,337 | |||||||||
| Business Services | 14,861 | 16,548 | |||||||||
| Distribution & Logistics | 6,260 | 6,386 | |||||||||
| Consumer Services | 6,191 | 6,199 | |||||||||
| Federal Services | 4,944 | 5,648 | |||||||||
| Specialty Chemicals & Materials | 5,471 | 5,469 | |||||||||
| Retail | 4,023 | 4,613 | |||||||||
| Healthcare Information Technology | 3,939 | 3,979 | |||||||||
| Education | 3,043 | 3,808 | |||||||||
| Business Products | 1,675 | 1,939 | |||||||||
| Total investments | $ | 264,502 | $ | 278,991 | |||||||
As of September 30, 2020, the Company had unfunded commitments on revolving credit facilities of $6,595 and no unfunded commitments on bridge facilities. As of September 30, 2020, the Company had unfunded commitments in the form of delayed draws or other future funding commitments of $28,552. The unfunded commitments on revolving credit facilities and delayed draws are disclosed on the Company's Schedule of Investments as of September 30, 2020.
Investment Risk Factors—First and second lien debt that the Company invests in is almost entirely rated below investment grade or may be unrated. Debt investments rated below investment grade are often referred to as "leveraged loans", "high yield" or "junk" debt investments, and may be considered "high risk" compared to debt investments that are rated investment grade. These debt investments are considered speculative because of the credit risk of the issuers. Such issuers are considered more likely than investment grade issuers to default on their payments of interest and principal, and such risk of default could reduce the net asset value and income distributions of the Company. In addition, some of the Company's debt investments will not fully amortize during their lifetime, which could result in a loss or a substantial amount of unpaid principal and interest due upon maturity. First and second lien debt may also lose significant market value before a default occurs. Furthermore, an active trading market may not exist for these first and second lien debt investments. This illiquidity may make it more difficult to value the debt.
The Company's financial condition and portfolio companies may continue to be negatively impacted by the recent outbreak of the novel strain of coronavirus ("COVID-19"). On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, a national emergency was declared in the U.S. The ongoing spread of COVID-19 has had, and will continue to have, a material adverse impact on the U.S. and global economy as commercial activity and public perception have been negatively impacted by the outbreak. The ultimate extent to which the COVID-19 crisis will impact the Company's financial condition and portfolio companies will depend on future developments affecting not
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only the Company, but also the entire U.S. and global economy, which are inherently uncertain, including, among others, new information that may emerge concerning the severity and rate of the spread of the disease.
Note 4. Fair Value
Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure ("ASC 820") establishes a fair value hierarchy that prioritizes and ranks the inputs to valuation techniques used in measuring investments at fair value. The hierarchy 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 the Company has 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 ASC 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds 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.
The following table summarizes the levels in the fair value hierarchy that the Company's portfolio investments fall into as of September 30, 2020:
| Total | Level I | Level II | Level III | ||||||||||||||||||||
| First lien | $ | 276,491 | $ | — | $ | 73,572 | $ | 202,919 | |||||||||||||||
| Second lien | 2,500 | — | — | 2,500 | |||||||||||||||||||
| Total investments | $ | 278,991 | $ | — | $ | 73,572 | $ | 205,419 | |||||||||||||||
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The following table summarizes the changes in fair value of Level III portfolio investments for the three months ended September 30, 2020, as well as the portion of appreciation included in income attributable to unrealized appreciation related to those assets and liabilities still held by the Company at September 30, 2020:
| Total | First Lien | Second Lien | |||||||||||||||
| Fair value, June 30, 2020 | $ | 195,166 | $ | 192,666 | $ | 2,500 | |||||||||||
| Total gains or losses included in earnings: | |||||||||||||||||
| Net realized gains on investments | 59 | 59 | — | ||||||||||||||
| Net change in unrealized appreciation | 2,652 | 2,652 | — | ||||||||||||||
| Purchases, including capitalized PIK and revolver fundings | 43,522 | 43,522 | — | ||||||||||||||
| Proceeds from sales and paydowns of investments | (10,510) | (10,510) | — | ||||||||||||||
| Transfers out of Level III (1) | (25,470) | (25,470) | — | ||||||||||||||
| Fair value, September 30, 2020 | $ | 205,419 | $ | 202,919 | $ | 2,500 | |||||||||||
Unrealized appreciation for the period relating to those Level III assets that were still held by the Company at the end of the period: | $ | 2,701 | $ | 2,701 | $ | — | |||||||||||
(1)As of September 30, 2020, portfolio investments were transferred out of Level III into Level II at fair value as of the beginning of the period in which the reclassification occurred.
The following table summarizes the changes in fair value of Level III portfolio investments for the nine months ended September 30, 2020, as well as the portion of appreciation included in income attributable to unrealized appreciation related to those assets and liabilities still held by the Company at September 30, 2020:
| Total | First Lien | Second Lien | |||||||||||||||
| Fair value, December 31, 2019 | $ | — | $ | — | $ | — | |||||||||||
| Total gains or losses included in earnings: | |||||||||||||||||
| Net realized gains on investments | 580 | 580 | — | ||||||||||||||
| Net change in unrealized appreciation | 8,597 | 8,459 | 138 | ||||||||||||||
| Purchases, including capitalized PIK and revolver fundings | 216,580 | 214,218 | 2,362 | ||||||||||||||
| Proceeds from sales and paydowns of investments | (20,338) | (20,338) | — | ||||||||||||||
| Fair value, September 30, 2020 | $ | 205,419 | $ | 202,919 | $ | 2,500 | |||||||||||
| Unrealized appreciation for the period relating to those Level III assets that were still held by the Company at the end of the period: | $ | 8,181 | $ | 8,043 | $ | 138 | |||||||||||
There were no investments held by the Company during the three months ended September 30, 2019 or for the period from January 23, 2019 (inception) to September 30, 2019.
Except as noted in the tables above, there were no transfers into or out of Level I, II, or III during the three and nine months ended September 30, 2020. Transfers into Level III occur as quotations obtained through pricing services are deemed not representative of fair value as of the balance sheet date and such assets are internally valued. As quotations obtained through pricing services are substantiated through additional market sources, investments are transferred out of Level III. In addition, transfers out of Level III and transfers into Level III occur based on the increase or decrease in the availability of certain observable inputs. Investments will be transferred into Level III from Level II and out of Level III into Level II at fair value as of the beginning of the period in which the reclassification occurred.
The Company invests in revolving credit facilities. These investments are categorized as Level III investments as these assets are not actively traded and their fair values are often implied by the term loans of the respective portfolio companies.
The Company generally uses the following framework when determining the fair value of investments where there are little, if any, market activity or observable pricing inputs. The Company typically determines the fair value of its 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 its due diligence process, the Company evaluates the overall performance and financial stability of the portfolio company. Post investment, the Company
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analyzes each portfolio company's current operating performance and relevant financial trends versus the prior year and budgeted results, including, but not limited to, factors affecting its revenue and EBITDA growth, margin trends, liquidity position, covenant compliance and changes to its capital structure. The Company also attempts 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 its original investment thesis. This analysis is specific to each portfolio company. The Company leverages the knowledge gained from its original due diligence process, augmented by this subsequent monitoring, to continually refine its outlook for each of its portfolio companies and ultimately form the valuation of its investment in each portfolio company. When an external event such as a purchase transaction, public offering or subsequent sale occurs, the Company will consider the pricing indicated by the external event to corroborate the private valuation.
