NMFC

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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 sourcing and originating debt securities at all levels of the capital structure, primarily in defensive growth companies. NMFC and AIV Holdings are holding companies with no direct operations; their sole asset is their ownership interest in the Operating Company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased by approximately 67% to $19.0 million, driven by larger invested balances following the May 2011 IPO and increased leverage utilization.
• Expense Increase: Total operating expenses rose significantly to $9.1 million from $1.8 million in the prior year. This increase is primarily due to the implementation of the Investment Management Agreement post-IPO, resulting in new management fees ($2.5 million) and incentive fees ($3.4 million), alongside higher interest expenses due to increased debt levels.
• Portfolio Performance: The portfolio generated a net increase in capital of $23.7 million, compared to $16.4 million in Q1 2011. This was driven by a $12.7 million net change in unrealized appreciation, partially offset by a decrease in realized gains ($1.0 million vs. $5.9 million in Q1 2011).
• Leverage: Total debt increased to $326.9 million, with the Holdings Credit Facility at $151.9 million and the SLF Credit Facility fully drawn at $175.0 million.

Outlook, Risks, and Unusual Items

• Dividends: The board declared a Q1 2012 distribution of $0.32 per unit/share. Subsequently, on May 8, 2012, a Q2 distribution of $0.34 and a special distribution of $0.23 (related to realized gains from Lawson Software and Infor Lux Bond Company) were declared.
• Credit Facility Amendments: On May 8, 2012, both the Holdings and SLF Credit Facilities were amended to lower interest rate spreads by 0.25% and extend maturity dates by one year to October 2016.
• Non-Accrual Status: The Operating Company placed its original first lien position in ATI Acquisition Company on non-accrual status due to the portfolio company's inability to service interest payments. The investment had a cost basis of $4.3 million and a fair value of $0.4 million as of March 31, 2012.
• Valuation Risks: Approximately 13.6% of the portfolio ($103.2 million) is classified as Level III (unobservable inputs), requiring significant management judgment. The filing notes that fair values may fluctuate and do not necessarily represent amounts ultimately realized.
• Expense Cap Excess: The Operating Company incurred $549,804 in expenses in excess of the $3.0 million expense cap for the period, with $246,009 receivable from an affiliate.

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 impairment relative to cost basis.
• Expense Cap Compliance: Monitor the impact of expenses exceeding the $3.0 million cap and the reimbursement arrangements with affiliates.
• Leverage Utilization: Assess the sustainability of the current debt levels ($326.9 million) and the impact of interest rate fluctuations on net investment income, given the floating-rate nature of the credit facilities.
• Level III Valuations: Review the specific valuation methodologies and assumptions used for the $103.2 million in Level III assets, particularly given the lack of observable market data.
• Dividend Sustainability: Confirm that future distributions are supported by Adjusted Net Investment Income and that the company maintains its Regulated Investment Company (RIC) status.