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New Mountain Finance Corporation Announces Financial Results for the Quarter Ended June 30, 2018

August 7, 2018

NEW YORK--(BUSINESS WIRE)--Aug 7, 2018--New Mountain Finance Corporation (NYSE: NMFC) (the “Company”, “we”, “us” or “our”) today announced its financial results for the quarter ended June 30, 2018 and reported second quarter net investment income of $0.34 per weighted average share. At June 30, 2018, net asset value (“NAV”) per share was $13.57, a decrease of $0.03 per share from March 31, 2018. The Company also announced that its board of directors declared a third quarter distribution of $0.34 per share, which will be payable on September 28, 2018 to holders of record as of September 14, 2018.

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We believe that the strength of the Company’s unique investment strategy – which focuses on acyclical “defensive growth” companies that are well researched by New Mountain Capital, L.L.C. (“New Mountain”), a leading alternative investment firm, is underscored by continued stable credit performance. The Company has had only eight portfolio companies, representing approximately $125 million of the cost of all investments made since inception in October 2008, or approximately 2.1% of $5.8 billion, go on non-accrual.

Robert A. Hamwee, CEO, commented: “The second quarter represented another solid quarter of performance for NMFC. We originated $296 million of investments as we began the process of increasing our leverage ratio following this quarter’s shareholder approval. Additionally, we maintained a stable book value and portfolio yield.”

We are very pleased with the completion of another successful quarter,” added Steven B. Klinsky, NMFC Chairman. “We believe New Mountain’s strategy of focusing on “defensive growth” industries and on companies that we know well continues to prove to be a successful strategy. We believe one of our keys to success is the strength of the team and we continue to build the team over time, now at over 140 employees.”

Portfolio and Investment Activity1

As of June 30, 2018, the Company’s NAV was approximately $1,032.6 million and its portfolio had a fair value of approximately $2,123.2 million in 90 portfolio companies, with a weighted average YTM at Cost 2 of approximately 11.1%. For the three months ended June 30, 2018, the Company made approximately $295.6 million of originations and commitments 3. The $295.6 million includes approximately $198.9 million of investments in nine new portfolio companies and approximately $96.7 million of follow-on investments in thirteen portfolio companies held as of March 31, 2018. For the three months ended June 30, 2018, the Company had approximately $55.6 million of sales and cash repayments 3 of approximately $152.6 million.

Consolidated Results of Operations

The Company’s total investment income for the three months ended June 30, 2018 and 2017 were approximately $54.6 million and $50.0 million, respectively. For the three months ended June 30, 2018 and 2017, the Company’s total investment income consisted of approximately $35.5 million and $33.6 million in cash interest income from investments, respectively, approximately $1.9 million and $0.8 million in payment-in-kind (“PIK”) and non-cash interest income from investments, prepayment penalties of approximately $1.0 million and $1.4 million, respectively, net amortization of purchase premiums/discounts of approximately $1.7 million and $1.8 million, respectively, cash dividend income of approximately $5.3 million and $4.9 million, respectively, PIK and non-cash dividend income of approximately $7.0 million and $4.8 million, respectively, and approximately $2.2 million and $2.7 million in other income, respectively.

The Company’s total net expenses after income tax expense for the three months ended June 30, 2018 and 2017 were approximately $28.8 million and $24.2 million, respectively. Total net expenses after income tax expense for the three months ended June 30, 2018 and 2017 consisted of approximately $12.8 million and $9.0 million, respectively, of costs associated with the Company’s borrowings and approximately $14.2 million and $13.3 million, respectively, in net management and incentive fees. Since the Company’s initial public offering (“IPO”), the base management fee calculation has deducted the borrowings under the New Mountain Finance SPV Funding, L.L.C. credit facility (the “SLF Credit Facility”). The SLF Credit Facility had historically consisted of primarily lower yielding assets at higher advance rates. As part of an amendment to the Company’s existing credit facilities with Wells Fargo Bank, National Association, the SLF Credit Facility merged with and into the New Mountain Finance Holdings, L.L.C. credit facility (the “Holdings Credit Facility”) on December 18, 2014. Post credit facility merger and to be consistent with the methodology since the IPO, New Mountain Finance Advisers BDC, L.L.C. (the “Investment Adviser”) will continue to waive management fees on the leverage associated with those assets that share the same underlying yield characteristics with investments that were leveraged under the legacy SLF Credit Facility, which as of June 30, 2018 and 2017 totaled approximately $360.3 million and $356.6 million, respectively. For the three months ended June 30, 2018 and 2017, management fees waived were approximately $1.5 million and $1.5 million, respectively. The Investment Adviser cannot recoup management fees that the Investment Advisor has previously waived. The Company’s net direct and indirect professional, administrative, other general and administrative and income tax expenses for the three months ended June 30, 2018 and 2017 were approximately $1.8 million and $1.9 million, respectively.

For the three months ended June 30, 2018 and 2017, the Company recorded approximately $(6.6) million and $(26.4) million of net realized losses, and $5.1 million and $27.8 million of net changes in unrealized appreciation (depreciation) of investments and securities purchased under collateralized agreements to resell, respectively. For the three months ended June 30, 2018 and 2017, (provision) benefit for taxes was approximately $(1.1) million and $0.1 million, respectively, related to differences between the computation of income for United States (“U.S.”) federal income tax purposes as compared to accounting principles generally accepted in the United States (“GAAP”).