For debt investments, the Company 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 the Company's debt investment. For equity investments or in cases where the Market Based Approach implies a lack of enterprise value coverage for the debt investment, the Company 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 the Company's 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: The Company may estimate the total enterprise value of each portfolio company by utilizing market value cash flow (EBITDA) multiples of publicly traded comparable companies and comparable transactions. The Company considers numerous factors when selecting the appropriate companies whose trading multiples are used to value its 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. The Company may apply an average of various relevant comparable company EBITDA multiples to the portfolio company's latest twelve month ("LTM") EBITDA or projected EBITDA to calculate the enterprise value of the portfolio company. Significant increases or decreases in the EBITDA multiple 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. In applying the market based approach as of September 30, 2020, the Company used the relevant EBITDA multiple ranges set forth in the table below to determine the enterprise value of its portfolio companies. The Company believes these were reasonable ranges in light of current comparable company trading levels and the specific portfolio companies involved.
Income Based Approach: The Company 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. In applying the income based approach as of September 30, 2020, the Company used the discount ranges set forth in the table below to value investments in its portfolio companies.
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The unobservable inputs used in the fair value measurement of the Company's Level III investments as of September 30, 2020 were as follows:
| Range | ||||||||||||||||||||||||||||||||||||||
| Type | Fair Value as of September 30, 2020 | Approach | Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||
| First lien | $ | 203,799 | Market & income approach | EBITDA multiple | 7.0x | 25.0x | 18.1x | |||||||||||||||||||||||||||||||
| Revenue multiple | 4.0x | 11.0x | 6.8x | |||||||||||||||||||||||||||||||||||
| Discount rate | 4.5 | % | 12.9 | % | 6.7 | % | ||||||||||||||||||||||||||||||||
| (880) | Other | N/A (1) | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Second lien | 2,500 | Market & income approach | EBITDA multiple | 30.0x | 34.0x | 32.0x | ||||||||||||||||||||||||||||||||
| Discount rate | 8.1 | % | 8.4 | % | 8.2 | % | ||||||||||||||||||||||||||||||||
| $ | 205,419 | |||||||||||||||||||||||||||||||||||||
(1)Fair value was determined based on transaction pricing or recent acquisition or sale as the best measure of fair value with no material changes in operations of the related portfolio company since the transaction date.
The fair value of the Wells Subscription Line (as defined below), which is categorized as Level III within the fair value hierarchy as of September 30, 2020, approximates its carrying value. Additionally, the carrying amounts of the Company's assets and liabilities, other than investments at fair value, approximate fair value due to their short maturities.
Fair value risk factors—The Company seeks investment opportunities that offer the possibility of attaining substantial capital appreciation. Certain events particular to each industry in which the Company's portfolio companies conduct their operations, as well as general economic, political and public health conditions (including the COVID-19 outbreak), may have a significant negative impact on the operations and profitability of the Company's investments and/or on the fair value of the Company's investments. The Company's investments are subject to the risk of non-payment of scheduled interest or principal, resulting in a reduction in income to the Company and their corresponding fair valuations. Also, there may be risk associated with the concentration of investments in one geographic region or in certain industries. These events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to uncertainties.
Note 5. Agreements and Related Parties
The Company entered into an investment advisory and management agreement (the "Investment Management Agreement") with the Investment Adviser. Under the Investment Management Agreement, the Investment Adviser manages the day-to-day operations of, and provides investment advisory services to the Company. For providing these services, the Investment Adviser receives an annual base management fee from the Company.
Pursuant to the Investment Management Agreement, during the Company's investment period, the base management fee is calculated at an annual blended rate with respect to the Company's then-current aggregate committed capital by reference to (i) 0.70% (the "Initial Fee Rate"), in the case of the aggregate Capital Commitments received at the initial acceptance of Capital Commitments (the "Initial Commitments", and such fee, the "Initial Management Fee"), and (ii) 0.60% (the "Subsequent Fee Rate") in the case of the aggregate Capital Commitments received in a subsequent closing of Capital Commitments (the "Subsequent Commitments," and such fee with respect thereto, a "Subsequent Management Fee"), subject, in each case, to the adjustments described below. Specifically, the Initial Fee Rate will be subject to reduction during the first 11 quarters following the initial acceptance of Capital Commitments. In addition, the Subsequent Fee Rate with respect to the Subsequent Commitments received in a subsequent closing of Capital Commitments will be reduced during the first 5 quarters following such subsequent closing. The base management fee will be payable quarterly in arrears.
For the three and nine months ended September 30, 2020, $919 and $2,484, respectively, of gross management fees were incurred by the Company, which were reduced to net management fees of $230 and $437, respectively, due to the management fee reduction described above. For the three months ended September 30, 2019 and for the period from January 23, 2019 (inception) to September 30, 2019, there were no management fees as the Company was in the development stage and had not commenced investment operations.
The Company has entered into the administration agreement ("Administration Agreement") with the Administrator under which the Administrator provides administrative services. The Administrator maintains, or oversees the maintenance of,
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the Company's financial records, prepares reports filed with the U.S. Securities and Exchange Commission (the "SEC"), generally monitors the payment of the Company's expenses and oversees the performance of administrative and professional services rendered by others. The Administrator has hired a third-party sub-administrator to assist with the provision of administrative services.
The Company, the Investment Adviser and the Administrator have also entered into a Trademark License Agreement, with New Mountain Capital, pursuant to which New Mountain Capital has agreed to grant the Company a non-exclusive, royalty-free license to use the "New Mountain" and the "NMF" names. Under the Trademark License Agreement, subject to certain conditions, the Company, the Investment Adviser and the Administrator will have a right to use the "New Mountain" and "NMF" names, for so long as the Investment Adviser or one of its affiliates remains the investment adviser of the Company. Other than with respect to this limited license, the Company will have no legal right to the "New Mountain" or the "NMF" names.
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 the Company's investment mandates. The Investment Adviser and its affiliates may determine that an investment is appropriate for the Company or 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 the Company 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 the SEC and its staff and consistent with the Investment Adviser's allocation procedures. On October 8, 2019, the SEC issued an exemptive order (the "Exemptive Order"), which superseded a prior order issued on December 18, 2017, which permits the Company 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, the Company is permitted to co-invest with its affiliates if a "required majority" (as defined in Section 57(o) of the 1940 Act) of the Company's 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 the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (2) the potential co-investment transaction is consistent with the interests of the Company's stockholders and is consistent with its then-current investment objective and strategies. As the Company's assets are treated as "plan assets" under ERISA, the Company will only co-invest in the same issuer with certain funds or entities managed by the Investment Adviser or its affiliates, so long as their and the Company's respective future investments are at the same level of such issuer's capital structure; provided, that in no event will the Company co-invest with any other fund or entity in contravention of the 1940 Act.
Note 6. Borrowings
On February 25, 2020, the Company entered into a Revolving Credit Agreement (the "Wells Subscription Line") with Wells Fargo Bank, National Association ("Wells Fargo"). The Wells Subscription Line will mature on February 25, 2022, if not further extended by that date, and has a maximum facility amount of $50,000. Under the Wells Subscription Line, the Company is permitted to borrow up to the lesser of $50,000 and the Borrowing Base. The "Borrowing Base" is based upon the unfunded Capital Commitments of subscribed investors in the Company that have been approved by Wells Fargo and meet certain criteria. The advance rate for such investors that meet a rating requirement or Wells Fargo net worth criteria or in the case of certain investors specified by Wells Fargo (the "Specified Investors") is 90% but may be subject to concentration limits. The concentration limits do not apply to the Specified Investors. The advance rate for other investors designated by Wells Fargo is 65%. The Wells Subscription Line contains certain customary affirmative and negative covenants and events of default.
From February 25, 2020 through March 25, 2020, the Wells Subscription Line bore interest at a rate of either LIBOR plus 1.55% per annum or Reference Rate (as defined by the Revolving Credit Agreement) plus 0.55% per annum. After March 25, 2020, the Wells Subscription Line bears interest at a rate of either LIBOR plus 1.50% per annum or Reference Rate plus 0.50% per annum. The Wells Subscription Line also charges a non-usage fee at a rate of (a) 0.20% per annum when the unused facility amount is greater than or equal to 50.0% of the maximum facility amount, or (b) 0.25% per annum when the unused facility amount is less than 50.0% of the maximum facility amount.
