News Column

CARLYLE GMS FINANCE, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 13, 2014

(dollar amounts in thousands, except per share data)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

We have included or incorporated by reference in this Form 10-Q, and from time to time our management may make, "forward-looking statements". These forward-looking statements are not historical facts, but instead relate to future events or the future performance or financial condition of Carlyle GMS Finance, Inc. ("we," "us," "our," "GMS Finance," or the "Company"). These statements are based on current expectations, estimates and projections about us, our current or prospective portfolio investments, our industry, our beliefs, and our assumptions. The forward-looking statements contained in this Form 10-Q and the documents incorporated by reference herein involve a number of risks and uncertainties, including statements concerning:



our, or our portfolio companies', future business, operations, operating

results or prospects; the return or impact of current and future investments;



the impact of a protracted decline in the liquidity of credit markets on

our business; the impact of fluctuations in interest rates on our business;



the impact of changes in laws or regulations (including the interpretation

thereof) governing our operations or the operations of our portfolio

companies;



the valuation of our investments in portfolio companies, particularly

those having no liquid trading market; our ability to recover unrealized losses;



market conditions and our ability to access alternative debt markets and

additional debt and equity capital; our contractual arrangements and relationships with third parties;



the general economy and its impact on the industries in which we invest;

the financial condition of and ability of our current and prospective

portfolio companies to achieve their objectives; our expected financings and investments; our ability to successfully integrate any acquisitions; the adequacy of our cash resources and working capital; the timing, form and amount of any dividend distributions;



the timing of cash flows, if any, from the operations of our portfolio

companies;



the ability of our investment adviser to locate suitable investments for

us and to monitor and administer our investments; and our intent to satisfy the requirements of a regulated investment company



under Subchapter M of the Internal Revenue Code of 1986, as amended.

We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2013 and Part II, Item 1A of and elsewhere in this Form 10-Q. 38



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We have based the forward-looking statements included in this Form 10-Q on information available to us on the date of this Form 10-Q, 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 Securities and Exchange Commission (the "SEC"), including our registration statement on Form 10, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.



OVERVIEW

Management's Discussion and Analysis should be read in conjunction with Part I, Item 1 of this Form 10-Q "Financial Statements." This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2013 and Part II, Item 1A of this Form 10-Q "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements. GMS Finance is a Maryland corporation formed on February 8, 2012, and structured as an externally managed, non-diversified closed-end investment company. On May 2, 2013, GMS Finance filed its election to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the "Investment Company Act"). GMS 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 ended December 31, 2013. GMS Finance's investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle market companies with approximately $10 million to $100 million of earnings before interest, taxes, depreciation and amortization ("EBITDA"). GMS Finance seeks to achieve its investment objective by investing primarily in first lien senior secured and unitranche loans to private U.S. middle market companies that are, in many cases, controlled by private equity investment firms ("Middle Market Senior Loans"). Depending on market conditions, GMS Finance expects that between 70% and 80% of the value of its assets, including the amount of any borrowings for investment purposes, will be invested in Middle Market Senior Loans, with the balance invested in higher-yielding investments, which may include middle market junior loans such as corporate mezzanine loans, equity co-investments, broadly syndicated first lien senior secured loans and second lien loans, high-yield bonds, structured finance obligations and/or other opportunistic investments. 39



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PORTFOLIO AND INVESTMENT ACTIVITY

The fair value of our investments was approximately $418,611 and $212,807, respectively, in 53 and 27 portfolio companies/structured finance obligations as of June 30, 2014 and December 31, 2013, respectively.