Liquidity and Capital Resources

As of June 30, 2018, the Company had cash and cash equivalents of approximately $33.9 million and total statutory debt outstanding of approximately $930.8 million 4, which consisted of approximately $390.5 million of the $495.0 million of total availability on the Holdings Credit Facility, $150.0 million of the $150.0 million of total availability on the Company’s senior secured revolving credit facility (the “NMFC Credit Facility”), $155.3 million 4 of convertible notes outstanding and $235.0 million of unsecured notes outstanding. Additionally, the Company had $163.0 million of SBA-guaranteed debentures outstanding as of June 30, 2018.

Portfolio and Asset Quality

The Company puts its largest emphasis on risk control and credit performance. On a quarterly basis, or more frequently if deemed necessary, the Company formally rates each portfolio investment on a scale of one to four. Each investment is assigned an initial rating of a “2” under the assumption that the investment is performing materially in-line with expectations. Any investment performing materially below our expectations would be downgraded from the “2” rating to a “3” or a “4” rating, based on the deterioration of the investment. An investment rating of a “4” could be moved to non-accrual status, and the final development could be an actual realization of a loss through a restructuring or impaired sale.

During the second quarter of 2018, the Company placed a portion of its second lien position in National HME, Inc. (“NHME”) on non-accrual status and wrote down the aggregate fair value of the Company’s preferred shares in NHME to zero.

As of June 30, 2018, the portion of NHME with an investment rating of “3” had a total cost basis of approximately $13.5 million and a fair value of approximately $6.8 million.

As of June 30, 2018, three portfolio companies (including NHME referenced above) had an investment rating of “4”. The Company’s investments in these portfolio companies had an aggregate cost basis of approximately $16.5 million and an aggregate fair value of approximately $7.3 million.

Recent Developments

The Company has had approximately $169.6 million of originations and commitments since the end of the second quarter through August 3, 2018. This was offset by approximately $178.9 million of repayments and $3.4 million of sales during the same period.

On July 5, 2018, the Company entered into a third supplement (the ‘‘Supplement’’) to its Amended and Restated Note Purchase Agreement, dated September 30, 2016 (the ‘‘NPA’’). Pursuant to the Supplement, on July 5, 2018, the Company issued to an institutional investor identified therein, in a private placement, $50.0 million in aggregate principal amount of 5.36% Series 2018B Notes due June 28, 2023 (the “2018B Unsecured Notes”) as an additional series of notes under the NPA. Except as set forth in the Supplement, the 2018B Unsecured Notes have the same terms as the $90.0 million in aggregate principal amount of the 5.313% Notes due May 15, 2021, the $55.0 million in aggregate principal amount of the 4.76% Series 2017A Notes due July 15, 2022 and the $90.0 million in aggregate principal amount of 4.87% Series 2018A Notes due January 30, 2023 (collectively, the ‘‘Prior Notes’’) that the Company previously issued pursuant to the NPA, the first supplement and the second supplement thereto, respectively. The Supplement includes certain additional covenants and terms, including, without limitation, a requirement that the Company not exceed a debt-to-equity ratio of 1.65 to 1.00 at the time of incurring additional indebtedness and a requirement that the Company not exceed a secured debt ratio of 0.70 to 1.00 at any time. The 2018B Unsecured Notes will rank equal in priority with the Company’s other unsecured indebtedness, including the Prior Notes. Interest on the 2018B Unsecured Notes will be payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019.

On July 5, 2018, the Company entered into Amendment No. 4 (the ‘‘Amendment’’) to the Company’s NMFC Credit Facility. The Amendment reduces the minimum asset coverage ratio that the Company must maintain at the time of any borrowing under the NMFC Credit Facility and as of each quarter end from 2.00 to 1.00 to 1.50 to 1.00. The Amendment also includes a requirement that the Company not exceed a debt-to equity ratio of 1.65 to 1.00 at the time of incurring additional indebtedness and a requirement that the Company not exceed a secured debt ratio of 0.70 to 1.00 at any time.

On August 1, 2018, the Company’s board of directors declared a third quarter 2018 distribution of $0.34 per share payable on September 28, 2018 to holders of record as of September 14, 2018.

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Conference Call

New Mountain Finance Corporation will host a conference call at 10 a.m. Eastern Time on Wednesday, August 8, 2018, to discuss its second quarter 2018 financial results. All interested parties may participate in the conference call by dialing +1 (877) 443-9109 approximately 15 minutes prior to the call. International callers should dial +1 (412) 317-1082. This conference call will also be broadcast live over the Internet and can be accessed by all interested parties through the Company’s website, http://ir.newmountainfinance.com. To listen to the live call, please go to the Company’s website at least 15 minutes prior to the start of the call to register and download any necessary audio software. Following the call, you may access a replay of the event via audio webcast on our website. We will be utilizing a presentation during the conference call and we have posted the presentation to the investor relations section of our website.

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