For the three months ended September 30, 2020, interest expense, non-usage costs and amortization of financing costs incurred on the Wells Subscription Line were $83, $16 and $53, respectively. The weighted average interest rate and effective interest rate on the Wells Subscription Line for the three months ended September 30, 2020 were 1.7% and 2.7%, respectively. For the period from February 25, 2020 (commencement of the Wells Subscription Line) to September 30, 2020, interest expense, non-usage costs and amortization of financing costs incurred on the Wells Subscription Line were $187, $41 and $126, respectively. The weighted average interest rate and effective interest rate on the Wells Subscription Line for the period from February 25, 2020 (commencement of the Wells Subscription Line) to September 30, 2020 were 1.8% and 3.1%, respectively.
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As of September 30, 2020, there was no outstanding balance on the Wells Subscription Line and the Company was in compliance with the applicable covenants in the Wells Subscription Line on such date.
Leverage risk factors—The Company utilizes and may utilize leverage to the maximum extent permitted by the law for investment and other general business purposes. The use of leverage also magnifies the potential for gain or loss on amounts invested. Leverage may magnify interest rate risk (particularly on the Company's fixed-rate investments), which is the risk that the prices of portfolio investments will fall or rise if market interest rates for those types of securities rise or fall. As a result, leverage may cause greater changes in the Company's net assets. Similarly, leverage may cause a sharper decline in the Company's income than if the Company had not borrowed. Such a decline could negatively affect the Company's ability to make distributions to its stockholders. Leverage is generally considered a speculative investment technique. The Company's ability to service any debt incurred will depend largely on financial performance and will be subject to prevailing economic conditions and competitive pressures.
Note 7. Regulation
The Company intends to elect to be treated as a RIC under Subchapter M of the Code with the filing of its tax return for the year ending December 31, 2020, and thereafter intends to comply with the requirements to continue to qualify and maintain its status as a RIC annually. In order to continue to qualify and be subject to tax as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90.0% of investment company taxable income, as defined by the Code, for each year. The Company intends to make the requisite distributions to its stockholders, and as such, the Company will generally be relieved from U.S. federal, state, and local income taxes (excluding excise taxes which may be imposed under the Code).
Additionally, as a BDC, the Company must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70.0% of its total assets are qualifying assets (with certain limited exceptions). In addition, the Company must offer to make available to all eligible portfolio companies managerial assistance.
Note 8. Commitments and Contingencies
In the normal course of business, the Company may enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company may also enter into future funding commitments such as revolving credit facilities, bridge financing commitments or delayed draw commitments. As of September 30, 2020, the Company had unfunded commitments on revolving credit facilities of $6,595, no outstanding bridge financing commitments and other future funding commitments of $28,552. The unfunded commitments on revolving credit facilities and delayed draws are disclosed on the Company's Schedule of Investments. As of December 31, 2019, the Company had no commitments or contingencies.
The Company also has revolving borrowings available under the Wells Subscription Line as of September 30, 2020. See Note 6. Borrowings, for details.
The Company may from time to time enter into financing commitment letters. As of September 30, 2020 and December 31, 2019, the Company had no commitment letters to purchase investments which could require funding in the future.
COVID-19 Developments
On March 11, 2020 the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. For the nine months ended September 30, 2020 and subsequent to September 30, 2020, COVID-19 has had a significant impact on the U.S. economy and on the Company.
The extent of the continued impact of the COVID-19 pandemic on the financial performance of the Company's current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions and the health of the financial markets and economy as a result of the COVID-19 pandemic, all of which are highly uncertain and cannot be predicted. To the extent the Company’s portfolio companies continue to be adversely impacted by the effects of the COVID-19 pandemic, the Company may experience a material adverse impact on its future net investment income, the fair value of its portfolio investments, its financial condition and the results of operations and financial condition of its portfolio companies.
Note 9. Net Assets
In connection with its formation, the Company has the authority to issue 500,000,000 shares of common stock at $0.001 per share par value.
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The following table summarizes the total shares of common stock issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the nine months ended September 30, 2020.
| Drawdown Date | Shares Issue Date | Shares Issued | Aggregate Offering Price | |||||||||||||||||
| February 3, 2020 | February 18, 2020 | 5,249,900 | $ | 52,499 | ||||||||||||||||
| March 12, 2020 | March 26, 2020 | 5,250,000 | 52,500 | |||||||||||||||||
| April 20, 2020 | May 4, 2020 | 10,500,000 | 105,000 | |||||||||||||||||
| August 13, 2020 | August 27, 2020 | 7,443,289 | 78,750 | |||||||||||||||||
| 28,443,189 | $ | 288,749 | ||||||||||||||||||
On April 15, 2019, the Company issued 100 shares of common stock for $1 to the Investment Advisor.
The following table reflects the distributions declared on the Company's common stock for the nine months ended September 30, 2020.
| Date Declared | Record Date | Payment Date | Per Share Amount | |||||||||||||||||
| June 23, 2020 | June 23, 2020 | July 13, 2020 | $ | 0.13 | ||||||||||||||||
| September 25, 2020 | September 29, 2020 | October 13, 2020 | 0.21 | |||||||||||||||||
| $ | 0.34 | |||||||||||||||||||
As of December 31, 2019, no distributions had been declared or paid by the Company.
Note 10. Earnings Per Share
The following information sets forth the computation of basic net increase (decrease) in the Company's net assets per share resulting from operations for the three and nine months ended September 30, 2020, for the three months ended September 30, 2019 and for the period from January 23, 2019 (inception) to September 30, 2019:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019(1) | ||||||||||||||||||||
| Earnings (loss) per share—basic & diluted | |||||||||||||||||||||||
| Numerator for basic & diluted earnings (loss) per share: | $ | 8,908 | $ | (12) | $ | 24,760 | $ | (594) | |||||||||||||||
| Denominator for basic & diluted weighted average share(2): | 23,831,686 | 100 | 17,762,235 | 100 | |||||||||||||||||||
| Basic & diluted earnings (loss) per share: | $ | 0.37 | $ | (121.76) | $ | 1.39 | $ | (5,937.98) | |||||||||||||||
(1)For the nine months ended September 30, 2019, the amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
(2)For the nine months ended September 30, 2020 and the period from January 23, 2019 (inception) to September 30, 2019, the Company's weighted average number of shares outstanding is based on the period from February 18, 2020 (commencement of operations) to September 30, 2020 and the period from April 15, 2019 (issuance of initial shares) to September 30, 2019, respectively.
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Note 11. Financial Highlights
The following information sets forth the Company's financial highlights for the nine months ended September 30, 2020 and for the period from January 23, 2019 (inception) to September 30, 2019.
| Nine Months Ended | |||||||||||
| September 30, 2020 | September 30, 2019(1) | ||||||||||
| Per share data: (2) | |||||||||||
| Net asset value, February 18, 2020 and January 23, 2019 (inception), respectively(3) | $ | — | $ | — | |||||||
| Net investment income (loss) | 0.52 | (5,937.98) | |||||||||
| Net realized and unrealized gains (4) | 0.35 | — | |||||||||
| Net increase (decrease) in net assets resulting from operations | 0.87 | (5,937.98) | |||||||||
| Issuance of shares of common stock | 10.15 | 10.00 | |||||||||
| Dividends declared to stockholders from net investment income | (0.34) | — | |||||||||
| Net asset value, September 30, 2020 and September 30, 2019, respectively | $ | 10.68 | $ | (5,927.98) | |||||||
| Total return (5) | 10.28 | % | N/M | ||||||||
| Shares outstanding at end of period | 28,443,289 | 100 | |||||||||
| Average weighted shares outstanding for the period (6) | 17,762,235 | 100 | |||||||||
| Average net assets for the period (6) | $ | 182,743 | N/M | ||||||||
| Ratio to average net assets: | |||||||||||
| Net investment income (7) | 8.19 | % | N/M | ||||||||
| Total expenses, before waivers (7) | 3.24 | % | N/M | ||||||||
| Total expenses, net of waivers (7) | 1.42 | % | N/M | ||||||||
| Average debt outstanding — Wells Subscription Line (8) | $ | 16,781 | N/A | ||||||||
| Asset coverage ratio (9) | N/A | N/A | |||||||||
| Portfolio turnover | 15.99 | % | N/A | ||||||||
| Capital Commitments | $ | 525,000 | N/A | ||||||||
| Funded Capital Commitments | $ | 288,750 | N/A | ||||||||
| % of Capital Commitments Funded | 55.00 | % | N/A | ||||||||
(1)For the nine months ended September 30, 2019, the amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
(2)Per share data is based on weighted average shares outstanding for the period from February 18, 2020 (commencement of operations) through September 30, 2020 (except for issuance of shares of common stock and distributions declared to stockholders, which are based on actual rate per share).
