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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended June 30, 2011

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 814-00832

 

 

NEW MOUNTAIN FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

(212) 730-0300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes o   No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

 

The number of shares of the registrant’s Common Stock, $.01 par value outstanding as of August 11, 2011 was 10,697,691.

 

 

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NEW MOUNTAIN FINANCE CORPORATION

 

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2011

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Statement of Assets and Liabilities as of June 30, 2011 (unaudited)	1
	Statement of Operations from May 19, 2011 (commencement of operations) to June 30, 2011 (unaudited)	2
	Statement of Changes in Net Assets from May 19, 2011 (commencement of operations) to June 30, 2011 (unaudited)	3
	Statement of Cash Flows from May 19, 2011 (commencement of operations) to June 30, 2011 (unaudited)	4
	Notes to Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
Appendix A	New Mountain Finance Holdings, L.L.C Form 10-Q	A-1
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	II-1
Item 1A.	Risk Factors	II-1
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	II-1
Item 3.	Defaults upon Senior Securities	II-2
Item 4.	Reserved	II-2
Item 5.	Other Information	II-2
Item 6.	Exhibits	II-2
	Signatures	II-4

 

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PART I. FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

New Mountain Finance Corporation

 

Statement of Assets and Liabilities

June 30, 2011

(unaudited)

 

Assets
Investment in New Mountain Finance Holdings, L.L.C., at fair value (cost $144,396,075)		$	152,442,298
Total assets		$	152,442,298
Net Assets
Common stock, par value $0.01 per share 10,697,691 shares issued and outstanding		106,977
Paid in capital in excess of par		144,289,098
Net unrealized appreciation		8,046,223
Total Net Assets		$	152,442,298
Number of shares oustanding		10,697,691
Net Asset Value Per Share		$	14.25

 

The accompanying notes are an integral part of these financial statements.

 

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New Mountain Finance Corporation

 

Statement of Operations

from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

Net investment income allocated from New Mountain Finance Holdings, L.L.C.
Interest income		$	2,423,593
Other income		105,921
Total expenses		(945,385		)
Net investment income allocated from New Mountain Finance Holdings, L.L.C.		1,584,129
Realized and unrealized gain (loss) allocated from New Mountain Finance Holdings, L.L.C.
Realized losses on investments		(139,087		)
Net change in unrealized appreciation (depreciation) of investments		380,661
Realized and unrealized gain (loss) allocated from New Mountain Finance Holdings, L.L.C.		241,574
Total net increase in net assets resulting from operations allocated from New Mountain Finance Holdings, L.L.C.		1,825,703
Unrealized appreciation in New Mountain Finance Holdings, L.L.C. resulting from public offering price		6,220,520
Net increase in net assets resulting from operations		$	8,046,223
Basic earnings per share		$	0.75
Weighted Average shares of common stock outstanding - basic (See Note 7)		10,697,691
Diluted earnings per share		$	0.17
Weighted average shares of common stock outstanding - diluted (See Note 7)		30,919,629

 

The accompanying notes are an integral part of these financial statements.

 

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New Mountain Finance Corporation

 

Statement of Changes in Net Assets

from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

Increase (Decrease) in net assets resulting from operations allocated from New Mountain Finance Holdings, L.L.C.:
Net investment income		$	1,584,129
Realized losses on investments		(139,087		)
Net change in unrealized appreciation (depreciation) of investments		380,661
Total net increase in net assets resulting from operations allocated from New Mountain Finance Holdings, L.L.C.		1,825,703
Unrealized appreciation in New Mountain Finance Holdings, L.L.C. resulting from public offering price		6,220,520
Total net increase in net assets resulting from operations		8,046,223
Capital Transactions
Proceeds from shares sold		129,864,996
Deferred Offering Costs allocated from New Mountain Finance Holdings, L.L.C.		(3,958,378		)
Contributions from Exchanged Shares		18,489,457
Total net increase in net assets resulting from capital transactions		144,396,075
Net increase in net assets		152,442,298
Net assets at beginning of period		—
Net assets at end of period		$	152,442,298

 

The accompanying notes are an integral part of these financial statements.

 

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New Mountain Finance Corporation

 

Statement of Cash Flows

from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

Cash flows from operating activities:
Net increase in net assets resulting from operations		$	8,046,223
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
Net investment income allocated from New Mountain Finance Holdings, L.L.C.		(1,584,129		)
Total realized and unrealized (gain) loss allocated from New Mountain Finance Holdings, L.L.C.		(241,574		)
Unrealized appreciation in New Mountain Finance Holdings, L.L.C. resulting from public offering price		(6,220,520		)
(Increase) decrease in operating assets:
Purchase of investment		(129,864,996		)
Net cash flows used in operating activities		(129,864,996		)
Cash flows from financing activities
Proceeds from shares sold		129,864,996
Net cash flows provided by financing activities		129,864,996
Net increase (decrease) in cash and cash equivalents		—
Cash and cash equivalents at the beginning of the period		—
Cash and cash equivalents at the end of the period		$	—
Non-cash financing activities:
New Mountain Guardian Partners, L.P. exchange of Operating Company units for shares		$	18,489,457
Deferred Offering Costs allocated from New Mountain Finance Holdings, L.L.C.		$	(3,958,378	)

 

The accompanying notes are an integral part of these financial statements.

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

1.         Formation and Business Purpose

 

New Mountain Finance Corporation (“New Mountain Finance”, the “Company”, “we”, “us”, or “our”) is a Delaware corporation that was originally incorporated on June 29, 2010.  New Mountain Finance is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”).  As such, the Company is obligated to comply with certain regulatory requirements.  New Mountain Finance intends to be treated, and intends to comply with the requirements to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”) commencing with its taxable year ending December 31, 2011.

 

On May 19, 2011, New Mountain Finance priced its initial public offering (the “IPO”) of 7,272,727 shares of common stock at a public offering price of $13.75 per share. Concurrently with the closing of the offering and at the public offering price of $13.75 per share, the Company sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital Group, L.L.C. in a separate private placement.