The Company's investment activity for the three month periods ended June 30, 2014 and June 30, 2013 is presented below (information presented herein is at amortized cost unless otherwise indicated). For the three month For the three month period ended period ended June 30, 2014June 30, 2013



Investments-non-controlled/non-affiliated:

Total

Investments-non-controlled/non-affiliated

as of March 31 $ 317,735 $ - New investments 141,344 19,136 Net accretion of discount on securities 384 - Realized gains 145 - Investments sold or repaid (41,518 ) - Total



Investments-non-controlled/non-affiliated

as of June 30 $ 418,090 $ 19,136 Principal amount of investments purchased: First Lien Debt 81,675 $ 19,250 Second Lien Debt 31,000 - Structured Finance Obligations 42,100 - Total $ 154,775 $ 19,250 Principal amount of investments sold or repaid: First Lien Debt $ (32,234 ) $ - Second Lien Debt (7,500 ) - Structured Finance Obligations - - Total $ (39,734 ) $ - Number of new funded investments 20 3 Average new funded investment amount $ 7,067 $ 6,379 Percentage of new funded investments at floating rates 100 % 100 % The increased investment activity for the three month period ended June 30, 2014 over the three month period ended June 30, 2013 was driven by our deployment of capital and increasing invested balance. As of June 30, 2014 and December 31, 2013, investments-non-controlled/non-affiliated consisted of the following: June 30, 2014 December 31, 2013 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt $ 272,416$ 273,899$ 141,510$ 141,676 Second Lien Debt 70,575 71,138 40,636 39,767 Structured Finance Obligations 75,099 73,574 30,982 31,364 Total $ 418,090$ 418,611$ 213,128$ 212,807 40



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The weighted average yields (1) of our portfolio, based on the amortized cost and fair value as of June 30, 2014 and December 31, 2013, were as follows:

June 30, 2014 December 31, 2013 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt 3.82 % 3.83 % 4.14 % 4.15 % Second Lien Debt 1.49 1.49 1.71 1.71 Structured Finance Obligations 4.12 4.12 2.73 2.73 Total 9.43 % 9.44 % 8.58 % 8.59 % The weighted average yields (1) for each investment type, based on the amortized cost and fair value as of June 30, 2014 and December 31, 2013, were as follows: June 30, 2014 December 31, 2013 Amortized Amortized Cost Fair Value Cost Fair Value First Lien Debt 5.85 % 5.84 % 6.24 % 6.23 % Second Lien Debt 8.91 8.85 8.97 9.16 Structured Finance Obligations 22.95 23.43 18.75 18.53



(1) Yields do not include the effect of accretion of discounts and amortization

of premiums and are based on interest rates as of June 30, 2014.

RESULTS OF OPERATIONS

For the three month and six month periods ended June 30, 2014 and June 30, 2013

The net increase or decrease in net assets from operations may vary substantially from period to period as a result of various factors, including the recognition of realized gains and losses and net change in unrealized appreciation and depreciation. As a result, quarterly comparison may not be meaningful.

Net investment income for the three month and six month periods ended June 30, 2014 and June 30, 2013 was as follows:

For the three For the three For the six month and six month period month period month periods ended June 30, ended June 30, ended June 30, 2014 2014 2013 Total investment income from non-controlled/non-affiliated investments $ 9,944 $ 16,577 $ 20 Net expenses (5,408 ) (9,002 ) (2,595 ) Net investment income $ 4,536 $ 7,575 $ (2,575 ) Investment Income For the three For the three For the six month and six month period month period month periods ended June 30, ended June 30, ended June 30, 2014 2014 2013 Interest income from non-controlled/non-affiliated investments $ 9,944 $ 16,577 $ 20 Total investment income $ 9,944 $ 16,577 $ 20 41



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The increase in interest income and net investment income for the three month and six month periods ended June 30, 2014 and June 30, 2013 was driven by our deployment of capital and increasing invested balance. As of June 30, 2014 and December 31, 2013, the size of our portfolio was $418,090 and $213,128, respectively, at amortized cost, with total par outstanding of $468,209 and $231,793, respectively. As of June 30, 2014 and December 31, 2013, our portfolio had a weighted average yield of 9.43% and 8.58%, respectively, on amortized cost. Expenses For the three month For the three month For the six month and six month period ended period ended periods ended June 30, 2014 June 30, 2014 June 30, 2014 Base management fees $ 1,455 $ 2,446 $ 15 Incentive fees 1,149 2,089 13 Organizational expenses - - 1,426 Professional fees 596 1,193 540 Administrative service fees 218 475 189 Interest expense 634 983 - Credit facility fees 1,526 2,056 164 Directors' fees and expenses 103 185 108 Transfer agency fees 34 60 57 Other general and administrative 178 330 88 Waiver of base management fees (485 ) (815 ) (5 ) Total net expenses $ 5,408 $ 9,002 $ 2,595



