Senior First Lien Rotation And Share Buybacks Will Support Attractive Returns Ahead

Catalysts

About New Mountain Finance

New Mountain Finance Corporation is a business development company that provides primarily first lien, senior secured loans to middle market companies in defensive, higher growth sectors.

What are the underlying business or industry changes driving this perspective?

• The anticipated rebound in private equity backed M&A and LBO activity in 2026, supported by full sponsor pipelines and pressure to deploy capital, is expected to expand high quality direct lending opportunities and support portfolio level revenue and net investment income.
• Ongoing rotation toward senior, first lien assets with low average loan to value of roughly 45 percent, combined with negligible realized losses, positions the company to focus on capital preservation through the cycle and support stable or improving net margins.
• Refinancing higher cost unsecured and convertible notes into lower cost, more flexible revolving facilities and maintaining a higher mix of fixed rate liabilities against predominantly floating rate assets is intended to lessen earnings volatility and support future growth in net investment income.
• The potential sale of up to 500 million dollars of well performing loans, with the goal of reducing position concentrations and PIK exposure, is intended to upgrade portfolio quality, lower noncash income and create capacity to redeploy into higher returning opportunities, supporting earnings and book value per share.
• Share repurchases at a roughly 20 percent discount to reported net asset value, together with a fully covered double digit dividend, can support accretion to NAV per share and concentrate earnings power among remaining shareholders, potentially improving per share earnings and return on equity.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming New Mountain Finance's revenue will decrease by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.8% today to 51.9% in 3 years time.
• Analysts expect earnings to reach $138.4 million (and earnings per share of $1.38) by about December 2028, up from $71.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 4.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A more robust than expected rebound in sponsor backed M&A and LBO activity in 2026 could allow NMFC to redeploy capital from repayments and any portfolio sale into higher yielding defensive growth loans. This may drive faster net investment income growth and support a higher share price through improved earnings and dividend sustainability.
• If the planned sale of up to 500 million dollars of well performing assets is executed at attractive prices and proceeds are used to both delever and repurchase shares at a roughly 20 percent discount to net asset value, the resulting uplift to return on equity and NAV per share accretion could lead to multiple expansion and a rising share price as investors re rate the stock.
• Continued rotation into senior first lien assets with an average 45 percent loan to value and very low nonaccruals may keep realized losses negligible. If this is combined with refinancing higher cost notes into cheaper revolving debt, it could structurally improve net margins and earnings, supporting a higher valuation over time.
• Stabilization or only modest declines in base interest rates, alongside NMFC achieving its targeted match of 85 percent floating rate assets and liabilities, could preserve or enhance net interest income. This in turn may support dividend increases or special dividends and could create upward pressure on the share price through stronger earnings quality.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.0 for New Mountain Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $266.7 million, earnings will come to $138.4 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $9.67, the analyst price target of $10.0 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.