KBRA Affirms Ratings for New Mountain Finance Corporation

KBRA affirms the issuer and senior unsecured debt ratings of BBB- for New Mountain Finance Corporation (NASDAQ: NMFC) ("the company"). The rating Outlook is revised to Negative from Stable.

Key Credit Considerations

The Negative Outlook reflects NMFC’s elevated PIK income, relatively high allocation to equity investments, sizeable realized and unrealized losses in recent periods, and comparatively high leverage, particularly when incorporating joint venture (JV) exposures. While the recent portfolio sale is a credit positive, NMFC will need to further reduce PIK income, decrease restructured equity positions, and reverse the negative trend in consolidated leverage for the Outlook to be revised to Stable.

In February, NMFC executed a secondary portfolio sale, divesting approximately 17% of the portfolio at roughly 94% of fair value as of December 31, 2025. The transaction supported a reduction in gross leverage, with proceeds used to repay debt and reposition the investment portfolio toward lower-risk assets. The sale included a meaningful reduction in PIK loans (37% of assets sold), subordinated debt, and older vintage positions, including a notable concentration in software-related credits (~33% of assets sold). Additionally, the repositioning is expected to enhance portfolio diversification. Pro forma portfolio is 81% senior secured loans, including 12% senior loan fund and 5% second lien loans.

Despite these actions, PIK income as a percentage of total investment income is expected to remain elevated relative to peers and continue to pressure cash coverage of the dividend. Management remains focused on reducing PIK exposure, which is largely dependent on the successful execution of anticipated loan exits and refinancings.

NMFC has experienced sustained NAV pressure in recent years, driven by both realized and unrealized losses. While a significant portion of historical NAV decline has been concentrated in a single equity investment (Edmentum), broader valuation pressures may persist given the still-meaningful—though declining—exposure to the software sector (~20% pro forma for the portfolio sale).

Following the portfolio sale, regulatory leverage is expected to remain within management’s stated target range of 1.0x–1.25x; however, look-through leverage, inclusive of JV exposures, remains elevated relative to peers. Although the two JVs are primarily composed of broadly syndicated loans (BSLs), leverage within these vehicles remains high at over 3.5x.

The ratings are supported by NMFC’s affiliation with New Mountain Capital’s approximately $60 billion platform, including a $14 billion credit business that provides sourcing and co-investment capabilities. Portfolio credit performance has remained generally stable, with non-accrual levels within an acceptable range for the rating category. Additional support is derived from a diversified funding mix, including secured credit facilities, senior unsecured debt, convertible notes, and SBA debentures. The company also maintains a relatively high proportion of unsecured debt, enhancing financial flexibility and limiting asset encumbrance for senior unsecured noteholders. Liquidity remains solid as of December 31, 2025, bolstered by the recent portfolio sale, with no unsecured debt not already repaid or prefunded maturing over the next two years.

Offsetting these strengths, NMFC maintains a relatively high proportion of investments outside of traditional senior secured lending, including common and preferred equity, a REIT focused on industrial real estate and NNN leases, subordinated debt, and JV investments; however, NNN leases and JV investments are senior cash paying assets, somewhat mitigating the risk. These factors, combined with the inherent risks of the BDC business model—such as exposure to illiquid assets, constraints on retained earnings as a RIC, and an uncertain macroeconomic environment—continue to weigh on the credit profile.

Rating Sensitivities

The Outlook could be revised to Stable if the company demonstrates sustained improvement in credit metrics, including a meaningful reduction in PIK income, improved cash earnings coverage of the dividend, and stabilization of NAV through maintaining portfolio company credit quality and moderating consolidated leverage. Conversely, the ratings could be downgraded if credit metrics deteriorate further, including continued NAV erosion, sustained reliance on elevated PIK income, or weakening cash earnings coverage of the dividend. Downward pressure could also arise from elevated or increasing leverage, higher non-accruals or adverse credit migration, or failure to execute on planned portfolio repositioning initiatives.

To access ratings and relevant documents, click here.

Methodologies