NMFC

Business Context and Reporting Period

Company: New Mountain Finance Corporation (New Mountain Finance) and its operating subsidiary, New Mountain Finance Holdings, L.L.C. (NMF Holdings).

Reporting Period: Quarter ended June 30, 2011. This is the first quarter of operations following the Initial Public Offering (IPO) on May 19, 2011.

Structure: New Mountain Finance is a closed-end, non-diversified Business Development Company (BDC) and holding company. Its sole asset is an ownership interest in NMF Holdings. As of June 30, 2011, New Mountain Finance owned approximately 34.6% of NMF Holdings, while New Mountain Finance AIV Holdings Corporation (AIV Holdings) owned the remaining 65.4%.

Investment Strategy: The company focuses on sourcing and originating debt securities (first and second lien, mezzanine) and equity interests in defensive growth companies.

Key Financial Metrics

Material Changes and Operational Highlights

• Commencement of Operations: The company commenced operations on May 19, 2011, following an IPO of 7,272,727 shares at $13.75 per share and a concurrent private placement of 2,172,000 shares. There are no prior comparable periods for New Mountain Finance specifically.
• Immediate Unrealized Appreciation: Due to the IPO price ($13.75) being lower than the underlying net asset value of the Operating Company at the time of the offering, the company recorded an immediate unrealized appreciation of $6.22 million ($0.58 per share) allocated to New Mountain Finance.
• Portfolio Growth: NMF Holdings increased its portfolio fair value from $441.1 million at December 31, 2010, to $544.3 million at June 30, 2011, driven by new investments of approximately $244.7 million in the first six months of 2011.
• Expense Structure: Operating expenses for NMF Holdings increased significantly compared to the prior year due to the implementation of the new Investment Management Agreement post-IPO, which includes management and incentive fees not previously borne entirely by the predecessor entities.

Guidance, Outlook, and Risks

• Dividend Policy: The company intends to distribute approximately all of its portion of the Operating Company's adjusted net investment income quarterly.
  • Q2 2011 Distribution: Declared $0.27 per share, payable August 31, 2011.
  • Q3 2011 Distribution: Declared $0.29 per share, payable September 30, 2011.
• Liquidity: Liquidity is generated through revolving credit facilities, cash flows from operations, and potential follow-on equity offerings. As of June 30, 2011, New Mountain Finance had no cash on hand, as proceeds were invested in the Operating Company.
• Debt Facilities:
  • Holdings Credit Facility: $160 million capacity; $34.3 million outstanding.
  • SLF Credit Facility: $150 million capacity (increased to $175 million in July 2011); $126.9 million outstanding.
• Risk Factors:
  • U.S. Credit Rating Downgrade: The August 5, 2011 downgrade of the U.S. credit rating by S&P could increase borrowing costs and negatively impact the credit risk perception of the portfolio.
  • Interest Rate Risk: The portfolio contains floating-rate loans tied to LIBOR. A 100 basis point increase in rates could decrease net interest income by approximately 2.55%.
  • Valuation Risk: A significant portion of the portfolio (Level III assets) relies on unobservable inputs and management judgment for valuation.

Investor Verification Checklist

• Ownership Structure: Verify the 34.6% ownership stake of New Mountain Finance in NMF Holdings and the potential dilution if AIV Holdings exercises its right to exchange units for public shares.
• Expense Cap: Confirm the status of the $3 million expense cap for the first year of operations and how it impacts future expense ratios.
• Debt Covenants: Review compliance with asset coverage ratios and other covenants in the Holdings and SLF credit facilities, particularly given the recent macroeconomic volatility.
• Dividend Sustainability: Assess whether the declared dividends ($0.27 and $0.29) are fully covered by the Adjusted Net Investment Income, considering the step-up in cost basis adjustments.
• Portfolio Concentration: Analyze the concentration of the portfolio in specific industries (e.g., Software, Healthcare Services) and the impact of any single portfolio company's performance on the overall NAV.