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FAIR VALUE MEASUREMENTS
6 Months Ended
Sep. 30, 2024
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS FAIR VALUE MEASUREMENTS
Investment Valuation Process

Beginning as of the fiscal quarter ended June 30, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors has designated the Valuation Committee comprised of certain officers of the Company as the Valuation Designee to determine the fair value of the Company's investments that do not have readily available market quotations, subject to the oversight of the Board of Directors. The valuation process is led by the valuation team and the Valuation Committee in conjunction with the investment team. The process includes a quarterly review of each investment by our valuation team and the Valuation Committee. Valuations of each portfolio security are prepared quarterly by the valuation team using updated financial and other operational information collected from the investment team. In conjunction with the internal valuation process, the Valuation Committee also has engaged multiple independent consulting firms specializing in financial due diligence, valuation, and business advisory services to provide third-party valuation reviews and an independent range of values for selected investments, which is presented to the Valuation Committee.

CSWC also uses a standard internal investment rating system in connection with its investment oversight, portfolio management, and investment valuation procedures for its debt portfolio. This system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein.

There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individual investment. While management believes our valuation methodologies are appropriate and consistent with market participants, the recorded fair values of our investments may differ significantly from fair values that would have been used had an active market for the securities existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.
Fair Value Hierarchy

CSWC has established and documented processes for determining the fair values of portfolio company investments on a recurring basis in accordance with the 1940 Act and ASC 820. As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly basis. We also use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement.

The three levels of valuation inputs established by ASC 820 are as follows:

Level 1: Investments whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair value measurement.
As of September 30, 2024 and March 31, 2024, 100% of the CSWC investment portfolio consisted of privately held debt and equity instruments for which inputs falling within the categories of Level 1 and Level 2 are generally not readily available. Therefore, the Valuation Committee determines the fair value of our investments in good faith using Level 3 inputs, pursuant to CSWC's valuation policy and procedures subject to the oversight of the Board of Directors.

Investment Valuation Inputs

ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date excluding transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date.

The Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used by market participants in pricing the investment in a transaction in the principal or most advantageous market for the asset.

The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:

financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
current and projected financial condition of the portfolio company;
current and projected ability of the portfolio company to service its debt obligations;
type and amount of collateral, if any, underlying the investment;
current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment;
current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
indicative dealer quotations from brokers, banks, and other market participants;
market yields on other securities of similar risk;
pending debt or capital restructuring of the portfolio company;
projected operating results of the portfolio company;
current information regarding any offers to purchase the investment;
current ability of the portfolio company to raise any additional financing as needed;
changes in the economic environment which may have a material impact on the operating results of the portfolio company;
internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
qualitative assessment of key management;
contractual rights, obligations or restrictions associated with the investment; and
other factors deemed relevant.

CSWC uses several different valuation approaches depending on the security type including the Market Approach, the Income Approach, and the Enterprise Value Waterfall Approach.

Market Approach

Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is a combination of the Enterprise Value Waterfall Approach and Income Approach as described in detail below. For investments recently originated (within a quarterly reporting period) or where the value has not departed significantly from its cost, we generally rely on our cost basis or recent transaction price to determine the fair value, unless a material event has occurred since origination.

Income Approach

In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of the factors listed above. Under the Income Approach, CSWC develops an expectation of the yield that a hypothetical market participant would require when purchasing each debt investment (the “Required Market Yield”). The Required Market Yield is calculated in a two-step process. First, using quarterly market data we estimate the current market yield of similar debt securities. Next, based on the factors described above, we modify the current market yield for each security to produce a unique Required Market Yield for each of our investments. The resulting Required Market Yield is the significant Level 3 input to the Income Approach model. If, with respect to an investment, the unobservable inputs have not fluctuated significantly from the date the investment was made or have not fluctuated significantly from CSWC’s expectations on the date the investment was made, and there have been no significant fluctuations in the market pricing for such investments, we may conclude that the Required Market Yield for that investment is equal to the stated rate on the investment. In instances where CSWC determines that the Required Market Yield is different from the stated rate on the investment, we discount the contractual cash flows on the debt instrument using the Required Market Yield in order to estimate the fair value of the debt security.

