Fair value of Financial Instruments

3 Months Ended

Dec. 31, 2022

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.

ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:


Level 1:	Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2:	Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
Level 3:	Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments, our Credit Facility and our SBA debentures are classified as Level 3. Our 2026 Notes and 2026 Notes-2 are classified as Level 2, as they are financial instruments with readily observable market inputs. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.

The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information, disorderly transactions or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence were available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable orderly market-based transactions for the same or similar assets or other relevant observable market-based inputs that may be used in pricing an asset.

Our investments are generally structured as debt and equity investments in the form of first lien secured debt, second lien secured debt, subordinated debt and equity investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information including comparable transactions, performance multiples and yields, among other factors. These non-public investments valued using unobservable inputs are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities.

In addition to using the above inputs to value cash equivalents, investments, our SBA debentures, our 2026 Notes, our 2026 Notes -2 and our Truist Credit Facility, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value. See Note 2.

As outlined in the table below, some of our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids include a disclaimer, may not have corroborating evidence, may be the result of a disorderly transaction and may be the result of consensus pricing. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such bids do not reflect the fair value of an investment, it may independently value such investment by using the valuation procedure that it uses with respect to assets for which market quotations

are not readily available. In accordance with ASC 820, we do not categorize any investments for which fair value is measured using the net asset value per share within the fair value hierarchy.

The remainder of our investment portfolio and our long-term Truist Credit Facility are valued using a market comparable or an enterprise market value technique. With respect to investments for which there is no readily available market value, the factors that our board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities, discount for lack of marketability and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event, excluding transaction costs, is used to corroborate the valuation. When using earnings multiples to value a portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment. Generally, an increase in a market yield will result in a decrease in the valuation of a debt investment, while a decrease in a market yield will have the opposite effect. Generally, an increase in an earnings before interest, taxes, depreciation and amortization, or EBITDA, multiple will result in an increase in the valuation of an investment, while a decrease in an EBITDA multiple will have the opposite effect.

Our Level 3 valuation techniques, unobservable inputs and ranges were categorized as follows for ASC 820 purposes:


Asset Category ($ in thousands)	Fair value at December 31, 2022		Valuation Technique	Unobservable Input	Range of Input (Weighted Average) (1)
First lien	$	46,082	Market Comparable	Broker/Dealer bids or quotes	N/A
First lien		602,366	Market Comparable	Market yield	7.0% - 21.0% (10.8%)
First lien		12,821	Enterprise Market Value	EBITDA multiple	8.0x
Second lien		9,505	Market Comparable	Broker/Dealer bids or quotes	N/A
Second lien		121,252	Market Comparable	Market yield	13.0 - 20.7 (14.8%)
Second lien		—	Enterprise Market Value	EBITDA multiple	6.3x
Subordinated debt / corporate notes		148,596	Market Comparable	Market yield	12.4% - 17.4 (13.3%)
Equity		179,383	Enterprise Market Value	EBITDA multiple	3.1x - 21.3x (9.4x)
Equity		6,725	Enterprise Market Value	DLOM(2)	17.2%
Total Level 3 investments	$	1,126,730
Debt Category ($ in thousands)
Truist Credit Facility	$	367,308	Market Comparable	Market yield	2.9%

(1)

The weighted averages disclosed in the table above were weighted by their relative fair value.

(2)

DLOM is defined as discount for lack of marketability.


Asset Category ($ in thousands)	Fair value at September 30, 2022		Valuation Technique	Unobservable Input	Range of Input (Weighted Average) (1)
First lien	$	44,530	Market Comparable	Broker/Dealer bids or quotes	N/A
First lien		569,488	Market Comparable	Market yield	7.0% – 20.2% (10.8%)
First lien		16,946	Market Comparable	EBITDA multiple	14.0x
Second lien		21,600	Market Comparable	Broker/Dealer bids or quotes	N/A
Second lien		108,336	Market Comparable	Market yield	13.3% – 17.0% (14.4%)
Second lien		—	Enterprise Market Value	EBITDA multiple	6.0x
Subordinated debt / corporate notes		141,265	Market Comparable	Market yield	10.8x – 17.2x (12.3x)
Equity		215,131	Enterprise Market Value	EBITDA multiple	3.3x – 21.4x (9.1x)
Equity		42,031	Enterprise Market Value	DLOM(2)	11.8
Total Level 3 investments	$	1,159,327
Debt Category ($ in thousands)
Truist Credit Facility	$	376,687	Market Comparable	Market yield	2.4%