 

New Mountain Finance is a holding company with no direct operations of its own, and its sole asset is its ownership in New Mountain Finance Holdings, L.L.C. (the “Operating Company”).  The Operating Company is externally managed and has elected to be treated as a business development company under the 1940 Act.  As such, the Operating Company is obligated to comply with certain regulatory requirements.  The Operating Company intends to be treated as a partnership for federal income tax purposes for so long as it has at least two members.  The Operating Company, formerly known as New Mountain Guardian (Leveraged), L.L.C., was originally formed as a subsidiary of New Mountain Guardian AIV, L.P. (“Guardian AIV”) by New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates) in October 2008.  Guardian AIV was formed through an allocation of approximately $300 million of the $5.1 billion of commitments supporting New Mountain Partners III, L.P., a private equity fund managed by New Mountain Capital.  In February 2009, New Mountain Capital formed a co-investment vehicle, New Mountain Guardian Partners, L.P., comprising $20.4 million of commitments.  New Mountain Guardian (Leveraged), L.L.C. and New Mountain Guardian Partners, L.P., together with their respective direct and indirect wholly-owned subsidiaries, are defined as the “Predecessor Entities.”

 

New Mountain Finance entered into a joinder agreement with respect to the amended and restated limited liability company agreement of the Operating Company, pursuant to which New Mountain Finance was admitted as a member of the Operating Company and acquired from the Operating Company, with the gross proceeds of the IPO and the concurrent private placement, common membership units (“units”) of the Operating Company (the number of units are equal to the number of shares of New Mountain Finance’s common stock sold in the IPO and the concurrent private placement).  In connection with New Mountain Finance’s IPO and through a series of transactions, the Operating Company owns all of the operations of the Predecessor Entities, including all of the assets and liabilities related to such operations.

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

Guardian AIV was the parent of the Operating Company prior to the IPO and as a result of the offering obtained units in the Operating Company.   Guardian AIV contributed its units in the Operating Company to its newly formed subsidiary, New Mountain Finance AIV Holdings Corporation (“AIV Holdings”), in exchange for common stock of AIV Holdings.  AIV Holdings has the right to exchange all or any portion of its units in the Operating Company for shares of New Mountain Finance’s common stock on a one-for-one basis.  At June 30, 2011, New Mountain Finance and AIV Holdings own approximately 34.6% and 65.4%, respectively, of the units of the Operating Company.

 

The diagram below depicts our current organizational structure.

 

 

The Company’s investment objective is to generate current income and capital appreciation through the Operating Company by the sourcing and originating of debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. In some cases, the Operating Company’s investments may also include equity interests. The primary focus is in the debt of defensive growth companies, which are defined as generally exhibiting the following characteristics: (i) sustainable secular growth drivers, (ii) high

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

barriers to competitive entry, (iii) high free cash flow after capital expenditure and working capital needs, (iv) high returns on assets and (v) opportunities for niche market dominance.

 

2.         Summary of Significant Accounting Policies

 

Basis of accounting — The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The Company does not consolidate the Operating Company.  New Mountain Finance applies investment company master-feeder financial statement preparation, as described in Accounting Standards Codification 946, Financial Services — Investment Companies, (“ASC 946”) to its interest in the Operating Company (or the “Master Fund”).  New Mountain Finance observes that it is industry practice to follow the presentation prescribed for a Master Fund-Feeder fund structure in ASC 946 in instances in which a Master Fund is owned by more than one Feeder Fund and that such presentation provides stockholders of New Mountain Finance with a clearer depiction of its investment in the Master Fund.  The Operating Company’s Form 10-Q for the quarter ended June 30, 2011 is attached to this report and should be read in conjunction with that of New Mountain Finance.

 

Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the period ending December 31, 2011.

 

Investments — New Mountain Finance is a holding company with no direct operations of its own, and its sole asset is its ownership in the Operating Company.  New Mountain Finance’s investment in the Operating Company is carried at fair value and represents the pro-rata interest in the net assets of the Operating Company as of the applicable reporting date.  New Mountain Finance values its ownership interest on a quarterly basis, or more frequently if required under the 1940 Act.   See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

Cash and cash equivalents — Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less.

 

Revenue, Expenses, and Capital Gains (Losses) — At each quarterly valuation date, the Operating Company’s investment income, expenses, net realized gains (losses), and net increase (decrease) in unrealized appreciation (depreciation) are allocated to New Mountain Finance based on its pro-rata interest in the net assets of the Operating Company.  This is recorded on New Mountain Finance’s Statement of Operations.  New Mountain Finance used the proceeds from its IPO and concurrent private placement to purchase units in the Operating Company at $13.75 per unit (its IPO price per share).  At the IPO date, $13.75 per unit represented a discount to the actual net asset value per unit of the Operating

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

Company.  As a result, New Mountain Finance experienced immediate unrealized appreciation on its investment in the Operating Company equal to the difference between the cost of $13.75 per unit and the actual net asset value per unit.  This unrealized appreciation is shown separately on the Statement of Operations of New Mountain Finance.  See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

All expenses, including those of New Mountain Finance, are paid and recorded by the Operating Company, and allocated to New Mountain Finance based on pro-rata ownership interest.  In addition, the Operating Company paid all of the offering costs related to the IPO.  New Mountain Finance has recorded its portion of the offering costs as a direct reduction to net assets and the cost of its investment in the Operating Company.

 

Income taxes —  New Mountain Finance intends to elect to be treated, and intends to comply with the requirements to qualify annually, as a RIC under subchapter M of the Code commencing with its taxable year ending on December 31, 2011.  As a RIC, the Company will not be subject to federal income tax on the portion of taxable income and gains timely distributed to stockholders; therefore, no provision for income taxes has been recorded.

 

To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income and net capital gains, as defined by the Code.  Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes.

 

The Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes, in a timely manner as required by the Code, an amount at least equal to the sum of (1) 98% of its net ordinary income earned for the calendar year and (2) 98.2% of its capital gain net income for the one-year period ending October 31 in the calendar year.

 

The Company has adopted the Income Taxes topic of the Codification (“ASC 740”).  ASC 740 provides guidance for how uncertain income tax positions should be recognized, measured, and disclosed in the financial statements.  Based on its analysis, the Company has determined that the adoption of ASC 740 did not have a material impact to the Company’s financial statements.

