BLACKSTONE SECURED LENDING FUND This section of this Form 10-K generally discusses 2022 and 2021 items and year to year comparisons between 2022 and 2021. For the discussion of 2021 compared to 2020 see " Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which specific discussion is incorporated herein by reference. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto in Part II, Item 8 of this Form 10-K "Consolidated Financial Statements and Supplementary Data." 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 this Form 10-K "Risk Factors." Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" appearing elsewhere in this Form 10-K.
Overview and Investment Framework
We are aDelaware statutory trust structured as a non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. In addition, forU.S. federal income tax purposes, we elected to be treated as a RIC under the Code. We are managed by our Adviser. The Administrator will provide the administrative services necessary for us to operate.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation.
Under normal market conditions, we generally invest at least 80% of our total assets (net assets plus borrowings for investment purposes) in secured debt investments and our portfolio is composed primarily of first lien senior secured and unitranche loans. To a lesser extent, we have and may continue to also invest in second lien, third lien, unsecured or subordinated loans and other debt and equity securities. We do not currently focus on investments in issuers that are distressed or in need of rescue financing.
Key Components of Our Results of Operations
Investments
We focus primarily on loans and securities, including syndicated loans, of
private
Our level of investment activity (both the number of investments and the size of each investment) can and will vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment, trading prices of loans and other securities and the competitive environment for the types of investments we make.
Revenues
We generate revenues in the form of interest income from the debt securities we
hold and dividends. Our debt investments typically have a term of five to eight
years and bear interest at floating rates on the basis of a benchmark such as
LIBOR, SOFR, or SONIA. In some instances, we receive payments on our debt
investments based on scheduled amortization of the outstanding balances. In
addition, we may receive repayments of some of our debt investments prior to
their scheduled maturity date. The frequency or volume of these repayments
fluctuates significantly from period to period. Our portfolio activity also
reflects the proceeds of sales of securities. In some cases, our investments may
provide for deferred interest payments or PIK interest. The principal amount of
loans and any accrued but unpaid interest generally become due at the maturity
date.
In addition, we generate revenue from various fees in the ordinary course of
business such as in the form of commitment, loan origination, structuring,
consent, waiver, amendment, syndication and other miscellaneous fees as well as
fees for providing managerial assistance to our portfolio companies.
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Table of Contents Expenses Except as specifically provided below, all investment professionals and staff of the Adviser, when and to the extent engaged in providing investment advisory services to us, and the base compensation, bonus and benefits, and the routine overhead expenses, of such personnel allocable to such services, will be provided and paid for by the Adviser. We bear all other costs and expenses of our operations, administration and transactions, including, but not limited to (a) investment advisory fees, including management fees and incentive fees, to the Adviser, pursuant to the Investment Advisory Agreement; (b) our allocable portion of compensation, overhead (including rent, office equipment and utilities) and other expenses incurred by the Administrator in performing its administrative obligations under the Administration Agreement, including but not limited to: (i) our chief compliance officer, chief financial officer and their respective staffs; (ii) investor relations, legal, operations and other non-investment professionals at the Administrator that perform duties for us; and (iii) any internal audit group personnel ofBlackstone or any of its affiliates; and (c) all other expenses of our operations, administrations and transactions. From time to time, the Adviser, the Administrator or their affiliates may pay third-party providers of goods or services on our behalf. We will reimburse the Adviser, Administrator or such affiliates thereof for any such amounts. From time to time, the Adviser or the Administrator may defer or waive fees and/or rights to be reimbursed for expenses. The Administrator has elected to forgo any reimbursement for rent and other occupancy costs for the years endedDecember 31, 2022 , 2021 and 2020. However, the Administrator may seek reimbursement for such costs in future periods. All of the foregoing expenses will ultimately be borne by our shareholders. Costs and expenses of the Administrator and the Adviser that are eligible for reimbursement by us will be reasonably allocated on the basis of time spent, assets under management, usage rates, proportionate holdings, a combination thereof or other reasonable methods determined by the Administrator in accordance with policies adopted by the Board.
