November 20, 2016 Comments (0) Blog

New Mountain Finance BDC Investment Losses

(Last Updated On: November 21, 2016)

New Mountain Finance Corporation (NYSE: NMFC) is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, according to their website. The Company aims to generate current income and capital appreciation through investments in debt securities at all levels of the capital structure.

According to BDC Reporter, a major portfolio company of New Mountain Finance (NMFC), Transtar Holding Company, has filed for Chapter 11 bankruptcy this week. Unfortunately, New Mountain Finance will be incurring a major loss of around $30 million.

Transtar Holding Company is an integrated portfolio of brands that provides world-class customer service, distribution and manufacturing of OE and aftermarket automotive products, according to their website. “Through market growth, share gain, and the acquisition of major players and competitors, the portfolio expanded into the global leader that it is today”. Transtar filed for Chapter 11 bankruptcy protection on November 20, 2016.

BDCs typically invest in debt of small and medium sized businesses. When those businesses are profitable, so is the BDC. However, BDCs often invest in businesses that were unable to secure bank loans and debt considered below investment grade.

Unregistered BDCs are likely to be carrying non-secured debt in companies that have a higher risk of bankruptcy. Most BDCs seek to have their loans protected by receiving a property interest or equity in the companies they invest in. By doing this, the BDCs increase their chances of salvaging some of the investment’s value in the case of a bankruptcy.

Unfortunately for investors in unregistered BDCs, not only are they likely investing in weaker and less stable companies, they are most likely not adequately protected in the case of a bankruptcy.

In addition, BDCs typically are high commission products that carry significant upfront fees. The resemblance BDCs share with another high commission and illiquid product, Non-traded REITs, has drawn the attention of securities regulators. Brokers that sell BDCs are advised to firmly adhere to suitability requirements when recommending BDCs to clients.

For more information on BDCs, see BDCs – the good, the bad, and the UGLY.

According to a recent press release, during the third quarter, the New Mountain Finance closed a public offering of an additional $40.25 million in aggregate principal amount of the company’s 5.00% convertible notes due 2019. In addition, the Company entered into an amended and restated note purchase agreement and issued an additional $40.0 million in aggregate principal amount of the company’s 5.313% unsecured notes to institutional investors in a private placement.

The high yields offered by private placements often attract many investors, especially retired individuals looking for a source of income. However, due to the risks, private placements are arguable unsuitable for most investors. Private placements are incredible complex and often illiquid investment that are intended for sophisticated and institutional investors. It is not uncommon for some brokers to downplay the inherent risk and portray private placements as “safe.” Although brokers are essentially just salesmen, they do have a duty to perform adequate due diligence to ensure that the investments they recommend have a reasonable likelihood of success.

Specifically, The White Law Group is investigating the following New Mountain offerings, among others:

New Mountain Finance SBIC LP
New Mountain Guardian AIV LP
New Mountain Guardian Partners (Cayman) LP
New Mountain Investments II LP
New Mountain Partners LP
New Mountain Partners IV Access LP
New Mountain Vantage California II LP

Brokers have a fiduciary duty to perform due diligence on any investment and to insure that investment recommendations are consistent with their client’s age, net worth, risk tolerance, investment experience and objectives, risk tolerance. If a broker overlooks suitability requirements, investors may have an actionable claim to recover their losses in a product in a claim through FINRA dispute resolution.

If you have questions about your investment in a nontraded BDC and would like to speak to a securities attorney about your potential to recover losses through FINRA arbitration, please call The White Law Group at 1-888-637-5510 for a free consultation.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.

For more information on The White Law Group, please visit our website at www.WhiteSecuritiesLaw.com.