Executive Summary / Key Takeaways

• Defensive Growth Strategy Delivers Stability: New Mountain Finance Corporation (NMFC) maintains a disciplined focus on direct lending to U.S. upper middle market companies in "defensive growth" sectors like software, healthcare, and business services, underpinning its consistent earnings and robust credit performance. This sector-specific expertise, leveraged from New Mountain Capital, is a core differentiator.
• Proactive Capital Structure Optimization: NMFC is actively enhancing its financial flexibility and reducing financing costs through strategic refinancing of higher-cost debt, including upcoming convertible and unsecured notes. The company is also shifting its liability mix to align more closely with its floating-rate assets, targeting approximately 75% floating-rate liabilities.
• Commitment to Shareholder Returns: A $0.32 per share quarterly dividend is supported by recurring earnings and a "dividend protection program" through Q4 2026. NMFC also engages in opportunistic share repurchases, having bought back $16 million year-to-date, signaling confidence in its intrinsic value amidst a market discount.
• Improving Portfolio Quality and PIK Reduction: The portfolio remains highly senior-oriented (nearly 80% senior assets) with low non-accruals (1.2% of fair value). NMFC is strategically reducing its Payment-in-Kind (PIK) income, aiming for a long-term target of 10-12% by monetizing older vintage PIK investments and redeploying capital into cash-yielding assets.
• Outlook for Increased Deal Flow: Management anticipates a productive period for LBO activity in the latter half of 2025 and early 2026, driven by significant private equity dry powder and sponsor pressure to exit investments, which should create new deployment opportunities and potentially boost fee income.

The Bedrock of Defensive Growth: NMFC's Enduring Strategy

New Mountain Finance Corporation (NMFC) operates as a specialized direct lender, providing crucial capital to U.S. upper middle market companies. Since its inception in 2010 and IPO in 2011, NMFC has carved a distinct niche by focusing exclusively on "defensive growth" industries. These sectors, including healthcare, information technology, software, insurance services, and infrastructure services, are characterized by acyclicality, sustainable secular growth drivers, niche market dominance, and strong free cash flow generation. This disciplined approach aims to generate both current income and capital appreciation, forming the bedrock of its investment thesis.

NMFC's competitive edge is deeply rooted in its differentiated investment approach, which leverages the extensive resources and proprietary underwriting model of its parent, New Mountain Capital. This "technology" in a financial services context involves in-house industry executives and private equity personnel who apply deep sector knowledge to identify and underwrite direct lending opportunities. This expertise allows NMFC to maintain a high underwriting bar, resulting in a portfolio that is notably insulated from market volatility. For instance, NMFC reports only 2% exposure to tariff-sensitive sectors, significantly lower than the peer average of 13%, underscoring its strategic positioning.

The company's history reflects a continuous evolution of this strategy. Early milestones included the licensing of SBIC I and SBIC II, which provided access to SBA-guaranteed debentures and enhanced borrowing capacity, further supported by exemptive relief from the SEC. Over the years, NMFC has consistently refined its capital structure and portfolio mix, adapting to market dynamics while adhering to its core philosophy. This strategic agility, combined with a focus on senior secured loans and selective junior capital positions, has enabled NMFC to maintain a strong competitive standing in the direct lending market, often offering more certain execution and bespoke capital structures compared to the broadly syndicated market.

Financial Performance and Portfolio Resilience

NMFC's financial performance in the second quarter of 2025 reflected a period of strategic adjustment amidst a dynamic market. Total investment income decreased by 12% year-over-year to $83.5 million, primarily due to a lower invested asset base and slightly lower portfolio yields. This was partially offset by a 13% decrease in total net operating expenses to $49 million, driven by an incentive fee waiver and reduced interest and other financing expenses from lower outstanding borrowings. Adjusted net investment income for the quarter was $0.32 per weighted average share, fully covering the $0.32 per share dividend.

The company's net asset value (NAV) per share stood at $12.21 as of June 30, 2025, a $0.24 decline from the previous quarter. This movement was primarily influenced by unrealized depreciation in equity positions such as Edmentum, ACI Parent Inc., and New Permian Holdco, Inc., though partially offset by realized gains in OA Topco, L.P. Despite these modest declines, NMFC's portfolio demonstrates remarkable resilience, with approximately 95% of its investments rated "green" on its internal risk heatmap. This high proportion of well-performing assets underscores the effectiveness of its defensive growth investment strategy.

A key focus for NMFC is managing its Payment-in-Kind (PIK) income. For the six months ended June 30, 2025, PIK interest and non-cash dividends totaled $29.3 million, representing 17.33% of total investment income. While this figure is higher than management's long-term target of 10-12%, NMFC is actively working to reduce it. Recent successes include monetizing Office Ally's $15 million common equity position and receiving full repayment on ARCOS preferred shares, including accrued PIK. These efforts are crucial for enhancing the cash-yielding nature of the portfolio and aligning with market preferences.