The weighted averages disclosed in the table above were weighted by their relative fair value.

DLOM is defined as discount for lack of marketability.

Our investments, cash and cash equivalents, Truist Credit Facility, SBA debentures, 2024 Notes, 2026 Notes and 2026 Notes-2 were categorized as follows in the fair value hierarchy:


	Fair Value at December 31, 2022
Description ($ in thousands)	Fair Value		Level 1		Level 2		Level 3		Measured at Net Asset Value (1)
Debt investments	$	940,621	$	—	$	—	$	940,621	$	—
Equity investments		255,414		509		—		186,109		68,796
Total investments		1,196,035		509		—		1,126,730		68,796
Cash and cash equivalents		28,556		28,556		—		—		—
Total investments and cash and cash equivalents	$	1,224,591	$	29,065	$	—	$	1,126,730	$	68,796
Truist Credit Facility	$	367,308	$	—	$	—	$	367,308	$	—
SBA Debentures(2)		19,701		—		—		19,701		—
2026 Notes(2)		146,993		—		146,993		—		—
2026 Notes-2(2)		161,586		—		161,586		—		—
Total debt	$	695,588	$	—	$	308,579	$	387,009	$	—


(1)	In accordance with ASC Subtopic 820-10, Fair Value Measurements and Disclosures, or ASC 820-10, our equity investment in PSLF and PTSF II are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value, and thus has not been classified in the fair value hierarchy.
(2)	We elected not to apply ASC 825-10 to the SBA debentures, the 2026 Notes and the 2026 Notes-2, and thus the balance reported in the Consolidated Statement of Assets and Liabilities represents the carrying value. As of December 31, 2022, the carrying value of the SBA debentures approximates the fair value.


	Fair Value at September 30, 2022
Description ($ in thousands)	Fair Value		Level 1		Level 2		Level 3		Measured at Net Asset Value (1)
Debt investments	$	902,165	$	—	$	—	$	902,165	$	—
Equity investments		324,136		304		—		257,162		66,670
Total investments		1,226,301		304		—		1,159,327		66,670
Cash and cash equivalents		52,666		52,666		—		—		—
Total investments and cash and cash equivalents	$	1,278,967	$	52,970	$	—	$	1,159,327	$	66,670
Truist Credit Facility	$	376,687	$	—	$	—	$	376,687		—
SBA Debentures (2)		19,686		—		—		19,686		—
2026 Notes (2)		146,767		—		146,767		—		—
2026-2 Notes (2)		161,373		—		161,373		—		—
Total debt	$	704,513	$	—	$	308,140	$	396,373	$	—


(1)	In accordance with ASC Subtopic 820-10, Fair Value Measurements and Disclosures, or ASC 820-10, our equity investment in PSLF is measured using the net asset value per share (or its equivalent) as a practical expedient for fair value, and thus has not been classified in the fair value hierarchy.
(2)	We elected not to apply ASC 825-10 to the SBA debentures and the 2026 Notes and thus the balance reported in the Consolidated Statement of Assets and Liabilities represents the carrying value. As of September 30, 2022, the carrying value of the SBA debentures approximates the fair value.