Interest and credit facility fees for the three month and six month periods ended June 30, 2014 and June 30, 2013 were comprised of the following:

For the three month For the three month For the six month and six month period ended period ended periods ended June 30, 2014 June 30, 2014 June 30, 2013

Interest expense $ 634 $ 983 $ - Unused commitment fee 372 658 62 Amortization of deferred financing costs 1,128 1,347 86 Other fees 26 51 16 Total interest expense and credit facility fees $ 2,160 $ 3,039 $ 164 Cash paid for interest expense $ 510 $ 795 $ - The increase in interest expense for the three month and six month periods ended June 30, 2014 was driven by increased usage of the facilities and increased deployment of capital to investments. For the three month and six month periods ended June 30, 2014, unused commitment fees and amortization of deferred financing costs increased related to fees associated with a second credit facility, the Facility, that closed on March 21, 2014. Additionally, for the three month and six month periods ended June 30, 2014, $827 of the amortization of deferred financing costs represents the prorated financing costs that were immediately expensed in lieu of continuing to amortize over the term of the Revolving Credit Facility related to the amendment that reduced commitments in the Revolving Credit Facility. For the three month and six month periods ended June 30, 2014, the average stated interest rate was 2.13% and 2.12%, respectively, and average principal debt outstanding was $117,699 and $92,401, respectively. 42



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Increased base management fees (and related waiver of base management fees) and incentive fees related to pre-incentive fee net investment income for the three month and six month periods ended June 30, 2014 were driven by our deployment of capital and increasing invested balance. For the three month and six month periods ended June 30, 2014, base management fees were $970 and $1,631, respectively (net of waiver of $485 and $815, respectively), incentive fees related to pre-incentive fee net investment income were $1,137 and $1,933, respectively, and there were no incentive fees related to realized capital gains. For the three month and six month periods ended June 30, 2013, base management fees were $10 (net of waiver of $5), there were no incentive fees related to pre-incentive fee net investment income, and there were no incentive fees related to realized capital gains. Incentive fees of $1,137 and $1,933, respectively, were deferred for the three month and six month periods ended June 30, 2014 and will be carried over for payment in subsequent calculation periods to the extent that the 6.0% hurdle is achieved for the most recent four calendar quarters prior to payment. For the three month and six month periods ended June 30, 2014, the Company recorded an accrued capital gains incentive fee of $12 and $156, respectively, based upon the cumulative net realized and unrealized appreciation/(depreciation) as of June 30, 2014. For the three month and six month periods ended June 30, 2013, the Company recorded an accrued capital gains incentive fee of $13 based upon the cumulative net realized and unrealized appreciation/(depreciation) as of June 30, 2013. The accrual for any capital gains incentive fee under accounting principles generally accepted in the United States ("US GAAP") in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual. See Note 5 to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information on the incentive and base management fees. Professional fees include legal, rating agencies, audit, tax, valuation, technology and other professional fees incurred related to the management of the Company. Administrative service fees represent fees paid to the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under an administration agreement between the Company and the Administrator, including our allocable portion of the cost of certain of our executive officers and their respective staff. Other general and administrative expenses include insurance, filing, research, subscriptions and other costs. Administrative service fees and other general and administrative expenses increased for the three month and six month periods ended June 30, 2014 driven by the increased deployment of capital.