Portfolio and Investment Activity
For the year endedDecember 31, 2022 , we acquired$1,109.6 million aggregate principal amount of investments (including$90.3 million of unfunded commitments),$1,074.5 million of which was first lien debt,$7.9 million of which was second lien debt,$14.0 million of which was unsecured debt and$13.2 million of which was equity. 103
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Our investment activity is presented below (information presented herein is at amortized cost unless otherwise indicated) (dollar amounts in thousands):
For
the Year Ended
2022 2021 2020
Investments:
Total investments, beginning of period$ 9,745,126 $ 5,575,482 $ 3,067,767 New investments purchased(1) 1,002,091 6,833,479 4,536,541 Net accretion of discount on investments 47,429 62,799 50,058 Net realized gain (loss) on investments 37,402 7,785 (4,378) Investments sold or repaid (1,174,176) (2,734,419) (2,074,506) Total investments, end of period$ 9,657,872 $ 9,745,126 $ 5,575,482 Amount of investments funded at principal: First lien debt investments$ 984,200 $ 6,672,961 $ 4,436,388 Second lien debt investments 7,896 68,519 35,352 Unsecured debt 14,023 52,670 129,933 Equity investments 13,144 90,286 17,852 Total$ 1,019,263 $ 6,884,436 $ 4,619,525 Proceeds from investments sold or repaid: First lien debt investments$ (1,077,767) $ (2,632,926) $ (1,923,689) Second lien debt investments (20,907) (48,024) (18,473) Unsecured debt (13,535) (52,537) (131,629) Warrants (8,514) - - Equity investments (53,453) (932) (715) Total$ (1,174,176) $ (2,734,419) $ (2,074,506) Number of portfolio companies 176 148 81
Number of new investment commitments in new portfolio companies
53 117 40
Average new investment commitment amount $ 19,231 $ 58,841 $ 115,488
Weighted average yield of new investment commitments 10.16 % 7.03 % 7.42 %
Weighted average yield on investments fully sold or paid down
7.14 % 7.45 % 7.81 %
Weighted average yield on debt and income producing investments, at amortized cost(2)(3)
10.64 % 7.25 % 7.70 %
Weighted average yield on debt and income producing investments, at fair value(2)(3)
10.73 % 7.21 % 7.68 %
Average loan to value (LTV)(4) 47.5 % 44.0 % 45.8 %
Percentage of debt investments bearing a floating rate 99.9 %
99.9 % 100.0 %
Percentage of debt investments bearing a fixed rate 0.1 % 0.1 % - %
(1)Includes payment-in-kind ("PIK") interest received that increases the loan principal.
(2)Computed as (a) the annual stated interest rate or yield plus the annual accretion of discounts or less the annual amortization of premiums, as applicable, on accruing debt included in such securities, divided by (b) total debt investments (at fair value or cost, as applicable) included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented above. (3)As ofDecember 31, 2022 , 2021 and 2020, the weighted average total portfolio yield at cost was 10.52%, 7.16% and 7.65%, respectively. The weighted average total portfolio yield at fair value was 10.56%, 7.08% and 7.64%, respectively. (4)Includes all private debt investments for which fair value is determined by our Board in conjunction with a third-party valuation firm and excludes quoted assets. Average loan-to-value represents the net ratio of loan-to-value for each portfolio company, weighted based on the fair value of total applicable private debt investments. Loan-to-value is calculated as the current total net debt through each respective loan tranche divided by the estimated enterprise value of the portfolio company as of the most recent quarter end. As ofDecember 31, 2022 , our portfolio companies had a weighted average annual revenue of$698 million and weighted average annual EBITDA of$167 million . These calculations include all private debt investments for which fair value is determined by theBoard of Trustees in conjunction with a third-party valuation firm and excludes quoted assets. Amounts are weighted based on fair value of each respective investment. Amounts were derived from the most recently available 104
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portfolio company financial statements, have not been independently estimated by us, and may reflect a normalized or adjusted amount. Accordingly, we make no representation or warranty in respect of this information.