(3)February 18, 2020 is the date of commencement of operations, which was the date on which shares were issued to persons not affiliated with the Investment Adviser.
(4)The total amount shown may not correspond with the aggregate amount for the period as it includes the effect of the timing of capital drawdowns which for the nine months ended September 30, 2020 was $(0.52) per share.
(5)Total return is calculated assuming an initial purchase price of $10.00 per share and a sale at net assets per share on the last day of the period. Dividends and distributions, if any, are assumed for purposes of this calculation, to be reinvested at net assets per share on the last day of the respective quarter. Total return calculation is not annualized.
(6)For the nine months ended September 30, 2020, average weighted shares outstanding and average net assets represent the period from February 18, 2020 (commencement of operations) to September 30, 2020. For the period from January 23, 2019 (inception) to September 30, 2019, the weighted shares outstanding represents the period from April 15, 2019 (issuance of initial shares) to September 30, 2019.
(7)Annualized, except organizational and offering costs.
(8)For the nine months ended September 30, 2020, average debt outstanding represents the period from February 25, 2020 (commencement of the Wells Subscription Line) to September 30, 2020.
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(9)As of September 30, 2020, the asset coverage ratio of the Company is not applicable as the Company had no debt outstanding.
N/A Not applicable as the Company was in the development stage and had not entered into the respective agreements.
N/M Calculations are not meaningful because the Company was in the development stage and had not commenced investment operations.
Note 12. Recent Accounting Standards Updates
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. Management is currently evaluating the impact of the optional guidance on the Company's consolidated financial statements and disclosures. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the three and nine months ended September 30, 2020.
Note 13. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from recent developments through the date the financial statements were issued. There have been no recent developments that require recognition or disclosure in these consolidated financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of NMF SLF I, Inc.
Results of Review of Interim Financial Information
We have reviewed the accompanying statement of assets and liabilities of NMF SLF I, Inc. (the "Company"), including the schedule of investments, as of September 30, 2020, the related consolidated statements of operations and changes in net assets for the three-month and nine-month periods ended September 30, 2020 and three-month period ended September 30, 2019 and the period from January 23, 2019 (inception) to September 30, 2019, and cash flows for the nine-month period ended September 30, 2020 and period from January 23, 2019 (inception) to September 30, 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the statement of assets and liabilities of the Company as of December 31, 2019, and the related statements of operations, changes in net assets, and cash flows for the period from January 23, 2019 (inception) to December 31, 2019 (not presented herein); and in our report dated March 27, 2020, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying statement of assets and liabilities as of December 31, 2019, is fairly stated, in all material respects, in relation to the statement of assets and liabilities from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our review in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ DELOITTE & TOUCHE LLP
November 13, 2020
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information in management's discussion and analysis of financial condition and results of operations relates to NMF SLF I, Inc. (collectively, "we", "us", "our", or the "Company").
Forward-Looking Statements
The information contained in this section should be read in conjunction with the financial data and 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 the impact of interest and inflation rates, and the COVID-19 pandemic on the industries in which we invest;
•our future operating results, our business prospects, the adequacy of our cash resources and working capital, and the impact of the COVID-19 pandemic thereon;
•the ability of our portfolio companies to achieve their objectives and the impact of the COVID-19 pandemic thereon;
•our ability to make investments consistent with our investment objectives, including with respect to the size, nature and terms of those investments;
•the ability of New Mountain Finance Advisers BDC, L.L.C. (the "Investment Adviser") or its affiliates to attract and retain highly talented professionals;
•actual and potential conflicts of interest with the Investment Adviser and New Mountain Capital Group, L.P. (together with New Mountain Capital, L.L.C. and its affiliates, "New Mountain Capital") whose ultimate owners include Steven B. Klinsky and related other vehicles; and
•the risk factors set forth in Item 1A.—Risk Factors contained in our Annual Report on Form 10-K for the period from January 23, 2019 (inception) to December 31, 2019 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 period from January 23, 2019 (inception) to December 31, 2019 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 the United States ("U.S.") Securities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, registration statement on Form 10, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We are a Maryland corporation formed on January 23, 2019. 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 intend to elect to be treated for U.S. federal income tax purposes as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
The Investment Adviser is a wholly-owned subsidiary of New Mountain Capital whose ultimate owners include Steven B. Klinsky and related other vehicles. 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 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 of New Mountain Capital, provides the administrative services necessary to conduct our day-to-day operations. The Administrator has hired a third-party sub-administrator to assist with the provision of administrative services.
We conducted a private offering (the "Private Offering") of our common stock to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended. At the closing of any private offering, each investor in the Private Offering will make a capital commitment (a "Capital Commitment") to purchase common stock pursuant
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to a subscription agreement entered into with us (a "Subscription Agreement"). We commenced our loan origination and investment activities on the date we issued shares to persons not affiliated with the Investment Adviser (the "Initial Closing Date"), which occurred on February 18, 2020. We may conduct subsequent closing at times during our investment period (the "Investment Period"), which will commence on the Initial Closing Date and shall initially continue until the 48-month anniversary of the Initial Closing Date, subject to automatic extensions thereafter, each for an additional one year period, unless the holders of a majority of our outstanding common stock elect to forego any such extension upon not less than ninety days prior written notice. Holders of a majority of our outstanding common stock may also terminate the Investment Period as of any earlier anniversary of the Initial Closing Date upon not less than ninety days written notice. Each investor will be required to make capital contributions to purchase our common stock each time a drawdown notice is issued based on such investor's Capital Commitment. Pursuant to the Subscription Agreement entered into with each investor, we shall commence the wind up of operations two years following the expiration of the Investment Period, subject to additional extensions, each for an additional one year period, upon approval of the holders of a majority of our then outstanding common stock.
Our investment objective is to generate current income and capital appreciation primarily by investing in or originating debt investments in or originating first lien and unitranche leveraged loans in companies that the Investment Adviser believes are "defensive growth" companies in non-cyclical industry niches where the Investment Adviser has developed strong proprietary research and operational advantages. We make investments through both primary originations and open-market secondary purchases. We predominantly target loans to, and invest in U.S. middle market businesses, a market segment we believe continues to be underserved by other lenders. We define middle market businesses as those businesses with annual earnings before interest, taxes, depreciation, and amortization ("EBITDA") between $10.0 million and $200.0 million. The 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. As of September 30, 2020, our top five industry concentrations were software, healthcare services, business services, distribution & logistics and consumer services.
As of September 30, 2020, our net assets were approximately $303.9 million and our portfolio had a fair value of approximately $279.0 million in 38 portfolio companies.
COVID-19 Developments
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The COVID-19 pandemic has had, and continues to have, a significant impact on the U.S. economy and on us. The extent of the continued impact of the COVID-19 pandemic on the financial performance of our current and future investments will depend on future developments, including the duration and spread of the virus, related advisories and restrictions, and the health of the financial markets and economy as a result of the COVID-19 pandemic, all of which are highly uncertain and cannot be predicted. To the extent our portfolio companies continue to be adversely impacted by the effects of the COVID-19 pandemic, such impact may have a material adverse impact on our future net investment income, the fair value of our portfolio investments, our financial condition and results of operations and the financial condition of our portfolio companies.