 

Dividends — Dividends and distributions to common stockholders are recorded on the record date. Quarterly dividend payments are determined by the board of directors.  New Mountain Finance intends to distribute approximately all of its portion of the Operating Company’s adjusted net investment income on a quarterly basis and substantially all of its portion of the Operating Company’s taxable income on an annual basis, except that it may retain certain net capital gains for reinvestment in units of the Operating Company.  See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

New Mountain Finance has adopted a dividend reinvestment plan that provides on behalf of its stockholders for reinvestment of any distributions declared, unless a stockholder elects to receive cash. Cash distributions reinvested in additional shares of New Mountain Finance’s common stock will be automatically reinvested by New Mountain Finance in units of the Operating Company. New Mountain Finance will use only newly issued shares to implement the plan if the price at which newly-issued shares are to be credited is equal to or greater than 110% of the last determined net asset value of the shares. Under such circumstances, the number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the market price per share of New Mountain Finance’s common stock at the close of regular trading on the New York Stock Exchange (“NYSE”) on the distribution payment date. Market price per share on that date will be the closing price for such shares on the NYSE or, if no sale is reported for such day, the average of their electronically reported bid and asked prices. If New Mountain Finance uses newly issued shares to implement the plan, New Mountain Finance will receive, on a one-for-one basis, additional units of the Operating Company in exchange for cash distributions that are reinvested in shares of New Mountain Finance’s common stock under the dividend reinvestment plan. If New Mountain Finance’s common stock price is less than 110% of the last determined net asset value of the shares, New Mountain Finance will either issue new shares or instruct the plan administrator to purchase shares in the open market to satisfy the additional shares required. Shares purchased in open market transactions by the plan administrator will be allocated to a stockholder based on the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased in the open market. The number of shares of New Mountain Finance’s common stock to be outstanding after giving effect to payment of the distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of New Mountain Finance’s stockholders have been tabulated.

 

Use of estimates — The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Changes in the economic environment, financial markets, and other metrics used in determining these estimates could cause actual results to differ from the estimates used, and the differences could be material.

 

3.         Agreements

 

On May 19, 2011, New Mountain Finance entered into a joinder agreement with respect to the amended and restated limited liability agreement of the Operating Company pursuant to which New Mountain Finance was admitted as a member of the Operating Company and agreed to acquire from the Operating Company a number of units of the Operating Company equal to the number of shares of common stock outstanding of New Mountain Finance.

 

The Operating Company entered into an Investment Management Agreement with New Mountain Finance Advisers BDC, L.L.C. (the “Investment Advisor”).   Under the

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

Investment Management Agreement, the Investment Adviser provides investment advisory services to the Operating Company. For providing these services, the Investment Adviser receives a fee from the Operating Company, consisting of two components — a base management fee and an incentive fee.  See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

New Mountain Finance and the Operating Company have entered into an Administration Agreement with New Mountain Finance Administration, L.L.C. (the “Administrator”) under which the Administrator provides administrative services. The Administrator oversees our financial records, prepares reports filed with the SEC, generally monitors the payment of our expenses, and watches the performance of administrative and professional services rendered by others. The Operating Company will reimburse the Administrator for New Mountain Finance’s and the Operating Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to New Mountain Finance and the Operating Company under the Administration Agreement.  During the first year of operations, the Operating Company has capped its direct and indirect expenses at $3 million.

 

New Mountain Finance and the Operating Company have also entered into a license agreement with New Mountain Capital, pursuant to which New Mountain Capital has agreed to grant New Mountain Finance and the Operating Company a non-exclusive, royalty-free license to use the New Mountain name. Under this agreement, subject to certain conditions, New Mountain Finance and the Operating Company will have a right to use the New Mountain name, for so long as the Investment Adviser or one of its affiliates remains the investment adviser of the Operating Company.  Other than with respect to this limited license, New Mountain Finance will have no legal right to the New Mountain name.

 

4.         Regulation

 

The Company intends to elect to be treated, and intends to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code.  In order to qualify as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year.  The Company, among other things, intends to make and continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal, state, and local income taxes (excluding excise taxes which may be imposed under the Code).

 

Additionally, as a business development company, both New Mountain Finance and the Operating Company must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of its total assets are qualifying assets (with certain limited exceptions).

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

5.         Related Parties

 

New Mountain Finance has entered into a number of business relationships with affiliated or related parties, including the following:

 

·      New Mountain Finance and the Operating Company have entered into an Administration Agreement with the Administrator, a wholly-owned subsidiary of New Mountain Capital.  The Administrator arranges office space for New Mountain Finance and the Operating Company and provides office equipment and administrative services necessary to conduct their respective day-to-day operations pursuant to the Administration Agreement. The Operating Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations to the Operating Company and New Mountain Finance under the Administration Agreement, including rent, the fees and expenses associated with performing administrative, finance, and compliance functions, and the compensation of the Operating Company’s chief financial officer and chief compliance officer and their respective staffs.  During the first year of operations, the Operating Company has capped its direct and indirect expenses at $3 million.

·      Together, New Mountain Finance and AIV Holdings own all the outstanding units of the Operating Company.  As of June 30, 2011, New Mountain Finance and AIV Holdings own approximately 34.6% and 65.4%, respectively, of the units of the Operating Company.

·      New Mountain Finance and the Operating Company have entered into a royalty-free license agreement with New Mountain Capital, pursuant to which New Mountain Capital has agreed to grant New Mountain Finance and the Operating Company a non-exclusive, royalty-free license to use the name ‘‘New Mountain’’.

 

Concurrently with the IPO, New Mountain Finance sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in a separate private placement.

 

6.         Commitments and Contingencies

 

In the normal course of business, the Company may enter into contracts that contain a variety of representations and warranties and which may provide general indemnifications.

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

7.         Stockholders’ Equity

 

The table below illustrates the effect of certain transactions on our capital accounts:

 

							Paid in Capital						Total
		Common Stock					in Excess			Net Unrealized			Stockholders’
		Shares		Par Amount			of Par			Appreciation			Equity
Balance at December 31, 2010		—		$	—		$	—		$	—		$	—
Issuances of common stock in the IPO(1)		7,272,727		72,727			99,927,269			—			99,999,996
Issuances of common stock in private placement(2)		2,172,000		21,720			29,843,280			—			29,865,000
Issuances of common stock to New Mountain Guardian Partners, L.P.(3)		1,252,964		12,530			18,476,927			—			18,489,457
Deferred Offering Costs allocated from New Mountain Finance Holdings, L.L.C.		—		—			(3,958,378		)	—			(3,958,378		)
Net increase in stockholders’ equity resulting from operations		—		—			—			8,046,223			8,046,223
Balance at June 30, 2011		10,697,691		$	106,977		$	144,289,098		$	8,046,223		$	152,442,298

 

(1)  On May 19, 2011, New Mountain Finance priced its initial public offering of 7,272,727 shares of common stock at a public offering price of $13.75 per share.