Net Realized Gain (Loss) and Net Change in Unrealized Appreciation/(Depreciation) on Investments

During the three month and six month periods ended June 30, 2014, the Company had a change in unrealized appreciation on 30 and 40 investments, respectively, totaling approximately $3,371 and $4,126, respectively, which was offset by a change in unrealized depreciation on 32 and 24 investments, respectively, totaling approximately $3,460 and $3,284, respectively. During the three month and six month periods ended June 30, 2013, the Company had a change in unrealized appreciation on 2 investments totaling approximately $146, which was offset by a change in unrealized depreciation on 1 investment totaling approximately $82. For the three month For the three month For the six month and six month period ended period ended periods ended June 30, 2014 June 30, 2014 June 30, 2013 Net realized gain (loss) on investments-non-controlled/non-affiliated $ 145 $ 191 $ - Net change in unrealized appreciation (depreciation) on investments-non-controlled/non-affiliated (89 ) 842 64 Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments $ 56 $ 1,033 $ 64 43



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Net realized gain (loss) and net change in unrealized appreciation (depreciation) for the three month and six month periods ended June 30, 2014 and June 30, 2013 was as follows:

For the three month period ended For the six month period June 30, 2014 ended June 30, 2014 Net change in Net change in unrealized unrealized Net realized appreciation Net realized appreciation Type gain (loss) (depreciation) gain (loss) (depreciation) First Lien Debt $ - $ 898 $ - $ 1,317 Second Lien Debt 120 1,048 120 1,432 Structured Finance Obligations 25 (2,035 ) 71 (1,907 ) Total $ 145 $ (89 ) $ 191 $ 842 For the three month and six month periods ended June 30, 2013 Net change in unrealized Net realized appreciation Type gain (loss) (depreciation) First Lien Debt $ - $ 64 Total $ - $ 64



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company generates cash from the net proceeds of offerings of our common stock and through cash flows from operations, including investment sales and repayments as well as income earned on investments and cash equivalents. We may also fund a portion of our investments through borrowings under the Borrower Sub's Revolving Credit Facility (as defined below) and/or the Company's Facility (as defined below). The Borrower Sub closed on May 24, 2013 on a senior secured revolving credit facility with various lenders (the "Revolving Credit Facility"), which Revolving Credit Facility was subsequently amended on June 30, 2014 (the "First Amendment"). The Revolving Credit Facility provides for secured borrowings up to the lesser of $400,000 or the amount of capital commitments the Company has received with an accordion feature that can, subject to certain conditions, increase the aggregate maximum credit commitment up to an amount not to exceed $750,000, subject to restrictions imposed on borrowings under the Investment Company Act and adequate collateral to support such borrowings. The Company closed on March 21, 2014 on a senior secured revolving credit facility with various lenders (the "Facility"). The maximum principal amount of the Facility is $150,000, subject to availability under the Facility, which is based on the value of the Company's portfolio investments net of certain other indebtedness that the Company may incur in the future in accordance with the terms of the Facility. Proceeds of the Facility may be used for general corporate purposes, including the funding of portfolio investments. Maximum capacity under the Facility may be increased to $225,000 through the exercise by the Company of an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing. The Facility includes a $20,000 limit for swingline loans and a $5,000 limit for letters of credit. For more information on the Revolving Credit Facility and Facility, see Note 6 to the consolidated financial statements in Part I, Item 1 of this Form 10-Q. The primary use of existing funds and any funds raised in the future is expected to be for investments in portfolio companies, repayment of indebtedness, cash distributions to our stockholders, and for other general corporate purposes. 44



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As of June 30, 2014 and December 31, 2013, the Company had $27,327 and $42,010, respectively, in cash. The facilities of the Company and the Borrower Sub consisted of the following as of June 30, 2014 and December 31, 2013:

June 30, 2014 Total Borrowings Unused Amount Facility Outstanding Portion (1) Available (2) Revolving Credit Facility $ 400,000$ 59,740$ 340,260$ 24,379 Facility 150,000 94,000 56,000 36,677 Total $ 550,000$ 153,740$ 396,260$ 61,056 December 31, 2013 Total Borrowings Unused Amount Facility Outstanding Portion (1) Available (2) Revolving Credit Facility $ 500,000$ 66,822$ 433,178$ 18,616 Total $ 500,000$ 66,822$ 433,178$ 18,616



(1) The unused portion upon which commitment fees are based.

