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Fair value of Financial Instruments
12 Months Ended
Sep. 30, 2022
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

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 2031 Asset-Backed Debt and the Credit Facility are classified as Level 3. Our 2026 Notes are classified as Level 2 as they are financial instruments with readily observable market inputs. Our 2023 Notes are classified as Level 1, as they were valued using the closing price from the primary exchange. 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 floating rate loans, mainly first lien secured debt, but also may include 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 2023 Notes, our 2026 Notes, our 2031 Asset-Backed Debt and the 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 as a practical expedient within the fair value hierarchy.

The remainder of our investment portfolio and our long-term 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 the 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 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 ($ in thousands):

 

Asset Category

 

Fair value at September 30, 2022

 

 

Valuation Technique

 

Unobservable Input

 

Range of Input
(Weighted Average)
(1)

First lien

 

$

70,363

 

 

Market Comparable

 

Broker/Dealer bids
or quotes

 

N/A

First lien

 

 

930,806

 

 

Market Comparable

 

Market Yield

 

8.2% - 21% (10.9%)

First lien

 

 

8,473

 

 

Enterprise Market Value

 

EBITDA multiple

 

14.0

Second lien

 

 

147

 

 

Market Comparable

 

Market Yield

 

0.147

Second lien

 

 

 

 

Enterprise Market Value

 

EBITDA multiple

 

6.0x

Equity

 

 

89,906

 

 

Enterprise Market Value

 

EBITDA multiple

 

3.3x - 21.4x (12.5x)

Equity

 

 

5,232

 

 

Enterprise Market Value

 

DLOM

 

11.8%

Total Level 3 investments

 

$

1,104,927

 

 

 

 

 

 

 

Long-Term Credit Facility

 

$

167,563

 

 

Market Comparable

 

Market Yield

 

2.5%

 

Asset Category

 

Fair value at September 30, 2021

 

 

Valuation Technique

 

Unobservable Input

 

Range of Input
(Weighted Average)
(1)

First lien

 

$

177,480

 

 

Market Comparable

 

Broker/Dealer bids
or quotes

 

N/A

First lien

 

 

754,004

 

 

Market Comparable

 

Market Yield

 

5.6% – 13.0% (7.5%)

Second lien

 

 

8,085

 

 

Market Comparable

 

Market Yield

 

11.0% – 14.0% (11.8%)

First lien

 

 

2,934

 

 

Enterprise Market Value

 

EBITDA multiple

 

1.8x

Second lien

 

 

864

 

 

Enterprise Market Value

 

EBITDA multiple

 

5.4x

Equity

 

 

70,253

 

 

Enterprise Market Value

 

EBITDA multiple

 

4.7x – 18.5x (11.5x)

Equity

 

 

7,569

 

 

Enterprise Market Value

 

DLOM

 

9.3%

Total Level 3 investments

 

$

1,021,189

 

 

 

 

 

 

 

Long-Term Credit Facility

 

$

218,851

 

 

Market Comparable

 

Market Yield

 

2.1%

 

(1)
The weighted averages disclosed in the table above were weighted by their relative fair value.

 

Our investments, cash and cash equivalents, Credit Facility or Prior Credit Facility, as applicable, 2023 Notes, 2026 Notes and 2031 Asset-Backed Debt were categorized as follows in the fair value hierarchy for ASC 820 purposes ($ in thousands):

 

 

 

Fair Value at September 30, 2022

 

Description

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Measured at Net
Asset Value
(1)

 

First lien

 

$

1,009,642

 

 

$

 

 

$

 

 

$

1,009,642

 

 

$

 

Second lien

 

 

147

 

 

 

 

 

 

 

 

 

147

 

 

 

 

Equity

 

 

154,465

 

 

 

 

 

 

 

 

 

95,138

 

 

 

59,327

 

Total investments

 

 

1,164,254

 

 

 

 

 

 

 

 

 

1,104,927

 

 

 

59,327

 

Cash and cash equivalents

 

 

47,880

 

 

 

47,880

 

 

 

 

 

 

 

 

 

 

Total investments and cash and cash equivalents

 

$

1,212,134

 

 

$

47,880

 

 

$

 

 

$

1,104,927

 

 

$

59,327

 

Credit Facility payable

 

$

167,563

 

 

$

 

 

$

 

 

$

167,563

 

 

$

 

2023 Notes payable

 

 

96,812

 

 

 

96,812

 

 

 

 

 

 

 

 

 

 

2026 Notes payable (2)

 

 

182,276

 

 

 

 

 

 

182,276

 

 

 

 

 

 

 

2031 Asset-Backed Debt(2)

 

 

226,128

 

 

 

 

 

 

 

 

 

226,128

 

 

 

 

Total debt

 

$

672,779

 

 

$

96,812

 

 

$

182,276

 

 

$

393,691

 

 

$

 

 

(1)
In accordance with ASC Subtopic 820-10, Fair Value Measurements and Disclosures, or ASC 820-10, our equity investment in PSSL and PTSF are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value, and thus have not been classified in the fair value hierarchy.
(2)
We elected not to apply the fair value option allowed by ASC 825-10 to the 2026 Notes and the 2031 Asset-Backed Debt and thus the balance reported in the Consolidated Statement of Assets and Liabilities represents the carrying value, which approximates the fair value.