(2)  Concurrently with the closing of the IPO and at the public offering price of $13.75 per share, the Company sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in a separate private placement.

(3)  On May 19, 2011, New Mountain Finance issued 1,252,964 shares of  common stock to New Mountain Guardian Partners, L.P. for their respective ownership interest in the Predecessor Entities.

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

8.         Earnings Per Share

 

The following information sets forth the computation of basic and diluted net increase in stockholders’ equity per share resulting from operations for the period May 19, 2011 to June 30, 2011:

 

		May 19, 2011 (commencement
		of operations) to June 30, 2011
Numerator for basic earnings per share:		$	8,046,223
Denominator for basic weighted average share:		10,697,691
Basic net increase in net assets resulting from operations:		$	0.75
Numerator for diluted earnings per share (a):		$	5,276,851
Denominator for diluted weighted average share (b):		30,919,629
Diluted net increase in net assets resulting from operations:		$	0.17

 

(a) Includes full income at the Operating Company for the period.  Does not include unrealized appreciation in the Operating Company resulting from the initial public offering.

(b) Assumes AIV Holdings exchanges its units in the Operating Company for public shares of New Mountain Finance on May 19, 2011 (see Note 1, Formation and Business Purpose)

 

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New Mountain Finance Corporation

 

Notes to the Financial Statements

As of June 30, 2011 and for the period from May 19, 2011 (commencement of operations) to June 30, 2011

(unaudited)

 

9.         Financial Highlights

 

The following information sets forth the financial highlights for the period May 19, 2011 to June 30, 2011.  The ratios to average net assets have been annualized.

 

		Period Ended
		June 30, 2011
Per share data:
Net asset value, beginning of period		$	13.50
Net increase in net assets resulting from operations allocated from New Mountain Finance Holdings, L.L.C.:
Net investment income		0.15
Net realized and unrealized gain (loss)		0.02
Total net increase		0.17
Unrealized appreciation in New Mountain Finance Holdings, L.L.C. resulting from public offering price		0.58
Net asset value, end of period		$	14.25
Total Return (a)		(5.93		)%
Average net assets for the period		$	151,529,446
Ratio to average net assets:
Total expenses		5.42		%
Net investment income		9.09		%

 

(a) Total Return is calculated as the ending market price per share as of June 30, 2011 less the average initial cost basis per share over the average initial cost basis per share.

 

10.      Recent Accounting Standards Updates

 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”), which provides clarification about how to measure fair value and improves comparability of fair value measurements presented and disclosed in accordance with U.S. GAAP and International Financial Reporting Standards.  ASU 2011-04 is effective for annual periods beginning after December 15, 2011. The Company is currently assessing the impact that adoption of ASU 2011-04 will have on the financial statements.

 

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Item 2.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in the report.  See ‘‘Risk Factors’’ for a discussion of the uncertainties, risks and assumptions associated with these statements.

 

Forward-Looking Statements

 

The information contained in this section should be read in conjunction with the financial data and financial statements and notes thereto appearing elsewhere in this quarterly report.  In addition, some of the statements in this report (including in the following discussion) constitute forward-looking statements, which relate to future events or the future performance or financial condition of New Mountain Finance Corporation (“New Mountain Finance”, the “Company”, “we”, “us”, or “our”).  The forward-looking statements contained in this report involve a number of risks and uncertainties, including:

 

·                  statements concerning the impact of a protracted decline in the liquidity of credit markets;

the general economy, including interest and inflation rates, and its impact on the industries in which New Mountain Finance Holdings, L.L.C. (the “Operating Company”) invests;

·                  the ability of the Operating Company’s portfolio companies to achieve their objectives;

the Operating Company’s ability to make investments consistent with its investment objectives, including with respect to the size, nature and terms of our investments;

·                  the ability of New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) or its affiliates to attract and retain highly talented professionals;

·                  actual and potential conflicts of interest with the Investment Adviser and other affiliates of New Mountain Capital Group, L.L.C.;

the impact of New Mountain Finance’s ownership of a minority of the outstanding common membership units of the Operating Company, New Mountain Finance’s only asset; and

·                  other factors, including those discussed in our Registration Statement on Form N-2, filed with the Securities and Exchange Commission (the “SEC”) on May 16, 2011.

 

We use words such as “anticipates”, “believes”, “expects”, “intends”, “will”, “should”, “may” and similar expressions to identify forward-looking statements.  Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” section in our Registration Statement on Form N-2, filed with the SEC on May 16, 2011.

 

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements.  Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Overview

 

New Mountain Finance Corporation (“New Mountain Finance”, the “Company”, “we”, “us”, or “our”) is a Delaware corporation that was originally incorporated on June 29, 2010.  New Mountain Finance is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”).  As such, the Company is obligated to comply with certain regulatory requirements.  New Mountain Finance intends to be treated, and intends to comply with the requirements to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”) commencing with its taxable year ending December 31, 2011.

 

On May 19, 2011, New Mountain Finance priced its initial public offering (the “IPO”) of 7,272,727 shares of common stock at a public offering price of $13.75 per share. Concurrently with the closing of the offering and at the public offering price of $13.75 per share, the Company sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital Group, L.L.C. in a separate private placement.

 

New Mountain Finance is a holding company with no direct operations of its own, and its sole asset is its ownership in New Mountain Finance Holdings, L.L.C. (the “Operating Company”).  The Operating Company is externally managed and has elected to be treated as a business development company under the 1940 Act.  As such, the Operating Company is obligated to comply with certain regulatory requirements.  The Operating Company intends to be treated as a partnership for federal income tax purposes for so long as it has at least two members.  The Operating Company, formerly known as New Mountain Guardian (Leveraged), L.L.C., was originally formed as a subsidiary of New Mountain Guardian AIV, L.P. (“Guardian AIV”) by New Mountain Capital (defined as New Mountain Capital Group, L.L.C. and its affiliates) in October 2008.  Guardian AIV was formed through an allocation of approximately $300 million of the $5.1 billion of commitments supporting New Mountain Partners III, L.P., a private equity fund managed by New Mountain Capital.  In February 2009, New Mountain Capital formed a co-investment vehicle, New Mountain Guardian Partners, L.P., comprising $20.4 million of commitments.  New Mountain

 

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Guardian (Leveraged), L.L.C. and New Mountain Guardian Partners, L.P., together with their respective direct and indirect wholly-owned subsidiaries, are defined as the “Predecessor Entities.”