(2) Available for borrowing based on the computation of collateral to support the

borrowings. Equity Activity There were $40,125 and $231,754 of investor equity capital commitments made to the Company during the three month and six month periods ended June 30, 2014, respectively. There were $250,115 of commitments made to the Company during the three month and six month periods ended June 30, 2013. Total investor equity capital commitments to the Company were $1,109,162 and $877,408 as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, $855,687 and $689,405, respectively, of total investor equity capital commitments were unfunded. As of June 30, 2014 and December 31, 2013, $42,967 of total investor equity capital commitments were made by the Investment Adviser, members of senior management, and certain employees, partners, and affiliates of the Investment Adviser. As of June 30, 2014 and December 31, 2013, certain directors had committed $1,750 in capital commitments to the Company.



Shares issued as of June 30, 2014 and December 31, 2013 were 12,891,569 and 9,575,990, respectively.

The following table summarizes activity in the number of shares of our common stock outstanding during the six month periods ended June 30, 2014 and June 30, 2013: For the six month For the six month period ended period ended June 30, 2014 June 30, 2013 Shares outstanding, beginning of period 9,575,990 100 Common stock issued 3,315,431 2,027,270 Reinvestment of dividends 148 - Shares outstanding, end of period 12,891,569 2,027,370 45



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Contractual Obligations

A summary of significant contractual payment obligations was as follows as of June 30, 2014 and December 31, 2013:

June 30, 2014 Payment Due by Period Less than More Than Total 1 Year 1-3 Years 3-5



Years 5 Years

Secured Borrowings $ 153,740 - - $ 94,000$ 59,740 December 31, 2013 Payment Due by Period Less than More Than Total 1 Year 1-3 Years 3-5



Years 5 Years

Secured Borrowings $ 66,822 - -



- $ 66,822

For more information on the Revolving Credit Facility and Facility, see Note 6 to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

During the six month period ended June 30, 2014, there were net repayments of $7,082 under the Revolving Credit Facility and secured borrowings of $94,000 under the Facility. For the six month period ended June 30, 2013, there were no borrowings. As of June 30, 2014 and December 31, 2013, $153,740 and $66,822, respectively, of secured borrowings were outstanding. For the three month and six month periods ended June 30, 2014, we incurred $634 and $983 of interest expense, respectively, and $372 and $658 of unused commitment fees, respectively. For the three month and six month periods ended June 30, 2013, we incurred no interest expense and $62 of unused commitment fees.



OFF BALANCE SHEET ARRANGEMENTS

In the ordinary course of its business, the Company enters into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. The Company believes that the likelihood of such an event is remote; however, the maximum potential exposure is unknown. No accrual has been made in these consolidated financial statements as of June 30, 2014 and December 31, 2013 included in Part I, Item 1 of this Form 10-Q for any such exposure.



We may also enter into future funding commitments such as revolving credit facilities, bridge financing commitments, or delayed draw commitments.

As of June 30, 2014, there was a $100,000 pledge of unfunded investor equity capital commitments to the lenders of the Facility, which shall be released once $100,000 of incremental capital has been called and received by the Company subsequent to the March 21, 2014 closing date of the Facility. Such capital call commitment has not been satisfied as of June 30, 2014.



The Company had the following commitments to fund delayed draw senior secured loans, none of which were funded:

Par Value as of June 30, 2014December 31, 2013

Total unfunded delayed draw commitments $ 1,780 $ 3,000 46



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DIVIDENDS AND DISTRIBUTIONS TO COMMON STOCKHOLDERS

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions on behalf of its stockholders, for those who have elected to participate in the plan. As a result of adopting such a plan, if the Board of Directors authorizes, and GMS Finance declares, a cash dividend or distribution, the stockholders who have elected to participate in the dividend reinvestment plan would have their cash dividends or distributions automatically reinvested in additional shares of the Company's common stock, rather than receiving cash. Prior to a Qualified IPO, the Company intends to use primarily newly issued shares of its common stock to implement the plan issued at net asset value per share determined as of the valuation date fixed by the Board of Directors for such dividend or distribution. After a Qualified IPO, the Company intends to use primarily newly issued shares to implement the plan so long as the market value per share is equal to or greater than the net asset value per share on the relevant valuation date. If the market value per share is less than the net asset value per share on the relevant valuation date, the plan administrator would purchase the common stock on behalf of participants in the open market, unless the Company instructs the plan administrator otherwise. On June 26, 2014 and March 13, 2014, the Company declared dividends of $0.27 and $0.19 per share, respectively, for the quarter ended June 30, 2014 and March 31, 2014, respectively, which were paid on July 14, 2014 and April 14, 2014, respectively, to holders of record of common stock at the close of business on June 30, 2014 and March 31, 2014, respectively. As of December 31, 2013, no dividends or distributions had been declared or paid by the Company.



CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are described below. The critical accounting policies should be read in connection with our consolidated financial statements in Part I, Item 1 of this Form 10-Q and in Part II, Item 8 of the Company's annual report on Form 10-K for the year ended December 31, 2013. Fair Value Measurements The Company applies fair value accounting in accordance with the terms of Financial Accounting Standards Board ASC Topic 820, Fair Value Measurement and Disclosures ("ASC 820"). ASC 820 defines fair value as the amount that would be exchanged to sell an asset or transfer a liability in an orderly transfer between market participants at the measurement date. The Company values securities/instruments traded in active markets on the measurement date by multiplying the closing price of such traded securities/instruments by the quantity of shares or amount of the instrument held. The Company may also obtain quotes with respect to certain of its investments, such as its securities/instruments traded in active markets and its liquid securities/instruments that are not traded in active markets, from pricing services, brokers, or counterparties (i.e. "consensus pricing"). When doing so, the Company determines and documents whether the quote obtained is sufficient according to US GAAP to determine the fair value of the security. The Company may use the quote obtained or alternative pricing sources may be utilized including valuation techniques typically utilized for illiquid securities/instruments. Securities/instruments that are illiquid or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Investment Adviser or the Board of Directors, does not represent fair value shall each be valued as of the measurement date using all techniques appropriate under the circumstances and for which sufficient data is available. These valuation techniques may vary by investment and include comparable public market valuations, comparable precedent transaction valuations and/or discounted cash flow analyses. The process generally used to determine the applicable value is as follows: (i) the value of each portfolio company or investment is initially reviewed by the 47



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investment professionals responsible for such portfolio company or investment and, for non-traded investments, a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs is used to determine a preliminary value; (ii) preliminary valuation conclusions are documented and reviewed by a valuation committee comprised of members of senior management; (iii) the Board of Directors engages one or more third-party valuation firms to provide positive assurance on portions of the portfolio each quarter (such that each non-traded investment is reviewed by a third-party valuation firm at least once annually) including a review of management's preliminary valuation and conclusion on fair value; (iv) the Audit Committee of the Board of Directors (the "Audit Committee") reviews the assessments of the Investment Adviser and, where appropriate, the respective third-party valuation firms and provides the Board of Directors with any recommendations with respect to changes to the fair value of each investment in the portfolio; and (v) the Board of Directors discusses the valuation recommendations of the Audit Committee and determines the fair value of each investment in the portfolio in good faith based on the input of the Investment Adviser and, where applicable, the respective third-party valuation firms.



All factors that might materially impact the value of an investment are considered, including, but not limited to the assessment of the following factors, as relevant:

the nature and realizable value of any collateral; call features, put features and other relevant terms of debt; the portfolio company's leverage and ability to make payments; the portfolio company's public or private credit rating;



the portfolio company's actual and expected earnings and discounted cash

flow; prevailing interest rates and spreads for similar securities and expected volatility in future interest rates; the markets in which the portfolio company does business and recent

economic and/or market events; and



comparisons to comparable transactions and publicly traded securities.