Our investments consisted of the following (dollar amounts in thousands):
December 31, 2022 December 31, 2021
% of Total % of Total
Investments at Fair Investments at Fair
Cost Fair Value Value Cost Fair Value Value
First lien debt $ 9,497,570 $ 9,419,963 97.95 % $ 9,563,051 $ 9,621,939 97.63 %
Second lien debt 48,753 46,336 0.48 62,445 63,175 0.64
Equity 111,549 150,949 1.57 119,630 170,265 1.73
Total $ 9,657,872 $ 9,617,248 100.00 % $ 9,745,126 $ 9,855,379 100.00 %
As of
Results of Operations
The following table represents the operating results (dollar amounts in thousands):
For
The Year Ended
2022 2021 2020
Total investment income $ 850,292 $ 624,700 $ 389,641
Net expenses 365,130 270,586 149,543
Net investment income before excise tax 485,162 354,114 240,098
Excise tax expense 1,386 2,438 517
Net investment income after excise tax 483,776 351,676 239,581
Net unrealized appreciation (depreciation) (122,149) 104,178 (16,582)
Net realized gain (loss) 42,929 4,568 (4,361)
Net increase (decrease) in net assets resulting from operations
$ 404,556
Net increase (decrease) in net assets resulting from operations can vary from period to period as a result of various factors, including acquisitions, the level of new investment commitments, the recognition of realized gains and losses and changes in unrealized appreciation and depreciation on the investment portfolio. As a result, comparisons may not be meaningful.
Investment Income
Investment income was as follows (dollar amounts in thousands):
For The Year Ended December 31,
2022 2021 2020
Interest income $ 796,499 $ 610,508 $ 381,797
Payment-in-kind interest income 40,324 8,188 7,119
Dividend income 9,307 219 -
Fee income 4,162 5,785 725
Total investment income $ 850,292 $ 624,700 $ 389,641
Total investment income increased to $850.3 million for the year ended
December 31, 2022 , an increase of $225.6 million , or 36%, compared to the year
ended December 31, 2021 primarily attributable to increased reference interest
rates driving increased interest income from our investments. The size of our
investment portfolio at fair value decreased slightly to $9,617.2 million at
December 31, 2022 from $9,855.4 million at December 31, 2021 . Additionally, for
the year ended December 31, 2022 , we recorded $4.9 million of non-recurring
interest income (e.g., prepayment premiums, accelerated accretion of upfront
loan origination fees and unamortized discounts, etc.) as compared to $60.9
million in the prior year primarily a result of decreased prepayments. We expect
that investment income will vary based on a variety of factors including the
pace of our originations, repayments and changes in interest rates.
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While rising interest rates have favorably impacted our investment income during 2022, further interest rate increases and the resulting higher cost of capital have the potential to negatively impact the free cash flow and credit quality of certain borrowers which could impact their ability to make principal and interest payments. If such interest rate increases occur concurrently with a period of economic weakness or a slowdown in growth, our borrowers' and/or our portfolio performance may be negatively impacted. Further, significant market dislocation as a result of changing economic conditions could limit the liquidity of certain assets traded in the credit markets, and this would impact our ability to sell such assets at attractive prices or in a timely manner.
Expenses
Expenses were as follows (dollar amounts in thousands):
For The Year Ended December 31,
2022 2021 2020
Interest expense $ 203,579 $ 120,469 $ 65,949
Management fees (Note 3) 101,707 62,401 32,874
Income based incentive fees (Note 3) 97,154 67,272 41,983
Capital gains incentive fees (Note 3) (11,883) 16,312 (3,141)
Professional fees 4,011 2,925 1,999
Board of Trustees' fees 853 571 467
Administrative service expenses 2,672 2,370 2,271
Other general and administrative 6,343 4,794 4,166
Amortization of offering costs - - 1,509
Excise tax expense 1,386 2,438 517
Total expenses (including excise tax expense) 405,822 279,552 148,594
Management fees waived (25,427) (4,195) -
Incentive fees waived (13,879) (2,333) -
Expense support - - -
Recoupment of expense support -
- 1,466
Net expenses (including excise tax expense)
Interest Expense Total interest expense (including unused fees and other debt financing expenses), increased to$203.6 million for the year endedDecember 31, 2022 , an increase of$83.1 million , or 69%, compared to the year endedDecember 31, 2021 , primarily driven by increased borrowings under our credit facilities during the year and an increase in our weighted average interest rate on our borrowings relative to the prior year. The average principal debt outstanding increased to$5,732.6 million for the year endedDecember 31, 2022 from$4,000.8 million in the prior year. Our weighted average interest rate increased to 3.46% for the year endedDecember 31, 2022 from 2.92% in the prior year.
