NMFC

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2014, for New Mountain Finance Holdings, L.L.C. (the Operating Company) and New Mountain Finance Corporation (NMFC). The Operating Company is a Business Development Company (BDC) focused on investing in debt securities of defensive growth companies. As of the reporting date, NMFC owned 100% of the Operating Company following a secondary offering in February 2014. A third entity, New Mountain Finance AIV Holdings Corporation (AIV Holdings), ceased operations on January 29, 2014, and was subsequently dissolved in April 2014.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased 22% to $30.9 million, driven by larger invested balances from 2013 capital raises and increased leverage. Interest income rose 12% to $28.1 million, and dividend income was $2.1 million (compared to zero in Q1 2013).
• Expense Increases: Net expenses increased to $14.6 million from $13.7 million. Management fees rose 17% and incentive fees (excluding capital gains) rose 28% due to higher asset balances. However, accrued capital gains incentive fees decreased 43% to $1.5 million.
• Capital Gains: Net realized gains increased significantly to $2.8 million from $1.0 million. Conversely, net unrealized appreciation decreased to $4.8 million from $11.9 million, reflecting market fluctuations.
• Leverage: Total debt increased to $486.8 million. The Holdings Credit Facility balance rose to $271.8 million, and the SLF Credit Facility was fully drawn at $215.0 million.
• Portfolio Composition: The portfolio grew to 60 companies with a weighted average Yield to Maturity at Cost of 10.9%. Software (21.1%) and Education (20.5%) remained the largest industry allocations.

Outlook, Risks, and Unusual Items

• Structural Restructuring: Subsequent to the quarter, stockholders approved a proposal to withdraw the Operating Company's election to be regulated as a BDC. The Operating Company will become a special purpose vehicle for credit facilities, while NMFC will assume all operating activities. AIV Holdings was dissolved in April 2014.
• Dividend Policy: A quarterly distribution of $0.34 per unit/share was declared for Q1 2014. A Q2 2014 distribution of $0.34 per unit/share was declared on May 6, 2014.
• Non-Accrual Status: Two super priority first lien positions in ATI Acquisition Company (and related equity in Ancora Acquisition LLC) are on non-accrual status due to regulatory constraints and underperformance. The aggregate fair value of these investments is approximately $0.4 million against a cost basis of $1.6 million.
• Expense Cap Expiration: The expense cap on administrative and other expenses expired on March 31, 2014. Future expense reimbursements to the Administrator may fluctuate.
• Market Risk: Approximately 86% of the portfolio consists of floating-rate investments. The company is exposed to interest rate fluctuations, though the impact on net interest income is modeled to be relatively stable under various rate scenarios.

Investor Verification Checklist

• Restructuring Impact: Verify the timeline and tax implications of the Operating Company withdrawing its BDC election and becoming a special purpose vehicle.
• ATI Acquisition Exposure: Confirm the current status of the non-accrual investment in ATI Acquisition Company and potential for further impairment.
• Expense Cap: Monitor future quarterly reports for increases in administrative expenses now that the $4.25 million cap has expired.
• Leverage Utilization: Track the utilization of the Holdings and SLF credit facilities, noting that the SLF facility is fully drawn ($215 million).
• Dividend Sustainability: Assess whether net investment income continues to support the $0.34 quarterly distribution rate given the expiration of the expense cap.