 

The following structure was designed to generally prevent New Mountain Finance from being allocated taxable income in respect of unrecognized gains in the Predecessor Entities’ assets, with the result that any distributions made to New Mountain Finance’s stockholders that are attributable to such gains generally will not be treated as taxable dividends.

 

New Mountain Finance entered into a joinder agreement with respect to the amended and restated limited liability company agreement of the Operating Company, pursuant to which New Mountain Finance was admitted as a member of the Operating Company and acquired from the Operating Company, with the gross proceeds of the IPO and the concurrent private placement, common membership units (“units”) of the Operating Company (the number of units are equal to the number of shares of New Mountain Finance’s common stock sold in the IPO and the concurrent private placement).  In connection with New Mountain Finance’s IPO and through a series of transactions, the Operating Company owns all of the operations of the Predecessor Entities, including all of the assets and liabilities related to such operations.

 

Guardian AIV was the parent of the Operating Company prior to the IPO and as a result of the offering obtained units in the Operating Company.  Guardian AIV contributed its units in the Operating Company to its newly formed subsidiary, New Mountain Finance AIV Holdings Corporation (“AIV Holdings”), in exchange for common stock of AIV Holdings.  AIV Holdings has the right to exchange all or any portion of its units in the Operating Company for shares of New Mountain Finance’s common stock on a one-for-one basis.  At June 30, 2011, New Mountain Finance and AIV Holdings own approximately 34.6% and 65.4%, respectively, of the units of the Operating Company.

 

The diagram below depicts our current organizational structure.

 

 

The Company’s investment objective is to generate current income and capital appreciation through the Operating Company by the sourcing and originating of debt securities at all levels of the capital structure, including first and second lien debt, notes, bonds and mezzanine securities. In some cases, the Operating Company’s investments may also include equity interests. The primary focus is in the debt of defensive growth companies, which are defined as generally exhibiting the following characteristics: (i) sustainable secular growth drivers, (ii) high barriers to

 

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competitive entry, (iii) high free cash flow after capital expenditure and working capital needs, (iv) high returns on assets and (v) opportunities for niche market dominance.

 

As of June 30, 2011, the Operating Company’s net asset value was $440.6 million and its portfolio had a fair value of approximately $544.3 million in 47 portfolio companies, with a weighted average Unadjusted and Adjusted Yield to Maturity of approximately 10.4% and 12.7%, respectively.  “Adjusted Yield to Maturity’’ assumes that the investments in the Operating Company’s portfolio are purchased at fair value on June 30, 2011 and held until their respective maturities with no prepayments or losses and are exited at par at maturity. This calculation excludes the impact of existing leverage, except for the non-recourse debt of New Mountain Finance SPV Funding, L.L.C (“NMF SLF”).  NMF SLF is treated as a fully levered asset of the Operating Company, with NMF SLF’s net asset value being included for yield calculation purposes. The actual yield to maturity may be higher or lower due to the future selection of LIBOR contracts by the individual companies in the portfolio or other factors. References to “Unadjusted Yield to Maturity” have the same assumptions as Adjusted Yield to Maturity except that NMF SLF is not treated as a fully levered asset of the Operating Company, but rather the assets themselves are consolidated into the Operating Company.

 

Recent Developments

 

On August 10, 2011, Daniel Hébert and Adam J. Collins were appointed to the board of directors of New Mountain Finance, the Operating Company, and AIV Holdings.

 

Dividend

 

On August 10, 2011, the Operating Company’s board of directors, and subsequently New Mountain Finance’s board of directors, declared a second quarter 2011 distribution of $0.27 per unit/share payable on August 31, 2011 to holders of record as of August 22, 2011.

 

Additionally, on August 10, 2011, the Operating Company’s board of directors, and subsequently New Mountain Finance’s board of directors, declared a third quarter 2011 distribution of $0.29 per unit/share payable on September 30, 2011 to holders of record as of September 15, 2011.

 

Because New Mountain Finance is a holding company, all distributions on its common stock will be paid from distributions received from the Operating Company. The Operating Company intends to make distributions to its members that will be sufficient to enable New Mountain Finance to pay quarterly distributions to its stockholders and to obtain and maintain its status as a RIC. The distribution per unit from the Operating Company will equal the dividend per share of New Mountain Finance. New Mountain Finance intends to distribute approximately all of its portion of the Operating Company’s adjusted net investment income on a quarterly basis and substantially all of its portion of the Operating Company’s taxable income on an annual basis, except that it may retain certain net capital gains for reinvestment.  See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

Critical Accounting Policies

 

Basis of Accounting

 

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates.

 

The Company does not consolidate the Operating Company.  New Mountain Finance applies investment company master-feeder financial statement preparation, as described in Accounting Standards Codification 946, Financial Services — Investment Companies, (“ASC 946”) to its interest in the Operating Company (or the “Master Fund”).  New Mountain Finance believes that it is industry practice to follow the presentation prescribed for a Master Fund-Feeder fund structure in ASC 946 in instances in which a Master Fund is owned by more than one Feeder Fund and that such presentation provides stockholders of New Mountain Finance with a clearer depiction of its investment in the Master Fund.  The Operating Company’s Form 10-Q for the quarter ended June 30, 2011 is attached to this report and should be read in conjunction with that of New Mountain Finance.

 

Valuation of Portfolio Investments

 

The Operating Company conducts the valuation of its assets, pursuant to which its net asset value and consequently New Mountain Finance’s net asset value is determined, at all times consistent with GAAP and the 1940 Act.