Management Fees
Management fees increased to$101.7 million for the year endedDecember 31, 2022 , an increase of$39.3 million , or 63%, compared to the year endedDecember 31, 2021 , primarily due to an increase in average quarter end gross assets during 2022 compared to the prior year. The Adviser voluntarily waived management fees following the IPO such that the management fee will remain at 0.75% for a period of two years following the IPO (versus the contractual rate of 1.00%), which resulted in a waiver of$25.4 million for the year endedDecember 31, 2022 . Management fees net of amounts waived increased$18.1 million , or 31% compared to the prior year.
Our average quarter end total gross assets increased to
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Table of Contents Income Based Incentive Fees Income based incentive fees increased to$97.2 million for the year endedDecember 31, 2022 an increase of$29.9 million , or 44%, compared to the year endedDecember 31, 2021 , primarily due to an increase in pre-incentive fee net investment income. The Adviser voluntarily waived incentive fees following the IPO such that the fee will remain at 15.0% for a period of two years following the IPO (versus the contractual rate of 17.5%), which resulted in waivers of$13.9 million for the year endedDecember 31, 2022 . Incentive fees net of amounts waived increased$18.3 million or 28%.
Pre-incentive fee net investment income increased to
Capital Gains Incentive Fees
We accrued capital gains incentive fees of$(11.9) million for the year endedDecember 31, 2022 compared to$16.3 million for the prior year. The reversal of previously accrued incentive fees was attributable to net realized and unrealized losses in the current year. The accrual for any capital gains incentive fee underU.S. 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 in the prior period. If such cumulative amount is negative, then there is no accrual.
Other Expenses
Professional fees include legal, rating agencies, audit, tax, valuation, technology and other professional fees incurred related to the management of us. 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 the administration agreement, including our allocable portion of the cost of certain of our executive officers, their respective staff and other non-investment professionals that perform duties for us. Prior to the IPO, offering costs included costs associated with our private offering. Other general and administrative expenses include insurance, filing, research, our sub-administrator, subscriptions and other costs. Total other expenses increased to$13.9 million for the year endedDecember 31, 2022 from$10.6 million in the prior year, primarily driven by an increase in professional fees and certain other general and administrative expenses.
Income Taxes, Including Excise Taxes
We elected to be treated as a RIC under Subchapter M of the Code, and we intend to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, we must, among other things, distribute to our shareholders in each taxable year generally at least 90% of the sum of our investment company taxable income, as defined by the Code (without regard to the deduction for dividends paid), and net tax-exempt income for that taxable year. To maintain our tax treatment as a RIC, we, among other things, intend to make the requisite distributions to our shareholders, which generally relieve us from corporate-levelU.S. federal income taxes. Depending on the level of taxable income earned in a tax year, we may carry forward taxable income (including net capital gains, if any) in excess of current year dividend distributions from the current tax year into the next tax year and pay a nondeductible 4%U.S. federal excise tax on such taxable income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such income, we will accrue excise tax on estimated excess taxable income.
For the years ended
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Net Unrealized Gain (Loss)
Net unrealized gain (loss) was comprised of the following (dollar amounts in
thousands):
For The Year Ended December 31,
2022 2021 2020
Net unrealized gain (loss) on investments $ (126,493) $ 104,727 $ (16,593)
Net unrealized gain (loss) on translation of
assets and liabilities in foreign currencies 4,344 (549) 11
Net unrealized gain (loss) on investments $ (122,149) $
104,178
For the year endedDecember 31, 2022 , we has net unrealized losses of$122.1 million , compared to unrealized gains of$104.2 million during the prior year, were primarily driven by an decrease in the fair value of our debt investments. The fair value of our debt investments as a percentage of principal decreased by 0.8% as compared to a 1.0% increase for the same period in prior year driven, in part, by inflation and changes in the economic outlook during the year endedDecember 31, 2022 .
