New Mountain Probes $500M Asset Sale as Private Credit Fears Mount

The private credit market is facing a critical test as New Mountain Finance explores the potential sale of $500 million in assets. This move has raised questions about the health of the broader $1 trillion sector and the risk of widespread credit issues. The company, a midsize player in the business-development company (BDC) space, is seeking to diversify its portfolio and reduce its exposure to PIK loans.

Investors have been closely watching the private credit market this year, especially after concerns about loan quality and repayment challenges emerged. New Mountain's stock has fallen nearly 20% this year, trading at a discount to its net asset value. The company classifies 95% of its portfolio as having a green risk weighting, but its higher-than-average leverage and PIK loan exposure remain points of concern.

The sale of New Mountain's assets could either validate its current valuations or highlight potential mispricing. A successful transaction at carrying value would signal confidence in its portfolio and provide a boost to the broader private credit market. However, if the sale fails to attract competitive bids or the company decides not to proceed, it could negatively impact New Mountain's stock and raise doubts about the sector's stability.

How Markets Reacted

The VanEck BDC Income ETF, which tracks the performance of BDCs, has declined 15% this year, reflecting broader investor caution. The sector has come under pressure as rising interest rates and concerns over borrower defaults create uncertainty. Meanwhile, lower short-term interest rates have also limited the dividends BDCs can pay, further dampening investor enthusiasm according to market analysis.

New Mountain's attempt to offload assets highlights the challenges facing the private credit market. Unlike public bonds or syndicated loans, private credit assets are illiquid and rarely trade on secondary markets. A successful sale could set a precedent for other BDCs seeking to rebalance their portfolios.

. The company has not yet provided an update on the transaction but plans to announce its next move ahead of its fourth-quarter earnings report.

What Analysts Are Watching

Analysts are watching closely to see whether New Mountain's portfolio is valued accurately. If the sale proceeds at the company's current carrying values, it would reinforce confidence in the private credit market. However, lower-than-expected prices could indicate that the portfolio has been overvalued. This could raise broader concerns about how other BDCs have priced their assets.

New Mountain has a strong credit record, but its leverage ratio and reliance on PIK loans remain red flags for investors. PIK loans allow borrowers to defer interest payments by issuing more debt, which can mask underlying financial stress. The company gets about 15% of its income from PIK loans, roughly double the industry average. This strategy has been controversial as it increases risk for lenders.

Risks to the Outlook

The private credit market has benefited from high yields and strong credit performance in recent years. However, concerns are growing as some borrowers struggle with repayment. Critics argue that weak loans are being extended or restructured into PIK formats to delay the recognition of losses. In technology, for example, artificial intelligence could disrupt software providers, leading to defaults.

New Mountain's CEO, Steven Klinsky, has emphasized that the asset sale could enhance financial flexibility and allow the company to consider debt paydowns or stock buybacks. He also noted that reducing PIK income could improve portfolio stability. Klinsky's stake in the company, along with other insiders, remains a sign of confidence in its long-term prospects.

The outcome of New Mountain's asset sale could influence investor sentiment in the broader private credit market. If successful, it could encourage more BDCs to explore similar strategies. If not, it could raise questions about the sector's ability to maintain its current valuations. Either way, the coming months will be a key period for private credit as investors assess risk and return.