In addition, under the Income Approach, CSWC also determines the appropriateness of the use of third-party broker quotes, if any, as a significant Level 3 input in determining fair value. In determining the appropriateness of the use of third-party broker quotes, CSWC evaluates the level of actual transactions used by the broker to develop the quote, whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes, the source of the broker quotes, and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market indices. To the extent sufficient observable inputs are available to determine fair value, CSWC may use third-party broker quotes or other independent pricing to determine the fair value of certain debt investments.

Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in the Required Market Yield for a particular debt security may result in a lower (higher) fair value for that security. A significant increase (decrease) in a third-party broker quote for a particular debt security may result in a higher (lower) value for that security.

Enterprise Value Waterfall Approach

In valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfall valuation model. CSWC estimates the enterprise value of a portfolio company and then allocates the enterprise value to the portfolio company’s securities in order of their relative liquidation preference. In addition, CSWC assumes that any outstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid at par. Additionally, we may estimate the fair value of non-performing debt securities using the Enterprise Value Waterfall approach as needed.

To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on public comparable companies, observable transactions and discounted cash flow analyses. A main input into the valuation model is a
measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. In addition, we consider other factors, including, but not limited to: (1) offers from third parties to purchase the portfolio company; and (2) the implied value of recent investments in the equity securities of the portfolio company. For certain non-performing assets, we may utilize the liquidation or collateral value of the portfolio company's assets in our estimation of its enterprise value.

The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived from the comparable public companies and transactions, (2) discount rate assumptions used in the discounted cash flow model and (3) a measure of the portfolio company’s financial performance, which generally is either Adjusted EBITDA or revenues. Inputs can be based on historical operating results, projections of future operating results or a combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management to obtain updates on the portfolio company’s performance, including information such as industry trends, new product development, loss of customers and other operational issues. Fair value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in either the multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for that security.

The following fair value hierarchy tables set forth our investment portfolio by level as of September 30, 2024 and March 31, 2024 (in thousands):
Fair Value Measurements
at September 30, 2024 Using
Asset CategoryTotalQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
First lien loans$1,345,389 $— $— $1,345,389 
Second lien loans27,372 — — 27,372 
Subordinated debt1,280 — — 1,280 
Preferred equity74,552 — — 74,552 
Common equity & warrants59,914 — — 59,914 
Total Investments$1,508,507 $— $— $1,508,507 
Fair Value Measurements
at March 31, 2024 Using
Asset Category
TotalQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
First lien loans$1,309,449 $— $— $1,309,449 
Second lien loans33,774 — — 33,774 
Subordinated debt1,336 — — 1,336 
Preferred equity71,127 — — 71,127 
Common equity & warrants60,875 — — 60,875 
Total Investments$1,476,561 $— $— $1,476,561 
The tables below present the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages) used in the valuation of CSWC’s debt and equity securities at September 30, 2024 and March 31, 2024. Significant Level 3 Inputs were weighted by the relative fair value of the investments. The tables are not intended to be all inclusive, but instead capture the significant unobservable inputs relevant to our determination of fair value.
Fair Value atSignificant
ValuationSeptember 30, 2024UnobservableWeighted
TypeTechnique(in thousands)InputsRangeAverage
First lien loansIncome Approach$1,284,492  Discount Rate 
5.5% - 50.4%
13.6%
Third Party Broker Quote
27.5 - 99.9
92.4
Market Approach59,763 Cost
97.8 - 98.5
98.2
Exit Value
92.5 - 92.5
92.5
Enterprise Value Waterfall Approach1,134 EBITDA Multiple
9.0x - 9.0x
9.0x
Discount Rate
45.0% - 45.0%
45.0%
Second lien loansIncome Approach27,372  Discount Rate 
9.2% - 28.5%
11.9%
Subordinated debtIncome Approach588  Discount Rate 
19.3% - 19.3%
19.3%
Third Party Broker Quote
25.0 - 25.0
25.0
Market Approach134 Cost
100.0 - 100.0
100.0
Enterprise Value Waterfall Approach558 EBITDA Multiple
5.9x - 7.6x
6.4x
Discount Rate
12.8% - 16.9%
14.1%
Preferred equityEnterprise Value Waterfall Approach73,577  EBITDA Multiple 
4.3x - 17.0x
9.1x
Discount Rate
11.1% - 45.0%
14.6%
Market Approach975 Cost
100.0 - 100.0
100.0
Common equity & warrantsEnterprise Value Waterfall Approach59,914  EBITDA Multiple 
4.2x - 16.9x
8.1x
Discount Rate
10.9% - 24.6%
15.2%
Total Level 3 Investments$1,508,507 

