NMFC

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2013, 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 at all levels of the capital structure for defensive growth companies. As of the reporting date, the portfolio consisted of 57 companies with a fair value of approximately $1.04 billion.

Key Financial Metrics

Debt Composition: The total debt consists of $215,000 under the SLF Credit Facility and $159,091 under the Holdings Credit Facility. The asset coverage ratio was 271.56%.

Material Changes vs. Prior Period

• Investment Income Growth: Total investment income for the nine months ended September 30, 2013, was $86.27 million, a 41% increase compared to $61.07 million in the same period of 2012. This was driven by larger invested balances from capital raises and leverage, as well as prepayment fees.
• Expense Increases: Net expenses increased to $38.44 million for the nine months ended September 30, 2013, from $29.38 million in the prior year. This increase was primarily due to higher management fees and interest expenses resulting from increased leverage and asset base.
• Realized Gains Decline: Net realized gains decreased to $9.52 million for the nine months ended September 30, 2013, compared to $14.59 million in the prior year period.
• Unrealized Appreciation Decline: Net change in unrealized appreciation decreased significantly to $2.52 million from $10.71 million in the prior year, reflecting market fluctuations and the reversal of cumulative unrealized gains on sold investments.
• Portfolio Composition: The portfolio shifted slightly, with Software (20.76%) and Business Services (17.40%) remaining the largest sectors. Floating-rate investments comprised 88.01% of the portfolio.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted that the increase in investment income was attributable to larger invested balances and prepayment fees. The decrease in unrealized appreciation was noted as a result of sales or repayments of investments where realized gains exceeded the reversal of cumulative unrealized gains.

Subsequent Events:

• On November 8, 2013, a fourth-quarter 2013 distribution of $0.34 per unit/share was declared.
• On October 17, 2013, NMFC completed a public offering of 3,000,000 shares and a secondary offering of 3,900,000 shares on behalf of AIV Holdings, raising net proceeds of $43.0 million for the Operating Company.
• On October 28, 2013, the Holdings Credit Facility was amended to increase the maximum borrowing capacity from $250 million to $280 million.

Risks and Contingencies:

• Credit Risk: The portfolio contains below-investment-grade debt. Two portfolio companies (ATI Acquisition Company and Ancora Acquisition LLC) were rated as Investment Rating 4 (substantially below expectations) due to regulatory constraints and underperformance. ATI Acquisition Company investments are on non-accrual status.
• Leverage Risk: The company utilizes leverage to the maximum extent permitted, which magnifies potential gains and losses and increases interest rate risk.
• Liquidity: Liquidity is generated through revolving credit facilities and cash flows. As of September 30, 2013, there were $10.5 million in unfunded commitments on revolving credit facilities and $52.5 million in bridge financing commitments.

Investor Verification Checklist

• Non-Accrual Status: Verify the status and potential recovery value of the ATI Acquisition Company investment, which is on non-accrual with a fair value of $0.34 million against a cost basis of $5.92 million.
• Expense Cap Compliance: Confirm that administrative and professional fees remain within the capped limits ($4.25 million for the period April 1, 2013, to March 31, 2014) and review the amount of expense waivers ($2.27 million for the nine months ended Sept 30, 2013).
• Capital Gains Incentive Fee: Note that $2.57 million of capital gains incentive fees were accrued on a hypothetical liquidation basis, though only approximately $0.94 million would be owed under the actual agreement terms if operations ceased.
• Debt Covenants: Review the asset coverage ratio (271.56%) to ensure continued compliance with credit facility covenants, particularly given the high leverage ratio.
• Dividend Sustainability: Assess the sustainability of the $0.34 quarterly distribution given the decline in unrealized appreciation and the reliance on interest income and realized gains.