 

New Mountain Finance is a holding company with no direct operations of its own, and its sole asset is its ownership in the Operating Company.  New Mountain Finance’s investment in the Operating Company is carried at fair value and represents the pro-rata interest in the net assets of the Operating Company as of the applicable reporting date.  New Mountain Finance values its ownership interest on a quarterly basis, or more frequently if required under the 1940 Act.   See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

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Revenue Recognition

 

At each quarterly valuation date, the Operating Company’s investment income, expenses, net realized gains (losses), and net increase (decrease) in unrealized appreciation (depreciation) are allocated to New Mountain Finance based on its pro-rata interest in the net assets of the Operating Company.  This is recorded on New Mountain Finance’s Statement of Operations.  New Mountain Finance used the proceeds from its IPO and concurrent private placement to purchase units in the Operating Company at $13.75 per unit (its IPO price per share).  At the IPO date, $13.75 per unit represented a discount to the actual net asset value per unit of the Operating Company.  As a result, New Mountain Finance experienced immediate unrealized appreciation on its investment in the Operating Company equal to the difference between the cost of $13.75 per unit and the actual net asset value per unit.  This unrealized appreciation is shown separately on the Statement of Operations of New Mountain Finance.  See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

All expenses, including those of New Mountain Finance, are paid and recorded by the Operating Company, and allocated to New Mountain Finance based on pro-rata ownership interest.

 

Results of Operations

 

As a result of the Master Fund-Feeder fund structure, New Mountain Finance’s results of operations are a function of their pro-rata ownership interest in the Operating Company.  Additionally, New Mountain Finance commenced operations on May 19, 2011 and therefore has no comparative periods of results of operations.  See the Operating Company’s Management Discussion and Analysis of Financial Condition and Results of Operations included in this filing for further details.

 

Liquidity and Capital Resources

 

On May 19, 2011, New Mountain Finance priced its IPO of 7,272,727 shares of common stock at a public offering price of $13.75 per share. Concurrently with the closing of the offering and at the public offering price of $13.75 per share, the Company sold an additional 2,172,000 shares of its common stock to certain executives and employees of, and other individuals affiliated with, New Mountain Capital in a separate private placement.

 

The Company’s liquidity is generally expected to be generated through periodic follow-on equity offerings.  The primary use of any funds raised in the future is expected to be for investments in the Operating Company and cash distributions to our stockholders or for other general corporate purposes.

 

At June 30, 2011, we had no cash and cash equivalents. Cash used in operating activities from May 19, 2011 (commencement of operations) to June 30, 2011 was approximately $(129.9) million.

 

The Operating Company’s liquidity is generated and generally available through advances from the revolving credit facilities, from cash flows from operations, investment sales of liquid assets, repayments of senior and subordinated loans, income earned on investments and cash equivalents, and, we expect, through periodic follow-on equity offerings of New Mountain Finance.

 

Distributions and Dividends

 

On August 10, 2011, the Operating Company’s board of directors, and subsequently New Mountain Finance’s board of directors, declared a second quarter 2011 distribution of $0.27 per unit/share payable on August 31, 2011 to holders of record as of August 22, 2011.

 

Additionally, on August 10, 2011, the Operating Company’s board of directors, and subsequently New Mountain Finance’s board of directors, declared a third quarter 2011 distribution of $0.29 per unit/share payable on September 30, 2011 to holders of record as of September 15, 2011.

 

Tax characteristics of all dividends paid by New Mountain Finance will be reported to stockholders on Form 1099 after the end of the calendar year. Future quarterly dividends, if any, for both the Operating Company and New Mountain Finance will be determined by the respective board of directors.

 

Because New Mountain Finance is a holding company, distributions will be paid on its common stock from distributions received from the Operating Company. The Operating Company intends to make distributions to its members that will be sufficient to enable New Mountain Finance to pay quarterly distributions to its stockholders and to obtain and maintain its status as a RIC. The distribution per unit from the Operating Company will equal the dividend per share of New Mountain Finance. New Mountain Finance intends to distribute approximately all of its portion of the Operating Company’s adjusted net investment income on a quarterly basis and substantially all of its portion of the Operating Company’s taxable income on an annual basis, except that it may retain certain net capital gains for reinvestment.  See the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing for further details.

 

New Mountain Finance maintains an “opt out” dividend reinvestment plan for our common stockholders. As a result, if New Mountain Finance declares a dividend, then New Mountain Finance stockholders’ cash dividends will be automatically reinvested in additional shares of the New Mountain Finance’s common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends.  Cash dividends reinvested in additional shares of New Mountain Finance’s common stock will be automatically reinvested by New Mountain Finance in the Operating Company in exchange for additional units of the Operating Company.

 

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Related Parties

 

New Mountain Finance has entered into a number of business relationships with affiliated or related parties, including the following:

 

·                  New Mountain Finance and the Operating Company have entered into an Administration Agreement with the Administrator, a wholly-owned subsidiary of New Mountain Capital.  The Administrator arranges office space for New Mountain Finance and the Operating Company and provides office equipment and administrative services necessary to conduct their respective day-to-day operations pursuant to the Administration Agreement. The Operating Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations to the Operating Company and New Mountain Finance under the Administration Agreement, including rent, the fees and expenses associated with performing administrative, finance, and compliance functions, and the compensation of the Operating Company’s chief financial officer and chief compliance officer and their respective staffs.  During the first year of operations, the Operating Company has capped its direct and indirect expenses at $3 million.

·                  Together, New Mountain Finance and AIV Holdings own all the outstanding units of the Operating Company.  As of June 30, 2011, New Mountain Finance and AIV Holdings own approximately 34.6% and 65.4%, respectively, of the units of the Operating Company.

·      New Mountain Finance and the Operating Company have entered into a royalty-free license agreement with New Mountain Capital, pursuant to which New Mountain Capital has agreed to grant New Mountain Finance and the Operating Company a non-exclusive, royalty-free license to use the name ‘‘New Mountain’’.

 

In addition, New Mountain Finance and the Operating Company have adopted a formal code of ethics that governs the conduct of their respective officers and directors. These officers and directors also remain subject to the duties imposed by the 1940 Act, the Delaware General Corporation Law and the Delaware Limited Liability Company Act.

 

Item 3.            Quantitative and Qualitative Disclosure about Market Risk

 

See the Quantitative and Qualitative Disclosure about Market Risk in the Operating Company’s Form 10-Q for the quarter ended June 30, 2011 included in this filing.

