NMFC

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2012, for New Mountain Finance Holdings, L.L.C. (the Operating Company), New Mountain Finance Corporation (NMFC), and New Mountain Finance AIV Holdings Corporation (AIV Holdings). The Operating Company is a Business Development Company (BDC) focused on originating debt securities (first and second lien, mezzanine) and equity interests in defensive growth companies. As of June 30, 2012, the portfolio consisted of 56 companies with a fair value of approximately $751.1 million.

Key Financial Metrics

Note: Debt consists of $138.76 million under the Holdings Credit Facility and $173.11 million under the SLF Credit Facility.

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased by 62% for the six months ended June 30, 2012, compared to the same period in 2011. This was driven by larger invested balances resulting from the May 2011 IPO and increased leverage.
• Expense Increase: Total operating expenses rose significantly to $17.76 million for the six months ended June 30, 2012, compared to $5.34 million in the prior year. This increase is primarily due to higher management and incentive fees (linked to larger asset bases) and increased interest expenses on credit facilities.
• Portfolio Performance: The portfolio generated a net gain of $13.19 million from realized and unrealized changes for the six months ended June 30, 2012, compared to a net gain of $6.09 million in the prior year period.
• Liquidity: Cash and cash equivalents decreased from $15.32 million at December 31, 2011, to $9.51 million at June 30, 2012, reflecting investment activity and dividend payments.

Guidance, Outlook, and Risks

• Dividends: The Operating Company declared a third-quarter 2012 distribution of $0.34 per unit/share, payable September 28, 2012. NMFC and AIV Holdings intend to distribute substantially all of their taxable income to maintain Regulated Investment Company (RIC) status.
• Capital Raising: Subsequent to the period end, on July 17, 2012, NMFC completed a public offering of 5.25 million shares for gross proceeds of approximately $75.3 million.
• Credit Facility Amendments: In August 2012, the Holdings Credit Facility was increased to $185 million and the SLF Credit Facility to $200 million.
• Non-Accrual Status: The investment in ATI Acquisition Company (Education sector) remains on non-accrual status due to regulatory headwinds and inability to service interest. As of June 30, 2012, the aggregate cost basis was $5.92 million with a fair value of $1.75 million.
• Valuation Risks: A significant portion of the portfolio ($106.37 million or 14.2%) is classified as Level III (unobservable inputs), requiring significant management judgment for valuation.

Investor Verification Checklist

• ATI Acquisition Exposure: Verify the current status and potential recovery value of the non-accrual investment in ATI Acquisition Company, which represents a significant unrealized loss.
• Leverage Ratios: Confirm the Asset Coverage Ratio (237.15% as of June 30, 2012) remains compliant with BDC requirements and credit facility covenants.
• Dividend Sustainability: Assess whether Adjusted Net Investment Income ($20.7 million for the six months) is sufficient to cover the declared dividend rate of $0.34 per share on a quarterly basis.
• Level III Valuations: Review the specific valuation methodologies (EBITDA multiples, discounted cash flows) used for the $106.4 million in Level III assets to ensure consistency with market conditions.
• Expense Cap Compliance: Verify that administrative expenses remain within the $3.5 million cap for the period April 1, 2012, to March 31, 2013, noting that $397,901 in excess expenses were incurred in the first half of 2012.