Credit quality remains a hallmark of NMFC's operations. Non-accruals are exceptionally low, totaling only $38 million, or 1.2% of the portfolio's fair value. This strong performance is a testament to NMFC's rigorous underwriting and active portfolio monitoring, which includes a proprietary risk rating system. The company's cumulative credit performance since its 2011 IPO shows just $16 million in net realized losses on over $10.2 billion of investments, translating to a mere 1 basis point annualized net realized loss rate. This track record highlights NMFC's ability to minimize credit losses and preserve capital, a critical factor for long-term shareholder value creation.

Capital Structure and Strategic Positioning

NMFC's capital structure is strategically designed for flexibility and cost efficiency. The company maintains a robust liquidity profile, with approximately $1.1 billion available on its revolving lines, subject to borrowing base limitations. This substantial capacity comfortably covers its unfunded commitments of $261.1 million and near-term bond maturities. The company's asset coverage ratio stood at a healthy 185.60% as of June 30, 2025, well above the 150% regulatory minimum.

Proactive liability management has been a significant theme. NMFC has successfully repriced its Wells Fargo (WFC) credit facility, reducing the spread from SOFR plus 2.15% to SOFR plus 1.95% and extending its maturity to March 2030. The corporate revolver was also expanded to $639 million, with a lower spread and extended maturity to September 2029. Furthermore, the company issued a second $300 million investment-grade bond in Q3 2024, using the proceeds to repay the higher-cost Deutsche Bank (DB) credit facility. These actions have significantly improved NMFC's floating-rate liabilities mix, which is targeted to reach approximately 75% inclusive of hedges, better aligning with its predominantly floating-rate asset base (86% of the loan portfolio).

NMFC's competitive positioning is further strengthened by its focus on senior-oriented assets, which now constitute nearly 80% of its overall portfolio, up from 75% in the prior year. This includes first lien loans, investments in its Senior Loan Programs (SLPs), and its net lease subsidiary. Second lien positions have been reduced to just 6% of the portfolio, down from 15% in Q4 2023, reflecting a deliberate shift towards lower-risk assets. The SLPs, comprising SLP III and SLP IV, are joint ventures that invest in broadly syndicated first lien senior secured loans, contributing significantly to NMFC's overall yield profile with diversified underlying portfolios.

Outlook, Shareholder Returns, and Risk Mitigation

Looking ahead, NMFC is committed to sustaining its $0.32 per share quarterly dividend, backed by its "dividend protection program" through Q4 2026. This program, which allows for incentive fee reductions if needed, provides shareholders with clear visibility and stability, particularly during periods of tighter new issue spreads and lower private equity deal activity. Management anticipates increased portfolio activity and improved fee income in the latter half of 2025, driven by an expected normalization of M&A and LBO activity. The pipeline of potential private equity exits remains robust, fueled by significant dry powder and pressure to return capital to limited partners.

The company's strategic priorities for the coming quarters include refinancing its 7.5% convertible notes and 8.25% unsecured notes, both callable or maturing in Q4 2025. NMFC plans to access the unsecured debt market and utilize interest rate hedges to optimize financing costs. A new SBIC III license, effective July 2025, will also provide additional leverage capacity. Furthermore, NMFC is actively addressing its stock trading at a discount to book value, having repurchased approximately $16 million of shares year-to-date, with an additional $31 million in Board authorization remaining. This reflects management's strong belief that the current share price represents a compelling entry point for investors.

While NMFC's defensive strategy provides significant insulation, certain risks persist. Interest rate fluctuations remain a key market risk, as leverage magnifies the impact of changes in borrowing and investment rates. Hypothetical scenarios suggest a 200 basis point decrease in rates could reduce net interest income by 16.44%, while a similar increase would boost it by 16.44%. NMFC mitigates this through interest rate swaps and its evolving floating-rate liability mix. Specific portfolio challenges include a consumer products company impacted by tariffs and needing liquidity support, and a dental healthcare business facing labor inflation and lower patient volumes. Management is actively monitoring these situations, with a focus on preserving capital and seeking recovery. The equity position in Edmentum also faces valuation pressure from senior accretive securities, despite stable operating performance.

Conclusion

New Mountain Finance Corporation stands as a testament to disciplined investment in an often-volatile direct lending landscape. Its unwavering commitment to "defensive growth" sectors, combined with a proprietary, expertise-driven underwriting model, has consistently delivered strong credit performance and stable recurring income. The company's proactive approach to capital structure optimization, marked by strategic refinancings and a deliberate shift towards a more balanced floating-rate profile, positions it well to navigate evolving interest rate environments.

NMFC's clear focus on reducing PIK income, monetizing non-yielding equity, and maintaining a highly senior-oriented portfolio underscores its dedication to enhancing shareholder value. With a robust dividend protection program and an active share repurchase initiative, NMFC demonstrates a profound alignment with its investors. As the market anticipates a resurgence in M&A activity, NMFC's strategic positioning, underpinned by its unique operational insights from New Mountain Capital, suggests a compelling opportunity for investors seeking consistent yield and long-term capital appreciation from a fundamentally sound and strategically agile direct lender.