As of September 30, 2020, we were in compliance with our asset coverage requirements under the 1940 Act. In addition, we were not in default of any of the covenants under our subscription line as of September 30, 2020. However, any increase in unrealized depreciation of our investment portfolio or reductions in our net asset value, as a result of the effects of the COVID-19 pandemic or otherwise, increases the risk of breaching the relevant covenants. For additional discussion on the impact of the COVID-19 pandemic on our portfolio companies, see "Monitoring of Portfolio Investments".
We will continue to monitor the rapidly evolving situation surrounding the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities, and we may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. For example, recurring COVID-19 outbreaks have led to the re-introduction or continuation of certain public health restrictions (such as instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues) in certain states in the U.S. and globally and could continue to lead to the reintroduction of such restrictions elsewhere. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impact of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. ("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
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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 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 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. Because (i) "benefit plan investors", as defined in Section 3(42) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any regulations promulgated thereunder ("Benefit Plan Investors"), hold 25% or more of our outstanding shares, and (ii) our shares are not listed on a national securities exchange, an unaffiliated third-party ("Sub-Administrator") has been engaged to independently value our investments, in consultation with the Investment Adviser. Our quarterly valuation procedures, which are the procedures that will be followed by such Sub-Administrator 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 personnel of the Sub-Administrator, in consultation with 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 Sub-Administrator is unable to sufficiently validate the quote(s) internally and if the investment's par value exceeds a certain 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, the personnel of the Sub-Administrator, in consultation with the investment professionals of the Investment Adviser, 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. If an IHS Markit Ltd. quote differs from the Thomson Reuters quote by +/- 5% or if the spread between the bid and ask for a quote is greater than 10%, the personnel of the Sub-Administrator, in consultation with the investment professionals of the Investment Adviser, will evaluate the reasonableness of the quote, and if the quote is determined to not be representative of fair value, the personnel of the Sub-Administrator, in consultation with the investment professionals of the Investment Adviser, 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 by the Sub-Administrator, in consultation with the investment professionals at the Investment Adviser. The personnel of the Sub-Administrator, in consultation with 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. For assets where a supporting analysis is prepared, the Sub-Administrator will document the selection and appropriateness of the indices selected for yield comparison and a conclusion documenting how the yield comparison analysis supports the proposed mark. The quarterly portfolio company monitoring reports which detail the qualitative and quantitative performance of the portfolio company will also be included. If the Sub-Administrator, in consultation with the investment professionals at the Investment Adviser, is unable to sufficiently validate the quote internally and if the investment's par value exceeds a certain 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 Sub-Administrator, in consultation with the investment professionals of the Investment Adviser responsible for the credit monitoring; and
b.Preliminary valuation conclusions will then be documented and discussed with our senior management.
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 our investments may fluctuate from period to period and the fluctuations could be material.
In the event Benefit Plan Investors do not hold 25% or more of our outstanding shares, or our shares are listed on a national securities exchange, then (i) personnel of the Investment Adviser will undertake the roles to be performed by the personnel of the Sub-Administrator, as described above and (ii) if an investment falls into category (3) above for four consecutive quarters and the investment's par value or its fair value exceeds a certain 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.
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.
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The following table summarizes the levels in the fair value hierarchy that our portfolio investments fall into as of September 30, 2020:
| (in thousands) | Total | Level I | Level II | Level III | |||||||||||||||||||
| First lien | $ | 276,491 | $ | — | $ | 73,572 | $ | 202,919 | |||||||||||||||
| Second lien | 2,500 | — | — | 2,500 | |||||||||||||||||||
| Total investments | $ | 278,991 | $ | — | $ | 73,572 | $ | 205,419 | |||||||||||||||
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 our revenue and EBITDA growth, margin trends, liquidity position, covenant compliance and changes to our 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 market value cash flow (EBITDA) 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 multiples to the portfolio company's latest twelve month ("LTM") EBITDA or projected EBITDA to calculate the enterprise value of the portfolio company. Significant increases or decreases in the EBITDA multiple 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. In applying the market based approach as of September 30, 2020, we used the relevant EBITDA multiple ranges set forth in the table below to determine the enterprise value of our portfolio companies. We believe these were reasonable ranges in light of current comparable company trading levels and the specific portfolio companies involved.
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 and 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. In applying the income based approach as of September 30, 2020, we used the discount ranges set forth in the table below to value investments in our portfolio companies.
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The unobservable inputs used in the fair value measurement of our Level III investments as of September 30, 2020 were as follows:
| (in thousands) | Range | |||||||||||||||||||||||||||||||||||||
| Type | Fair Value as of September 30, 2020 | Approach | Unobservable Input | Low | High | Weighted Average | ||||||||||||||||||||||||||||||||
| First lien | $ | 203,799 | Market & income approach | EBITDA multiple | 7.0x | 25.0x | 18.1x | |||||||||||||||||||||||||||||||
| Revenue multiple | 4.0x | 11.0x | 6.8x | |||||||||||||||||||||||||||||||||||
| Discount rate | 4.5 | % | 12.9 | % | 6.7 | % | ||||||||||||||||||||||||||||||||
| (880) | Other | N/A (1) | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Second lien | 2,500 | Market & income approach | EBITDA multiple | 30.0x | 34.0x | 32.0x | ||||||||||||||||||||||||||||||||
| Discount rate | 8.1 | % | 8.4 | % | 8.2 | % | ||||||||||||||||||||||||||||||||
| $ | 205,419 | |||||||||||||||||||||||||||||||||||||
(1)Fair value was determined based on transaction pricing or recent acquisition or sale as the best measure of fair value with no material changes in operations of the related portfolio company since the transaction date.
Revenue Recognition
Sales and paydowns of investments: Realized gains and losses on investments are determined on the specific identification method.
Interest 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 in our portfolio that contain a payment-in-kind ("PIK") interest provision. PIK interest is accrued and recorded as income at the contractual rates, if deemed collectible. The PIK interest is added to the principal balance on the capitalization date and is generally due at maturity or when redeemed by the issuer. For both the three and nine months ended September 30, 2020, we recognized PIK interest from investments of approximately $0.1 million. For the three months ended September 30, 2019 and for the period from January 23, 2019 (inception) to September 30, 2019, we had not commenced investment operations and recognized no PIK interest.
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.
Fee income: Fee 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. Fee 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 by us 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 material element of our original investment strategy.
We use an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in the portfolio. We use a four-level numeric rating scale as follows:
•Investment Rating 1—Investment is performing materially above expectations;
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•Investment Rating 2—Investment is performing materially in-line with expectations. All new loans are rated 2 at initial purchase;
•Investment Rating 3—Investment is performing materially below expectations, where the risk of loss has materially increased since the original investment; and
•Investment Rating 4—Investment is performing substantially below expectations and risks have increased substantially since the original investment. Payments may be delinquent. There is meaningful possibility that we will not recoup our original cost basis in the investment and may realize a substantial loss upon exit.
The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of September 30, 2020:
| (in millions) | As of September 30, 2020 | |||||||||||||||||||||||||
| Investment Rating | Cost | Percent | Fair Value | Percent | ||||||||||||||||||||||
| Investment Rating 1 | $ | 18.5 | 7.0 | % | $ | 19.2 | 6.9 | % | ||||||||||||||||||
| Investment Rating 2 | 246.0 | 93.0 | % | 259.8 | 93.1 | % | ||||||||||||||||||||
| Investment Rating 3 | — | — | % | — | — | % | ||||||||||||||||||||
| Investment Rating 4 | — | — | % | — | — | % | ||||||||||||||||||||
| $ | 264.5 | 100.0 | % | $ | 279.0 | 100.0 | % | |||||||||||||||||||
As of September 30, 2020, all investments in our portfolio had an Investment Rating of 1 or 2.