 

Item 4.            Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

As of June 30, 2011 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Act of 1934, as amended). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic Securities and Exchange Commission (“SEC”) filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

 

(b) Changes in Internal Controls Over Financial Reporting

 

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the second quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

 

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APPENDIX A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2011
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 814-00839

 

 

NEW MOUNTAIN FINANCE HOLDINGS, L.L.C

(Exact name of registrant as specified in its charter)

 

 

 

 

(212) 730-0300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes o  No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The number of the registrant’s common membership units outstanding as of August 11, 2011 was 30,919,629.

 

 

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NEW MOUNTAIN FINANCE HOLDINGS, L.L.C.

 

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2011

TABLE OF CONTENTS

 

		PAGE
PART I. FINANCIAL INFORMATION		A-3
Item 1.	Financial Statements	A-3
	Consolidated Statements of Assets, Liabilities and Members’ Capital as of June 30, 2011 (unaudited) and December 31, 2010	A-3
	Consolidated Statements of Operations for the three and six months ended June 30, 2011 (unaudited) and June 30, 2010 (unaudited)	A-4
	Consolidated Statements of Changes in Members’ Capital for the six months ended June 30, 2011 (unaudited) and June 30, 2010 (unaudited)	A-5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 (unaudited) and June 30, 2010 (unaudited)	A-6
	Consolidated Schedule of Investments as of June 30, 2011 (unaudited)	A-7
	Consolidated Schedule of Investments as of December 31, 2010	A-10
	Notes to Consolidated Financial Statements (unaudited)	A-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	A-31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	A-42
Item 4.	Controls and Procedures	A-42
PART II. OTHER INFORMATION		A-43
Item 1.	Legal Proceedings	A-43
Item 1A.	Risk Factors	A-43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	A-43
Item 3.	Defaults upon Senior Securities	A-43
Item 4.	Reserved	A-43
Item 5.	Other Information	A-43
Item 6.	Exhibits	A-43
	Signatures	A-46

 

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PART I. FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

New Mountain Finance Holdings, L.L.C.

 

Consolidated Statements of Assets, Liabilities and Members’ Capital

 

		June 30, 2011			December 31, 2010
		(unaudited)
Assets
Investments, at fair value (cost $524,049,396 and $414,308,823 respectively)		$	544,336,397		$	441,057,840
Cash equivalents, at value (cost $60,000,067 and $0 respectively)		59,999,970			—
Cash		17,850,716			10,744,082
Interest receivable		4,046,499			3,007,787
Deferred credit facility costs (net of accumulated amortization of $381,192 and $69,909 respectively)		3,596,057			1,880,120
Deferred offering costs		—			3,528,110
Other assets		760,367			5,842
Total assets		$	630,590,006		$	460,223,781
Liabilities
SLF credit facility		126,917,448			56,936,000
Holdings credit facility		34,300,000			59,696,938
Payable for unsettled securities purchased		22,885,720			94,462,500
Interest payable		1,092,341			813,192
Management fee payable		807,509			—
Incentive fee payable		504,393			—
Payable to affiliates		—			2,531,319
Other liabilities		3,477,299			3,856,571
Total liabilities		189,984,710			218,296,520
Members’ Capital		440,605,296			241,927,261
Total liabilities and members’ capital		$	630,590,006		$	460,223,781
Outstanding Common Membership Units (a)			30,919,629
Capital per unit (a)		$	14.25

 

(a)   Fund was not unitized as of December 31, 2010.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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New Mountain Finance Holdings, L.L.C.

 

Consolidated Statements of Operations

 

(unaudited)

 

		Three months ended						Six months ended
		June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Investment income
Interest income		$	12,810,147		$	8,331,777		$	23,978,194		$	17,219,965
Other income		306,144			265,192			349,817			453,934
Total investment income		13,116,291			8,596,969			24,328,011			17,673,899
Expenses
Interest and other credit facility expenses		1,534,147			556,046			3,080,900			1,221,963
Management fee		773,509			17,749			807,509			35,498
Incentive fee		504,393			—			504,393			—
Professional fees (net of reimbursable expenses of $130,186)		516,678			141,307			569,834			193,342
Administrative expenses (net of reimbursable expenses of $180,255)		62,610			84,183			203,418			196,679
Other general and administrative expenses		170,712			21,173			178,568			41,700
Total expenses		3,562,049			820,458			5,344,622			1,689,182
Net investment income		9,554,242			7,776,511			18,983,389			15,984,717
Realized gains on investments		6,659,833			8,249,823			12,552,163			29,193,602
Net change in unrealized (depreciation) appreciation of investments		(7,559,450		)	(13,598,102		)	(6,462,113		)	(16,404,095		)
Net increase in capital resulting from operations		$	8,654,625		$	2,428,232		$	25,073,439		$	28,774,224

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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New Mountain Finance Holdings, L.L.C.

 

Consolidated Statements of Changes in Members’ Capital

(unaudited)

 

		Six months ended			Six months ended
		June 30, 2011			June 30, 2010
Increase (Decrease) in members’ capital resulting from operations:
Net investment income		$	18,983,389		$	15,984,717
Realized gains on investments		12,552,163			29,193,602
Net change in unrealized (depreciation) appreciation of investments		(6,462,113		)	(16,404,095		)
Net increase (decrease) in members’ capital resulting from operations		25,073,439			28,774,224
Distributions		(10,249,155		)	(38,270,191		)
Contributions		195,294,674			12,131,014
Offering Costs		(11,440,923		)	—
Net increase in members’ capital		198,678,035			2,635,047
Members’ capital at beginning of period		241,927,261			239,440,683
Members’ capital at end of period		$	440,605,296		$	242,075,730

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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New Mountain Finance Holdings, L.L.C.