Investment performance data utilized are the most recently available financial statements and compliance certificate received from the portfolio companies as of the measurement date which in many cases may reflect a lag in information. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments may fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been reported had a ready market for the investments existed, and it is reasonably possible that the difference could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the realized gains or losses on investments to be different than the net change in unrealized appreciation or depreciation currently reflected in the consolidated financial statements as of June 30, 2014. US GAAP establishes a hierarchal disclosure framework which ranks the level of observability of market price inputs used in measuring investments at fair value. The observability of inputs is impacted by a number of factors, including the type of investment and the characteristics specific to the investment and state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available quoted prices or for which fair value can be measured from quoted prices in active markets generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value. 48



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Investments measured and reported at fair value are classified and disclosed based on the observability of inputs used in determination of fair values, as follows:



Level I-inputs to the valuation methodology are quoted prices available in

active markets for identical investments as of the reporting date. The

types of financial instruments included in Level I include unrestricted

securities, including equities and derivatives, listed in active markets.

The Company does not adjust the quoted price for these investments, even

in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level II-inputs to the valuation methodology are either directly or



indirectly observable as of the reporting date and are those other than

quoted prices in active markets. The type of financial instruments in this

category includes less liquid and restricted securities listed in active

markets, securities traded in other than active markets, government and

agency securities, and certain over-the-counter derivatives where the fair

value is based on observable inputs. Level III-inputs to the valuation methodology are unobservable and



significant to overall fair value measurement. The inputs into the

determination of fair value require significant management judgment or

estimation. Financial instruments that are included in this category

include investments in privately-held entities, collateralized loan

obligations, and certain over-the-counter derivatives where the fair value

is based on unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the overall fair value measurement. The Investment Adviser's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.



Transfer between levels, if any, are recognized at the beginning of the quarter in which the transfers occur.

The Company generally uses the following framework when determining the fair value of investments that are categorized as Level III:

Investments in debt securities are initially evaluated to determine whether the enterprise value of the portfolio company is greater than the applicable debt. The enterprise value of the portfolio company is estimated using a market approach and an income approach. The market approach utilizes market value (EBITDA) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The income approach typically uses a discounted cash flow analysis of the portfolio company. Investments in debt securities that do not have sufficient coverage through the enterprise value analysis are valued based on an expected probability of default and discount recovery analysis. Investments in debt securities with sufficient coverage through the enterprise value analysis are generally valued using a discounted cash flow analysis of the underlying security. Projected cash flows in the discounted cash flow typically represent the relevant security's contractual interest, fees and principal payments plus the assumption of full principal recovery at the investment's expected maturity date. The discount rate to be used is determined using an average of two market-based methodologies.



Investments in structured finance obligations are generally valued using a discounted cash flow and/or consensus pricing.

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The significant unobservable inputs used in the fair value measurement of the Company's investments in first and second lien debt securities are discount rates. Significant increases in discount rates would result in a significantly lower fair value measurement. The significant unobservable inputs used in the fair value measurement of the Company's investments in structured finance obligations are discount rates, default rates, prepayment rates, recovery rates and indicative quotes. Significant increases in discount rates, default rates or prepayment rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value. Significant decreases in indicative quotes in isolation may result in a significantly lower fair value measurement. The fair value of the secured borrowings approximates its carrying value and is categorized as Level III within the hierarchy. Secured borrowings are valued generally using discounted cash flow analysis. The significant unobservable inputs used in the fair value measurement of the Company's secured borrowings are discount rates. Significant increases in discount rates would result in a significantly lower fair value measurement.



The fair value of other financial assets and liabilities approximates their carrying value based on the short term nature of these items.

See Note 4 to the consolidated financial statements in Part I, Item 1 of this Form 10-Q for further information on fair value measurements.

Use of Estimates

The preparation of consolidated financial statements, included in Part I, Item 1 of this Form 10-Q, in conformity with US GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting period. Management's estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Company's accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on base management and incentive fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Actual results could differ from these estimates and such differences could be material.