In response to the continuing impact of the outbreak of COVID-19 and its impact on the overall market environment and the health of our portfolio companies, we performed a company-by-company evaluation of the anticipated impact of the COVID-19 pandemic. The evaluation process consisted of dialogue with sponsors and portfolio companies to understand the impact of the COVID-19 pandemic on each portfolio company, the portfolio company’s response to any disruption, the level of sponsor support, and the current and projected financial and liquidity position of the portfolio company. Based on this evaluation, we assigned each portfolio company a "Risk Rating" of red, orange, yellow and green, with red reflecting a portfolio company with the potential for the most severe impact due to the COVID-19 pandemic and green reflecting the least. We will continue to monitor our portfolio companies and provide support to their management teams where possible. The following table shows the Risk Ratings of our portfolio companies as of September 30, 2020:
| (in millions) | As of September 30, 2020 | |||||||||||||||||||||||||
| Risk Rating | Cost | Percent | Fair Value | Percent | ||||||||||||||||||||||
| Red | $ | — | — | % | $ | — | — | % | ||||||||||||||||||
| Orange | — | — | % | — | — | % | ||||||||||||||||||||
| Yellow | 1.8 | 0.7 | % | 2.4 | 0.9 | % | ||||||||||||||||||||
| Green | 262.7 | 99.3 | % | 276.6 | 99.1 | % | ||||||||||||||||||||
| $ | 264.5 | 100.0 | % | $ | 279.0 | 100.0 | % | |||||||||||||||||||
Portfolio and Investment Activity
The fair value of our investments was approximately $279.0 million in 38 portfolio companies at September 30, 2020.
The following table shows our portfolio and investment activity for the nine months ended September 30, 2020:
| Nine Months Ended | ||||||||
| (in millions) | September 30, 2020 | |||||||
| New investments in 44 portfolio companies | $ | 282.1 | ||||||
| Debt repayments in existing portfolio companies | (15.4) | |||||||
| Sales of securities in 6 portfolio companies | (6.9) | |||||||
| Change in unrealized appreciation on 34 portfolio companies | 15.5 | |||||||
| Change in unrealized depreciation on 4 portfolio companies | (1.0) | |||||||
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Recent Accounting Standards Updates
See Part I—Financial Information—Note 12. Recent Accounting Standards for details on recent accounting standards updates.
Results of Operations for the Three Months Ended September 30, 2020 and September 30, 2019
Revenue
| Three Months Ended | ||||||||||||||
| (in thousands) | September 30, 2020 | September 30, 2019 | ||||||||||||
| Interest income | $ | 5,771 | $ | — | ||||||||||
| Fee income | 359 | — | ||||||||||||
| Total investment income | $ | 6,130 | $ | — | ||||||||||
Investment income for the three months ended September 30, 2020 is driven by our deployment of capital and increasing invested balance. We had not commenced investment operations for the three months ended September 30, 2019 and therefore had no investment income.
Operating Expenses
| Three Months Ended | ||||||||||||||
| (in thousands) | September 30, 2020 | September 30, 2019 | ||||||||||||
| Management fee | $ | 919 | $ | — | ||||||||||
| Less: management fee waiver | (689) | — | ||||||||||||
| Net management fee | 230 | — | ||||||||||||
| Professional fees | 152 | — | ||||||||||||
| Interest and other credit facility expenses | 152 | — | ||||||||||||
| Other general and administrative expenses | 79 | — | ||||||||||||
| Administrative expenses | 67 | — | ||||||||||||
| Organizational expenses | — | 12 | ||||||||||||
| Net expenses | $ | 680 | $ | 12 | ||||||||||
Net management fees for the three months ended September 30, 2020 were approximately $0.2 million. Pursuant to the investment advisory and management agreement between us and the Investment Adviser (the "Investment Management Agreement"), the management fee rate will be reduced during the first 11 quarters following the initial acceptance of Capital Commitments.
Professional fees for the three months ended September 30, 2020 were approximately $0.1 million, and included, legal fees, audit fees, tax professional fees and other miscellaneous professional fees.
Interest and other financing expenses for the three months ended September 30, 2020 were approximately $0.2 million due to our entry into the Wells Subscription Line.
During the three months ended to September 30, 2019, the only expenses incurred were related to our formation, organization and offering of shares of our common stock.
Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
| Three Months Ended | ||||||||||||||
| (in thousands) | September 30, 2020 | September 30, 2019 | ||||||||||||
| Net realized gains on investments | $ | 511 | $ | — | ||||||||||
| Net change in unrealized appreciation of investments | 2,947 | — | ||||||||||||
| Net realized and unrealized gains | $ | 3,458 | $ | — | ||||||||||
Our net realized and unrealized gains resulted in a total gain of approximately $3.4 million for the three months ended September 30, 2020. 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 ended September 30, 2020 was primarily driven by the overall increase in market prices of our investments during the period due to the partial recovery of the market
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from the impact of the COVID-19 pandemic. We commenced investment activities on February 18, 2020 and therefore did not incur net realized and unrealized gains (losses) for the three months ended September 30, 2019.
Results of Operations for the Nine Months Ended September 30, 2020 and for the Period from January 23, 2019 (inception) to September 30, 2019
Revenue
| Nine Months Ended | ||||||||||||||
| (in thousands) | September 30, 2020 | September 30, 2019 (1) | ||||||||||||
| Interest income | $ | 9,830 | $ | — | ||||||||||
| Fee income | 1,022 | — | ||||||||||||
| Total investment income | $ | 10,852 | $ | — | ||||||||||
(1)For the nine months ended September 30, 2019, amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
Investment income for the nine months ended September 30, 2020 is driven by our deployment of capital and increasing invested balance. We had not commenced investment operations for the nine months ended September 30, 2019 and therefore had no investment income.
Operating Expenses
| Nine Months Ended | ||||||||||||||
| (in thousands) | September 30, 2020 | September 30, 2019 (1) | ||||||||||||
| Management fee | $ | 2,484 | $ | — | ||||||||||
| Less: management fee waiver | (2,047) | — | ||||||||||||
| Net management fee | 437 | — | ||||||||||||
| Professional fees | 429 | — | ||||||||||||
| Interest and other credit facility expenses | 354 | — | ||||||||||||
| Other general and administrative expenses | 232 | — | ||||||||||||
| Administrative expenses | 141 | — | ||||||||||||
| Organizational expenses | 20 | 594 | ||||||||||||
| Net expenses | $ | 1,613 | $ | 594 | ||||||||||
(1)For the nine months ended September 30, 2019, amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
Net management fees for the nine months ended September 30, 2020 were approximately $0.4 million. Pursuant to the Investment Management Agreement, the management fee rate will be reduced during the first 11 quarters following the initial acceptance of Capital Commitments.
Professional fees for the nine months ended September 30, 2020 were approximately $0.4 million and included, legal fees, audit fees, tax professional fees and other miscellaneous professional fees.
Interest and other financing expenses for the nine months ended September 30, 2020 were approximately $0.4 million due to our entry into the Wells Subscription Line.
During period from January 23, 2019 (inception) to September 30, 2019, the only expenses incurred were related to our formation, organization and offering of shares of our common stock.
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Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation)
| Nine Months Ended | ||||||||||||||
| (in thousands) | September 30, 2020 | September 30, 2019 (1) | ||||||||||||
| Net realized gains on investments | $ | 1,032 | $ | — | ||||||||||
| Net change in unrealized appreciation of investments | 14,489 | — | ||||||||||||
| Net realized and unrealized gains | $ | 15,521 | $ | — | ||||||||||
(1)For the nine months ended September 30, 2019, amounts represent the period from January 23, 2019 (inception) to September 30, 2019.