 

Consolidated Statements of Cash Flows

(unaudited)

 

		Six months ended
		June 30, 2011			June 30, 2010
Cash flows from operating activities
Net increase in capital resulting from operations		$	25,073,439		$	28,774,224
Adjustments to reconcile net increase (decrease) in capital resulting from operations to net cash (used in) provided by operating activities:
Realized gains on investments		(12,552,163		)	(29,193,602		)
Net change in unrealized (appreciation) depreciation of investments		6,462,113			16,404,095
Amortization of purchase discount		(3,401,906		)	(7,494,472		)
Amortization of deferred credit facility costs		311,283			—
Non-cash interest		(727,135		)	(1,011,987		)
(Increase) decrease in operating assets:
Purchase of investments		(245,993,220		)	(75,681,612		)
Proceeds from sales and paydowns of investments		152,208,584			110,581,682
Cash received for purchase of undrawn portion of revolving credit facility		1,260,000			—
Cash paid for drawn revolver		(535,593		)	—
Interest receivable		(1,038,712		)	(1,337,237		)
Receivable from unsettled securities sold		—			5,124,622
Other assets		(754,525		)	1,407
Increase (decrease) in operating liabilities:
Payable for unsettled securities purchased		(71,576,780		)	(3,482,265		)
Interest payable		279,149			(47,516		)
Management fee payable		807,509			—
Incentive fee payable		504,393			—
Payable to affiliates		(202,180		)	(173,440		)
Other liabilities		(326,040		)	258,364
Net cash flows (used in) provided by operating activities		(150,201,784		)	42,722,263
Cash flows from financing activities
Contributions		195,294,674			12,131,014
Distributions		(10,249,155		)	(38,270,191		)
Offering costs paid		(8,344,393		)	—
Proceeds from Holdings credit facility		63,281,605			21,785,175
Repayment of Holdings credit facility		(88,678,542		)	(38,419,909		)
Proceeds from SLF credit facility		92,043,800			—
Repayment of SLF credit facility		(22,062,352		)	—
Deferred credit facility costs paid		(3,977,249		)	—
Net cash flows provided by (used in) financing activities		217,308,388			(42,773,911		)
Net increase in cash and cash equivalents		67,106,604			(51,648		)
Cash and cash equivalents at the beginning of the period		10,744,082			4,110,193
Cash and cash equivalents at the end of the period		$	77,850,686		$	4,058,545
Supplemental disclosure of cash flow information
Interest paid		$	1,962,278		$	1,073,927
Non-cash financing activities:
Accrual of offering costs		3,096,530			—

 

The accompanying notes are an integral part of these consolidated financial statements.

 

A-6

Table of Contents

 

New Mountain Finance Holdings, L.L.C.

 

Consolidated Schedule of Investments

 

June 30, 2011

(unaudited)

 

								Principal
								Amount,								Percent of
Portfolio Company,								Par Value					Fair			Members’
Location and Industry		Type of Investment		Interest Rate		Maturity Date		or Shares		Cost			Value			Capital
United States
Stratus Technologies, Inc.
Information Technology		Ordinary shares(2)		—		—		144,270		$	65,123		$	56,324
		Preferred shares(2)		—		—		32,830		14,819			12,817
										79,942			69,141			0.02	%
Total shares										79,942			69,141			0.02	%
United States
Alion Science and Technology Corporation
Federal Services		Warrants (2)		—		—		6,000		292,851			316,560			0.07	%
Learning Care Group (US), Inc.
Education		Warrants (2)		—		—		845		193,850			90,663			0.02	%
Total warrants										486,701			407,223			0.09	%
United States
Managed Health Care Associates, Inc.
Healthcare Services		First lien (2)		3.44% (Base Rate + 3.25%)		8/1/2014		22,467,673		18,046,809			21,568,965
		Second lien (2)		6.69% (Base Rate + 6.50%)		2/1/2015		15,000,000		11,575,183			14,025,000
								37,467,673		29,621,992			35,593,965			8.08	%
Decision Resources, LLC
Business Services		First lien (3)		7.00% (Base Rate + 5.50%)		12/28/2016		17,910,000		17,658,629			17,943,580
		Second lien (2)		9.50% (Base Rate + 8.00%)		5/7/2018		14,500,000		14,357,575			14,427,500
								32,410,000		32,016,204			32,371,080			7.35	%
Novell, Inc. (fka Attachmate Corporation, NetIQ Corporation)
Software		First lien (3)		6.50% (Base Rate + 5.00%)		4/27/2017		12,000,000		11,907,570			12,062,495
		Second lien (2)		9.50% (Base Rate + 8.00%)		10/27/2017		15,000,000		14,853,966			15,199,995
								27,000,000		26,761,536			27,262,490			6.19	%
Lawson Software, Inc. (fka SoftBrands, Inc.)
Software		First lien (3)		6.75% (Base Rate + 5.25%)		7/5/2017		20,000,000		19,200,000			19,215,620
		Subordinated(2)		11.50%		7/15/2018		4,000,000		3,685,720			3,685,720
								24,000,000		22,885,720			22,901,340			5.20	%
Learning Care Group (US), Inc.
Education		First lien (2)		12.00%		4/27/2016		17,368,421		17,086,426			17,368,421
		Subordinated(2)		15.00%		6/30/2016		3,044,655		2,841,846			2,919,766
								20,413,076		19,928,272			20,288,187			4.60	%
U.S. Healthworks Holding Company, Inc.
Healthcare Services		Second lien (2)		10.50% (Base Rate + 9.00%)		6/15/2017		20,000,000		19,701,348			19,800,000			4.49	%
Unitek Global Services, Inc.
Business Services		First lien (2)		9.00% (Base Rate + 7.50%)		4/15/2018		19,950,000		19,368,140			19,501,125			4.43	%
KeyPoint Government Solutions, Inc.
Federal Services		First lien (2)		10.00% (Base Rate + 8.00%)		12/31/2015		17,910,000		17,579,885			17,865,225			4.05	%
Smile Brands Group Inc.
Healthcare Services		First lien (3)		7.00% (Base Rate + 5.25%)		12/21/2017		17,412,500		17,165,414			17,470,536			3.97	%
Sotera Defense Solutions, Inc. (Global Defense Technology & Systems, Inc.)
Federal Services		First lien (3)		7.00% (Base Rate + 5.50%)		4/21/2017		17,000,000		16,834,586			17,042,500			3.87	%
TravelCLICK, Inc. (fka TravelCLICK Acquisition Co.)
Information Services		First lien (3)		6.50% (Base Rate + 5.00%)		3/16/2016		16,458,750		16,147,823			16,304,449			3.70	%
Brock Holdings III, Inc.
Industrial Services		Second lien (2)		10.00% (Base Rate + 8.25%)		3/16/2018		15,000,000		14,716,318			15,375,000			3.49	%

 

The accompanying notes are an integral part of these consolidated financial statements.

 

A-7