 

 

 

 

Fair Value at September 30, 2021

 

Description

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Measured at Net
Asset Value
(1)

 

First lien

 

$

934,418

 

 

$

 

 

$

 

 

$

934,418

 

 

$

 

Second lien

 

 

8,949

 

 

 

 

 

 

 

 

 

8,949

 

 

 

 

Equity

 

 

138,252

 

 

 

 

 

 

 

 

 

77,822

 

 

 

60,430

 

Total investments

 

 

1,081,619

 

 

 

 

 

 

 

 

 

1,021,189

 

 

 

60,430

 

Cash and cash equivalents

 

 

49,826

 

 

 

49,826

 

 

 

 

 

 

 

 

 

 

Total investments and cash and cash equivalents

 

$

1,131,445

 

 

$

49,826

 

 

$

 

 

$

1,021,189

 

 

$

60,430

 

Credit Facility payable

 

$

218,851

 

 

$

 

 

$

 

 

$

218,851

 

 

$

 

2023 Notes payable

 

 

111,114

 

 

 

111,114

 

 

 

 

 

 

 

 

 

 

2026 Notes payable (2)

 

 

97,171

 

 

 

 

 

 

97,171

 

 

 

 

 

 

 

2031 Asset-Backed Debt(2)

 

 

225,497

 

 

 

 

 

 

 

 

 

225,497

 

 

 

 

Total debt

 

$

652,633

 

 

$

111,114

 

 

$

97,171

 

 

$

444,348

 

 

$

 

 

(1)
In accordance with ASC Subtopic 820-10, Fair Value Measurements and Disclosures, or ASC 820-10, our equity investment in PSSL and PTSF 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 the fair value option allowed by ASC 825-10 to the 2026 Notes and the 2031 Asset-Backed Debt and thus the balance reported in the Consolidated Statement of Assets and Liabilities represents the carrying value, which approximates the fair value.

 

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

 

 

 

Year Ended September 30, 2022

 

Description

 

First Lien

 

 

Second lien,
subordinated
debt and equity
investments

 

 

Totals

 

Beginning Balance

 

$

934,419

 

 

$

86,770

 

 

$

1,021,189

 

Net realized losses

 

 

894

 

 

 

(12,358

)

 

 

(11,464

)

Net change in unrealized depreciation

 

 

(17,661

)

 

 

11,655

 

 

 

(6,006

)

Purchases, PIK interest, net discount accretion and non-cash exchanges

 

 

593,144

 

 

 

27,048

 

 

 

620,192

 

Sales, repayments and non-cash exchanges

 

 

(501,154

)

 

 

(17,830

)

 

 

(518,984

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

1,009,642

 

 

$

95,285

 

 

$

1,104,927

 

Net change in unrealized depreciation reported within the net change in unrealized
depreciation on investments in our Consolidated Statements of Operations
attributable to our Level 3 assets still held at the reporting date
.

 

$

(15,247

)

 

$

11,584

 

 

$

(3,663

)

 

 

 

Year Ended September 30, 2021

 

Description

 

First Lien

 

 

Second lien,
subordinated debt
and equity
investments

 

 

Totals

 

Beginning Balance

 

$

968,616

 

 

$

78,402

 

 

$

1,047,018

 

Net realized losses

 

 

(3,731

)

 

 

(8,220

)

 

 

(11,951

)

Net change in unrealized appreciation

 

 

16,326

 

 

 

26,124

 

 

 

42,450

 

Purchases, PIK interest, net discount accretion and non-cash exchanges

 

 

630,324

 

 

 

15,477

 

 

 

645,801

 

Sales, repayments and non-cash exchanges

 

 

(677,116

)

 

 

(25,013

)

 

 

(702,129

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

934,419

 

 

$

86,770

 

 

$

1,021,189

 

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.

 

$

10,313

 

 

$

30,025

 

 

$

40,338

 

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

 

 

 

Years Ended September 30,

 

Long-Term Credit Facility

 

2022

 

 

2021

 

Beginning Balance (cost – $219,400 and $308,599, respectively)

 

$

218,851

 

 

$

299,047

 

Net change in unrealized (depreciation) appreciation included in earnings

 

 

(1,542

)

 

 

9,003

 

Borrowings

 

 

147,254

 

 

 

346,500

 

Repayments

 

 

(197,000

)

 

 

(435,699

)

Transfers in and/or out of Level 3

 

 

 

 

 

 

Ending Balance (cost – $168,830 and $219,400, respectively)

 

$

167,563

 

 

$

218,851

 

 

As of September 30, 2022, we had outstanding non-U.S. dollar borrowings on our Prior Credit Facility. Net change in fair value from 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

 

Australian Dollar

 

$

10,000

 

 

$

7,254

 

 

$

6,430

 

 

10/1/22

 

 

(824

)

 

As of September 30, 2021 we did not have any outstanding non-U.S. dollar borrowings on the Credit Facility.

 

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 the Credit Facility and the 2023 Notes. We elected to use the fair value option for the Credit Facility and the 2023 Notes 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 incurred expenses of $0.4 million, $2.9 million and zero relating to amendment costs on the Credit Facility and debt issuance costs on the 2023 Notes during the years ended September 30, 2022, 2021, and 2020, respectively. 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 entities 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 Credit Facility and the 2023 Notes are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities, including our 2026 Notes and 2031 Asset-Backed Debt.

 

For the years ended September 30, 2022, 2021, and 2020, the Credit Facility or our Prior Credit Facility, as applicable, the 2023 Notes had a net change in unrealized (appreciation) depreciation of $(4.9) million, $(11.6) million, and $14.2 million, respectively. As of September 30, 2022 and 2021 , the net unrealized depreciation on the Credit Facility or our Prior Credit Facility, as applicable, the 2023 Notes totaled $1.5 million and $7.2 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of the Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments. Our 2023 Notes trade on the TASE and we use the closing price on the exchange to determine the fair value.