Our net realized and unrealized gains resulted in a total gain of approximately $15.5 million for the nine months ended September 30, 2020. 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 nine months ended September 30, 2020 was primarily driven by the overall increase in market prices of our investments during the period due to the partial recovery of the market from the impact of the COVID-19 pandemic. We commenced investment activities on February 18, 2020 and therefore did not incur net realized and unrealized gains (losses) for the period from January 23, 2019 (inception) to September 30, 2019.
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.
We expect to generate cash from (1) drawing down capital in respect of common stock, (2) cash flows from investments and operations and (3) borrowings from banks or other lenders. We will seek to enter into any bank debt, credit facility or other financing arrangements on at least customary market terms; however, we cannot assure you we will be able to do so. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. As permitted by the Small Business Credit Availability Act (the "SBCA") upon organization, the Investment Adviser, as the initial stockholder, authorized us to adopt the application of the modified asset coverage requirements set forth in Section 61(a) (2) of the 1940 Act, as amended by the SBCA, which resulted in the reduction from 200.0% to 150.0% of the minimum asset coverage ratio applicable to us. In connection with their subscriptions of the shares, our stockholders were required to acknowledge our ability to operate with an asset coverage ratio that may be as low as 150.0%. 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 of September 30, 2020, we had no outstanding borrowings and for the three and nine months ended September 30, 2020, we have used minimal leverage under our Wells Subscription Line while awaiting proceeds from capital drawdowns.
On January 27, 2020, we entered into Subscription Agreements with several investors providing for the private placement of shares of common stock.
The following table summarizes the total shares of common stock issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the nine months ended September 30, 2020.
| Drawdown Date | Shares Issue Date | Shares Issued | Aggregate Offering Price | |||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| February 3, 2020 | February 18, 2020 | 5,249,900 | $ | 52,499 | ||||||||||||||||
| March 12, 2020 | March 26, 2020 | 5,250,000 | 52,500 | |||||||||||||||||
| April 20, 2020 | May 4, 2020 | 10,500,000 | 105,000 | |||||||||||||||||
| August 13, 2020 | August 27, 2020 | 7,443,289 | 78,750 | |||||||||||||||||
| 28,443,189 | $ | 288,749 | ||||||||||||||||||
On September 30, 2020, we had aggregate capital commitments and undrawn capital commitments from investors as follows:
| (in millions) | September 30, 2020 | |||||||
| Capital Commitments | $ | 525.0 | ||||||
| Unfunded Capital Commitments | 236.3 | |||||||
| % of Capital Commitments Funded | 55.0 | % | ||||||
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At September 30, 2020 and December 31, 2019, we had cash and cash equivalents of approximately $38.4 million and $0.0 million, respectively. Our cash used in operating activities for the nine months ended September 30, 2020 and for the period from January 23, 2019 (inception) to September 30, 2019, was approximately $247.0 million and $0.0 million, respectively. We expect that all current liquidity needs will be met with cash flows from operations and drawdowns on Capital Commitments to purchase shares of our common stock.
Borrowings
On February 25, 2020, we entered into a Revolving Credit Agreement (the "Wells Subscription Line") with Wells Fargo Bank, National Association ("Wells Fargo"). The Wells Subscription Line will mature on February 25, 2022, if not further extended by that date, and has a maximum facility amount of $50.0 million. Under the Wells Subscription Line, we are permitted to borrow up to the lesser of $50.0 million and the Borrowing Base. The "Borrowing Base" is based upon the unfunded Capital Commitments of subscribed investors in us that have been approved by Wells Fargo and meet certain criteria. The advance rate for such investors that meet a rating requirement or Wells Fargo net worth criteria or in the case of certain investors specified by Wells Fargo (the "Specified Investors") is 90% but may be subject to concentration limits. The concentration limits do not apply to the Specified Investors. The advance rate for other investors designated by Wells Fargo is 65%. The Wells Subscription Line contains certain customary affirmative and negative covenants and events of default.
From February 25, 2020 through March 25, 2020, the Wells Subscription Line bore interest at a rate of either LIBOR plus 1.55% per annum or Reference Rate (as defined by the Revolving Credit Agreement) plus 0.55% per annum. After March 25, 2020, the Wells Subscription Line bears interest at a rate of either LIBOR plus 1.50% per annum or Reference Rate plus 0.50% per annum. The Wells Subscription Line also charges a non-usage fee at a rate of (a) 0.20% per annum when the unused facility amount is greater than or equal to 50.0% of the maximum facility amount, or (b) 0.25% per annum when the unused facility amount is less than 50.0% of the maximum facility amount.
For the three months ended September 30, 2020, interest expense, non-usage costs and amortization of financing costs incurred on the Wells Subscription Line were $0.1 million, less than $20 thousand and less than $60 thousand, respectively. The weighted average interest rate and effective interest rate on the Wells Subscription Line for the three months ended September 30, 2020 were 1.7% and 2.7%, respectively. For the period from February 25, 2020 (commencement of the Wells Subscription Line) through September 30, 2020, interest expense, non-usage costs and amortization of financing costs incurred on the Wells Subscription Line were $0.2 million, less than $50 thousand and $0.1 million, respectively. The weighted average interest rate and effective interest rate on the Wells Subscription Line for the period from February 25, 2020 (commencement of the Wells Subscription Line) to September 30, 2020 were 1.8% and 3.1%, respectively.
As of September 30, 2020, there was no outstanding balance on the Wells Subscription Line and we were in compliance with the applicable covenants in the Wells Subscription Line on such date.
Off-Balance Sheet Arrangements
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. We may from time to time enter into financing commitment letters or bridge financing commitments, which could require funding in the future. As of September 30, 2020, we had outstanding commitments to third parties to fund investments totaling $35.1 million 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 September 30, 2020, we had no commitment letters to purchase investments and we had not entered into any bridge financing commitments which could require funding in the future.
Contractual Obligations
We have entered into 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 a management fee for these services.
We have also entered into an administration agreement (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. The Administrator has hired a third-party sub-administrator to assist with the provision of administrative services.
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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.
Distributions and Dividends
Distributions declared for the nine months ended September 30, 2020 totaled approximately $8.7 million.
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 current fiscal year to date:
| Fiscal Year Ended | Date Declared | Record Date | Payment Date | Per Share Amount | ||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||
| Third Quarter | September 25, 2020 | September 29, 2020 | October 13, 2020 | $ | 0.21 | |||||||||||||||||||||
| Second Quarter | June 23, 2020 | June 23, 2020 | July 13, 2020 | 0.13 | ||||||||||||||||||||||
| $ | 0.34 | |||||||||||||||||||||||||
As of December 31, 2019, no distributions had been declared or paid by the Company.
We intend to pay quarterly distributions to our stockholders in amounts sufficient to qualify as and 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.
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 of New 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 the Administration Agreement with the Administrator, a wholly-owned subsidiary of New Mountain Capital. The Administrator arranges our office space and provides office equipment and administrative services necessary to conduct our respective day-to-day operations pursuant to the Administration Agreement.
•We, the Investment Adviser and the Administrator have entered into a Trademark License Agreement with New Mountain Capital, pursuant to which New Mountain Capital has granted us, the Investment Adviser and the Administrator a non-exclusive, royalty-free license to use the "New Mountain" and the "NMF" names.
In addition, we have adopted a formal Code of Ethics that governs the conduct of our officers and directors. These officers and directors also remain subject to the duties imposed by the 1940 Act and the Maryland General Corporation Law (the "MCGL").
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 the SEC and its staff, and consistent with the Investment Adviser's allocation procedures. On October 8, 2019, the SEC issued an exemptive order (the "Exemptive Order"), which superseded a prior order issued on December 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. As our assets are treated as "plan assets" under ERISA, we will only co-invest in the same issuer with certain funds or entities managed by the Investment Adviser or its affiliates, so long as their and our respective future
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investments are at the same level of such issuer's capital structure; provided, that in no event will we co-invest with any other fund or entity in contravention of the 1940 Act.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to certain financial market risks, such as interest rate fluctuations. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In addition, in a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. As of September 30, 2020, 100.0% of investments at fair value (excluding unfunded debt investments) represent floating-rate investments with a LIBOR floor (includes investments bearing prime interest rate contracts) and none of our investments at fair value represent fixed-rate investments. Additionally, our Wells Subscription Line is also subject to floating interest rates and are currently paid based on floating LIBOR rates and prime interest rates.