Net Realized Gain (Loss)
The realized gains and losses on fully exited and partially exited investments comprised of the following (dollar amounts in thousands):
For The Year
Ended
2022 2021 2020
Net realized gain (loss) on investments $ 37,402 $ 7,785 $ (4,378)
Net realized gain (loss) on foreign currency
transactions 5,527 (3,217) 17
Net realized gain (loss) on investments $ 42,929 $
4,568
For the year ended
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are generated primarily from cash flows from interest, dividends and fees earned from our investments and principal repayments, our credit facilities, debt securitization transactions, and other secured and unsecured debt. We may also generate cash flow from operations, future borrowings and future offerings of securities including public and/or private issuances of debt and/or equity securities through both registered offerings and private offerings. The primary uses of our cash and cash equivalents are for (i) originating loans and purchasing senior secured debt investments, (ii) funding the costs of our operations (including fees paid to our Adviser and expense reimbursements paid to our Administrator), (iii) debt service, repayment and other financing costs of our borrowings and (iv) cash distributions to the holders of our shares. As ofDecember 31, 2022 andDecember 31, 2021 , we had 4 revolving credit facilities outstanding and we had 5 unsecured bonds outstanding. We may from time to time enter into additional credit facilities, increase the size of our existing credit facilities or issue further debt securities. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to incur borrowings, issue debt securities or issue preferred stock, if immediately after the borrowing or issuance, the ratio of total assets (less total liabilities other than indebtedness) to total indebtedness plus preferred stock, is at least 150%. As ofDecember 31, 2022 andDecember 31, 2021 , we had an aggregate amount of$5,563.0 million and$5,544.3 million of senior securities outstanding and our asset coverage ratio was 174.8% and 180.2%, respectively. We seek to carefully consider our unfunded commitments for the purpose of planning our ongoing financial leverage. Further, we maintain sufficient borrowing capacity within the 150% asset coverage limitation to cover any outstanding unfunded commitments we are required to fund. Cash and cash equivalents as ofDecember 31, 2022 , taken together with our$987.0 million of unused capacity under our credit facilities (subject to borrowing base availability) is expected to be sufficient for our investing activities and to conduct our operations in the near term. Additionally, we held$144.5 million of Level 2 debt investments as ofDecember 31, 2022 , which could provide additional liquidity if necessary. Although we were able to issue unsecured debt during the year endedDecember 31, 2022 , a deterioration in economic conditions or any other negative economic developments could restrict our access to financing in the future. We may not be able to find new financing for future investments or liquidity needs and, 108
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even if we are able to obtain such financing, such financing may not be on as favorable terms as we have previously obtained. These factors may limit our ability to make new investments and adversely impact our results of operations.
As ofDecember 31, 2022 , we had$131.3 million in cash and cash equivalents. During the year endedDecember 31, 2022 , cash provided by operating activities was$672.9 million , primarily as a result of proceeds from sale of investments and principal repayment of$1,174.2 million partially offset by funding of portfolio investments of$961.8 million . Cash used in financing activities was$648.2 million during the period, which was primarily as a result of our dividends paid in cash of$423.4 million and redemptions paid in cash of$263.0 million , partially offset by net borrowings on our credit facilities of$43.7 million . Equity
There were no equity issuances of our common shares during the year ended
Distributions The following table summarizes the Company's distributions declared and payable for the year endedDecember 31, 2022 (dollars in thousands except per share amounts): Date Declared Record Date Payment Date Per Share Amount Total Amount October 18, 2021 January 18, 2022 May 13, 2022 $ 0.1000$ 16,927 (1) October 18, 2021 March 16, 2022 May 13, 2022 0.1500 25,454 (1) February 23, 2022 March 31, 2022 May 13, 2022 0.5300 89,937 October 18, 2021 May 16, 2022 August 12, 2022 0.2000 33,995 (1) May 2, 2022 June 30, 2022 August 12, 2022 0.5300 89,169 October 18, 2021 July 18, 2022 November 14, 2022 0.2000 32,976 (1) August 30, 2022 September 30, 2022 November 14, 2022 0.6000 97,094 November 2, 2022 December 30, 2022 January 31, 2023 0.6000 96,882 Total distributions $ 2.9100$ 482,434
(1)Represents a special distribution.