The tables below show a reconciliation of the beginning and ending balances for investments measured at fair value using significant unobservable inputs (Level 3):


	Three Months Ended December 31, 2022
Description ($ in thousands)	Debt investments			Equity investments			Totals
Beginning Balance	$	902,165		$	257,162		$	1,159,327
Net realized (loss) gain		42			4,024			4,066
Net change in unrealized appreciation		(5,885	)		(83,427	)		(89,312	)
Purchases, PIK interest, net discount accretion and non-cash exchanges		68,890			14,379			83,269
Sales, repayments and non-cash exchanges		(24,590	)		(6,030	)		(30,620	)
Transfers in/out of Level 3		—			—			—
Ending Balance	$	940,622		$	186,108		$	1,126,730
Net change in unrealized appreciation reported within the net change in unrealized appreciation on investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date	$	(5,667	)	$	(83,580	)	$	(89,247	)


	Three Months Ended December 31, 2021
Description ($ in thousands)	Debt investments			Equity investments			Totals
Beginning Balance	$	850,593		$	360,428		$	1,211,021
Net realized (loss) gain		30			(26,196	)		(26,166	)
Net change in unrealized appreciation		(7,014	)		53,736			46,722
Purchases, PIK interest, net discount accretion and non-cash exchanges		285,421			16,231			301,652
Sales, repayments and non-cash exchanges		(123,718	)		(6,134	)		(129,852	)
Transfers in/out of Level 3		—			—			—
Ending Balance	$	1,005,312		$	398,065		$	1,403,377
Net change in unrealized appreciation reported within the net change in unrealized appreciation on investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date	$	(6,126	)	$	53,800		$	47,674

The table below shows a reconciliation of the beginning and ending balances for liabilities measured at fair value using significant unobservable inputs (Level 3):


	Three months ended December 31,
Long-Term Credit Facility	2022			2021
Beginning Balance (cost – $385,920 and $316,545, respectively)	$	376,687		$	314,813
Net change in unrealized appreciation (depreciation) included in earnings		(4,379	)		996
Borrowings (1)		44,000			416,897
Repayments (1)		(49,000	)		(288,218	)
Transfers in and/or out of Level 3		—			—
Ending Balance (cost – $380,920 and $445,224, respectively)	$	367,308		$	444,488
Temporary draws outstanding, at cost		—			—
Ending Balance (cost – $380,920 and $445,224, respectively)	$	367,308		$	444,488

(1)

Excludes temporary draws.

As of December 31, 2022, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value on foreign currency translation on outstanding borrowings is listed below ($ in thousands):


Foreign Currency	Amount Borrowed		Borrowing Cost		Current Value		Reset Date	Change in Fair Value
British Pound	£	36,000	$	49,420	$	43,304	March 31, 2023	$	(6,116	)

As of September 30, 2022, we had outstanding non-U.S. dollar borrowings on our Truist Credit Facility. Net change in fair value on foreign currency translation on outstanding borrowings is listed below ($ in thousands):


Foreign Currency	Amount Borrowed		Borrowing Cost		Current Value		Reset Date	Change in Fair Value
British Pound	£	36,000	$	49,420	$	40,187	December 31, 2022	$	(9,233	)

Generally, the carrying value of our consolidated financial liabilities approximates fair value. We have adopted the principles under ASC Subtopic 825-10, Financial Instruments, or ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Truist Credit Facility. We elected to use the fair value option for the Truist Credit Facility to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we did not incur any expenses relating to amendment costs on the Truist Credit Facility during the three months ended December 31, 2022 and 2021. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires us to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Truist Credit Facility is reported in our Consolidated Statements of Operations. We did not elect to apply ASC 825-10 to any other financial assets or liabilities, including the 2024 Notes, the 2026 Notes, 2026 Notes-2, and the SBA debentures.

For the three months ended December 31, 2022 and 2021, the Truist Credit Facility had a net change in unrealized (appreciation) depreciation of $4.4 million and $(1.0) million, respectively. As of December 31, 2022 and September 30, 2022, the net unrealized depreciation on the Truist Credit Facility totaled $13.6 million and $9.2 million, respectively. We use an independent valuation service to measure the fair value of our Truist Credit Facility in a manner consistent with the valuation process that our board of directors uses to value our investments.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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