The following table estimates the potential changes in net cash flow generated from interest income and expenses, should interest rates increase by 100, 200 or 300 basis points, or decrease by 25 basis points. Interest income is calculated as revenue from interest generated from our portfolio of investments held on September 30, 2020. Interest expense is calculated based on the terms of our outstanding subscription line. For our floating rate subscription line, we use the outstanding balance as of September 30, 2020. Interest expense on our floating rate subscription line is calculated using the interest rate as of September 30, 2020, adjusted for the hypothetical changes in rates, as shown below. The base interest rate case assumes the rates on our portfolio investments remain unchanged from the actual effective interest rates as of September 30, 2020. These hypothetical calculations are based on a model of the investments in our portfolio, held as of September 30, 2020, and are only adjusted for assumed changes in the underlying base interest rates. In addition, in a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results.
Actual results could differ significantly from those estimated in the table.
| Change in Interest Rates | Estimated Percentage Change in Interest Income Net of Interest Expense (unaudited) | |||||||
| –25 Basis Points | (0.61) | % | ||||||
| Base Interest Rate | — | % | ||||||
| +100 Basis Points | 7.26 | % | ||||||
| +200 Basis Points | 22.31 | % | ||||||
| +300 Basis Points | 37.37 | % | ||||||
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Item 4. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
As of September 30, 2020 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
(b)Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
The terms "we", "us", "our" and the "Company" refers to NMF SLF I, Inc.
Item 1. Legal Proceedings
We, the Investment Adviser and the Administrator are not currently subject to any material legal proceedings as of September 30, 2020. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A.—Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial condition and/or operating results, including the Risk Factor titled "We may borrow money, which could magnify the potential for gain or loss on amounts invested in us and increase the risk of investing in us". The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. Other than as set forth below, there have been no material changes during the nine months ended September 30, 2020 to the risk factors discussed in Item 1A.—Risk Factors in our Annual Report on Form 10-K.
Events outside of our control, including public health crises, could negatively affect our portfolio companies and our results of our operations.
Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, in December 2019, a novel strain of coronavirus (also known as "COVID-19") surfaced in China and has since spread and continues to spread to other countries, including the United States. This outbreak has led, and for an unknown period of time, will continue to lead to disruptions in local, regional, national and global markets and economies affected thereby, including a recession and a steep increase in unemployment in the United States. With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) government imposition of various forms of shelter-in-place orders and the closing of "non-essential" businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses.
While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Health advisors warn that recurring COVID-19 outbreaks will continue if reopening is pursued too soon or in the wrong manner, which may lead to the re-introduction or continuation of certain public health restrictions (such as instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues). Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration, severity or potential worsening of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the COVID-19 pandemic or treat its impact, all of which are beyond our control.
The COVID-19 outbreak is having, and any future outbreaks could have, an adverse impact on the markets and the economy in general, which could have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by us and returns to us, among other things. As of the date of this 10-Q, it is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on us and our portfolio companies. Any
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potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the COVID-19 pandemic or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our and our portfolio companies' operating results.
If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations.
We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.
Any public health emergency, including the COVID-19 pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments. Our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that may not show the complete impact of the COVID-19 pandemic and the resulting measures taken in response thereto. These potential impacts, while uncertain, could adversely affect our and our portfolio companies' operating results.
We are currently operating in a period of capital markets disruption and economic uncertainty.
The impact of the COVID-19 pandemic has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn.
Disruptions in the capital markets caused by the COVID-19 pandemic have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.
Additionally, the recent disruption in economic activity caused by the COVID-19 pandemic has had, and may continue to have, a negative effect on the potential for liquidity events involving our investments. The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital, and any required sale of all or a portion of our investments as a result, could have a material adverse effect on our business, financial condition or results of operations.
Adverse developments in the credit markets may impair our ability to secure debt financing.
In past economic downturns, such as the financial crisis in the United States that began in mid-2007 and during other times of extreme market volatility, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, for example as a result of the COVID-19 pandemic, it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.
So far, the COVID-19 pandemic has resulted in, and until fully resolved is likely to continue to result in, among other things, increased draws by borrowers on revolving lines of credit and increased requests by borrowers for amendments, modifications and waivers of their credit agreements to avoid default or change payment terms, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans. In addition, the duration and effectiveness of responsive measures implemented by governments and central banks cannot be predicted. The commencement, continuation, or cessation of government and central bank policies and economic stimulus programs, including changes in
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monetary policy involving interest rate adjustments or governmental policies, may contribute to the development of or result in an increase in market volatility, illiquidity and other adverse effects that could negatively impact the credit markets and us.
If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.
There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations in the United States that may directly affect financial institutions and the global economy.
The presidential election occurred on November 3, 2020. Changes in federal policy, including tax policies, and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and focus on the financial services industry or the tax rates paid by corporate entities. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain pending the results of the presidential election. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.
Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR. In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association ("BBA") in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.
Actions by the ICE Benchmark Administration, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us.
On July 27, 2017, the U.K. Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible. It is unclear if LIBOR will cease to exist after 2021 or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate ("SOFR"). The Federal Reserve Bank of New York began publishing SOFR in
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April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain, including whether the COVID-19 pandemic will have further effect on LIBOR transition plans.
The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. In the event that the LIBOR rate is no longer available or published on a current basis or no longer made available or used for determining the interest rate of loans, our administrative agent that manages our loans will generally select a comparable successor rate; provided that (i) to the extent a comparable or successor rate is approved by the administrative agent, the approved rate shall be applied in a manner consistent with market practice; and (ii) to the extent such market practice is not administratively feasible for the administrative agent, such approved rate shall be applied as otherwise reasonably determined by the administrative agent.
Because we are not currently a "publicly offered regulated investment company," as defined in the Code, certain U.S. stockholders will be treated as having received a dividend from us in the amount of such U.S. stockholder's allocable share of certain of our expenses, including a portion of its management fees, and such expenses will be treated as miscellaneous itemized deductions of such U.S. stockholders that are not currently deductible.
We do not currently qualify as a "publicly offered regulated investment company", as defined in the Code. Accordingly, U.S. individual and other noncorporate stockholders will be taxed as though they received a distribution of some of our expenses. A "publicly offered regulated investment company" is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market, or (iii) held by at least 500 persons at all times during the taxable year. We anticipate that we will not qualify as a publicly offered RIC for the 2020 tax year, and we cannot determine when we will qualify as a publicly offered RIC. Since the Company is not a publicly offered RIC, a non-corporate stockholder's allocable portion of our affected expenses, including a portion of our management fees, will be treated as an additional distribution to the stockholders. A non-corporate stockholder's allocable portion of these expenses are treated as miscellaneous itemized deductions that are not currently deductible by such stockholder (and beginning in 2026, will be deductible to such stockholder only to the extent they exceed 2% of such stockholder's adjusted gross income), and are not deductible for alternative minimum tax purposes.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None, other than those already disclosed in certain Form 8-Ks filed with the SEC.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the United States Securities and Exchange Commission:
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
(1)Previously filed in connection with NMF Senior Loan Fund I, Inc.'s (now known as NMF SLF I, Inc.) registration statement on Form 10 (File No. 000-56123) filed on November 22, 2019.
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 13, 2020.
| NMF SLF I, Inc. | |||||||||||
| By: | /s/ ROBERT A. HAMWEE | ||||||||||
Robert A. Hamwee Chief Executive Officer (Principal Executive Officer) | |||||||||||
| By: | /s/ SHIRAZ Y. KAJEE | ||||||||||
Shiraz Y. Kajee Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | |||||||||||
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