Investments

Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation on investments as presented in the Consolidated Statements of Operations included in Part I, Item 1 of this Form 10-Q reflects the net change in the fair value of investments, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. 50



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Revenue Recognition

Interest from Investments and Realized Gain/Loss on Investments

Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on debt securities purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of investments represents the original cost, including loan origination fees, adjusted for the accretion of discounts and amortization of premiums, if any. At time of exit, the realized gain or loss on an investment is the difference between the amortized cost at time of exit and the cash received at exit using the specific identification method. The Company may have loans in its portfolio that contain payment-in-kind ("PIK") provisions. PIK represents interest that is accrued and recorded as interest income at the contractual rates, increases the loan principal on the respective capitalization dates, and is generally due at maturity. Interest income from investments in the "equity" class of collateralized loan obligation ("CLO") funds, which we refer to as "structured finance obligations", is recorded based upon an estimation of the expected cash inflows from our CLO equity investments, including the expected residual payments. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties, including the amount and timing of principal payments which are impacted by prepayments, repurchases, defaults, delinquencies and liquidations of or within the CLO funds. These uncertainties are difficult to predict and are subject to future events that may impact our estimates and interest income. As a result, actual results may differ significantly from these estimates. Interest income from investments in the notes of CLO funds, which are also refered to as "structured finance obligations", is recorded based upon the stated interest rate. Other Income Other income may include income such as consent, waiver and amendment fees associated with the Company's investment activities as well as any fees for managerial assistance services rendered by the Company to portfolio companies. Such fees are recognized as income when earned or the services are rendered. The Company may receive a fee for guaranteeing the outstanding debt of a portfolio company. Such fee will be amortized into other income over the life of the guarantee. The unamortized amount, if any, is included in other assets in the Consolidated Statements of Assets and Liabilities included in Part I, Item 1 of this Form 10-Q. Non-Accrual Income Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid current and, in management's judgment, are likely to remain current. Management may not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.



Income Taxes

For federal income tax purposes, GMS Finance intends to be treated as a RIC under the Code, and intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, GMS Finance must meet certain minimum distribution, source-of-income and asset diversification requirements. If such requirements are met, then GMS Finance is generally required to pay income taxes only on the portion of its taxable income and gains it does not distribute. 51



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The minimum distribution requirements applicable to RICs require GMS Finance to distribute to its stockholders at least 90% of its investment company taxable income ("ICTI"), as defined by the Code, each year. Depending on the level of ICTI earned in a tax year, GMS Finance may choose to carry forward ICTI in excess of current year distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI. In addition, based on the excise distribution requirements, GMS Finance is subject to a 4% nondeductible federal excise tax on undistributed income unless GMS Finance distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year. For this purpose, however, any ordinary income or capital gain net income retained by GMS Finance that is subject to corporate income tax is considered to have been distributed. GMS Finance intends to make sufficient distributions each taxable year to satisfy the excise distribution requirements. The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are "more-likely than not" to be sustained by the applicable tax authority. All penalties and interest associated with income taxes, if any, are included in income tax expense.



The Borrower Sub is a disregarded entity for tax purposes and is consolidated with the return of GMS Finance.

Capital Calls and Dividends and Distributions to Common Stockholders

The Company records the shares issued in connection with capital calls as of the effective date, or due date, of the capital call, which is the date shares are issued. To the extent that the Company has taxable income available, the Company intends to make quarterly distributions to its common stockholders. Dividends and distributions to common stockholders are recorded on the record date. The amount to be distributed is determined by the Board of Directors each quarter and is generally based upon the taxable earnings estimated by management and available cash. Net realized capital gains, if any, is generally distributed at least annually, although the Company may decide to retain such capital gains for investment. The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions on behalf of its stockholders, for those who have elected to participate in the plan. As a result of adopting such a plan, if the Board of Directors authorizes, and GMS Finance declares a cash dividend or distribution, the stockholders who have elected to participate in the dividend reinvestment plan would have their cash dividends or distributions automatically reinvested in additional shares of the Company's common stock, rather than receiving cash. Prior to a Qualified IPO, the Company intends to use primarily newly issued shares of its common stock to implement the plan issued at net asset value per share determined as of the valuation date fixed by the Board of Directors for such dividend or distribution. After a Qualified IPO, the Company intends to use primarily newly issued shares to implement the plan so long as the market value per share is equal to or greater than the net asset value per share on the relevant valuation date. If the market value per share is less than the net asset value per share on the relevant valuation date, the plan administrator would purchase the common stock on behalf of participants in the open market, unless the Company instructs the plan administrator otherwise.


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