           
Fair Value atSignificant
ValuationMarch 31, 2024UnobservableWeighted
TypeTechnique(in thousands)InputsRangeAverage
First lien loansIncome Approach$1,211,447 Discount Rate
5.5% - 43.8%
13.4%
Third Party Broker Quote
38.3 - 100.0
92.4
Market Approach98,002 Cost
98.0 - 99.0
98.1
Second lien loansIncome Approach33,774 Discount Rate
13.4% - 33.3%
15.6%
Third Party Broker Quote
28.0 - 28.0
28.0
Subordinated debtIncome Approach568 Discount Rate
18.7% - 18.7%
18.7%
Third Party Broker Quote
23.3 - 23.3
23.3
Market Approach210 Cost
94.0 - 100.0
96.1
Enterprise Value Waterfall Approach558 EBITDA Multiple
5.7x - 7.9x
6.4x
Discount Rate
13.2% - 18.6%
14.8%
Preferred equityEnterprise Value Waterfall Approach68,877 EBITDA Multiple
4.3x - 17.0x
9.9x
Discount Rate
10.3% - 38.0%
16.7%
Market Approach2,250 Cost
100.0 - 100.0
100.0
Common equity & warrantsEnterprise Value Waterfall Approach60,375 EBITDA Multiple
4.7x - 15.6x
8.6x
Discount Rate
10.3% - 30.2%
16%
Market Approach500 Cost
100.0 - 100.0
100.0
Total Level 3 Investments$1,476,561 

Changes in Fair Value Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments from one fair value level to another. During the three and six ended September 30, 2024 and 2023, we had no transfers between fair value levels.
The following tables provide a summary of changes in the fair value of investments measured using Level 3 inputs during the six months ended September 30, 2024 and 2023 (in thousands):
Fair Value March 31, 2024Realized & Unrealized Gains (Losses)
Purchases of Investments1,2
RepaymentsPIK Interest CapitalizedDivestituresConversion/Exchange of SecurityFair Value September 30, 2024YTD Unrealized Appreciation (Depreciation) on Investments held at period end
First lien loans$1,309,449 $(14,912)$196,254 $(128,801)$5,984 $(22,585)$— $1,345,389 $(15,970)
Second lien loans33,774 (1,986)(4)(3,420)70 — (1,062)27,372 (106)
Subordinated debt1,336 29 57 — 11 — (153)1,280 21 
Preferred equity71,127 (132)3,557 — — — — 74,552 (132)
Common equity & warrants60,875 (5,861)3,685 — — — 1,215 59,914 (5,062)
Total Investments$1,476,561 $(22,862)$203,549 $(132,221)$6,065 $(22,585)$— $1,508,507 $(21,249)
Fair Value March 31, 2023Realized & Unrealized Gains (Losses)
Purchases of Investments1
RepaymentsPIK Interest CapitalizedDivestitures
Conversion/Exchange of Security3
Fair Value September 30, 2023YTD Unrealized Appreciation (Depreciation) on Investments held at period end
First lien loans$1,000,984 $(5,395)$200,986 $(40,307)$2,678 $(13,875)$(3,791)$1,141,280 $(5,740)
Second lien loans35,820 2,184 126 (1,114)18 — — 37,034 2,181 
Subordinated debt791 (28)— (20)17 — — 760 (28)
Preferred equity63,393 (1,345)4,392 — — — — 66,440 (1,345)
Common equity & warrants54,144 (3,030)3,127 — — (3,402)3,791 54,630 (3,217)
Total Investments$1,155,132 $(7,614)$208,631 $(41,441)$2,713 $(17,277)$— $1,300,144 $(8,149)

1Includes purchases of new investments, as well as discount accretion on existing investments.
2Included are distributions-in-kind of investments received in connection with the dissolution and liquidation of I-45 SLF LLC ("I-45 SLF"). See Note 11 - Related Party Transactions for more information.
3Includes $3.8 million of cost basis allocated from first lien debt to warrants.