For the years ended
For the years ended
For the years endedDecember 31, 2022 , 2021, and 2020, capital gain dividends represented 2.6%, 0.0%, and 0.0%, of total dividends paid by the Company, respectively. Qualified short-term capital gain dividends are exempt fromU.S. withholding tax applicable to non-U.S. shareholders. With respect to distributions, we have adopted an "opt out" dividend reinvestment plan for shareholders. As a result, in the event of a declared cash distribution or other distribution, each shareholder that has not "opted out" of the dividend reinvestment plan will have their dividends or distributions automatically reinvested in additional shares rather than receiving cash distributions. Shareholders who receive distributions in the form of shares will be subject to the sameU.S. federal, state and local tax consequences as if they received cash distributions. 109
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The following table summarizes the amounts and shares issued to shareholders who
have not opted out of our dividend reinvestment plan during the year ended
Payment Date DRIP Shares Value DRIP Shares Issued
January 31, 2022 $ 11,469 417,379
May 13, 2022 16,501 640,829
August 12, 2022 11,470 455,148
November 14, 2022 12,942 541,489
Total distributions $ 52,382 2,054,845
For additional information on our distributions and dividend reinvestment plan,
see "Item 8. Consolidated Financial Statements and Supplementary Data-Notes to
Consolidated Financial Statements-Note 8. Net Assets."
Share Repurchase Plan
InOctober 2021 , our Board approved a share repurchase plan (the "Company 10b5-1 Plan"), to acquire up to approximately$262 million (representing the net proceeds from the IPO) in the aggregate of our common shares at prices below our NAV per share over a specified period, in accordance with the guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Exchange Act. The Company 10b5-1 Plan terminated by its own terms inNovember 2022 . InFebruary 2023 , our Board authorized a share repurchase plan, under which we may repurchase up to$250 million in the aggregate of our outstanding common shares in the open market at prices below our NAV per share for a one-year term, in accordance with the guidelines specified in Rule 10b-18 of the Exchange Act (the "Company 10b-18 Plan"). The timing, manner, price and amount of any share repurchases will be determined by us, in our sole discretion, based upon the evaluation of economic and market conditions, stock price, applicable legal and regulatory requirements and other factors. The following table summarizes the shares repurchased under the Company 10b5-1 Plan during the year endedDecember 31, 2022 (dollars in thousands except share amounts): Approximate Total Number of Dollar Value of Shares Purchased as Shares that May Part of Publicly Yet Be Total Number of Average Price Announced Plans or Purchased Under
Period Shares Purchased Paid per Share Programs the Program
April 1 - April 30, 2022 - $ - - $ 262,000
May 1 - May 31, 2022 774,558 $ 25.24 774,558 $ 242,447
June 1 - June 30, 2022 1,313,782 $ 24.49 1,313,782 $ 210,275
July 1 - July 31, 2022 2,394,113 $ 23.20 2,394,113 $ 154,736
August 1 - August 31, 2022 2,223,389 $ 24.22 2,223,389 $ 100,886
September 1 - September 30, 2022 2,251,657 $ 24.14 2,251,657 $ 46,527
October 1- October 31, 2022 2,002,432 $ 23.67 2,002,432 $ -
Total Repurchases 10,959,931 10,959,931
For additional information on our changes in net assets and distributions see "Item 8. Consolidated Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 8. Net Assets."
Borrowings
As of
For additional information on our debt obligations see "Item 8. Consolidated Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 6. Borrowings."
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We have entered into a number of business relationships with affiliated or related parties, including the following:
•the Investment Advisory Agreement; and
•the Administration Agreement;
In addition to the aforementioned agreements, we, our Adviser and certain of our Adviser's affiliates have been granted exemptive relief by theSEC to co-invest with other funds managed by our Adviser or its affiliates in a manner consistent with our investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. See "Item 8. Consolidated Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements-Note 3. Agreements and Related Party Transactions."
Recent Developments
Macroeconomic Environment
TheU.S. Federal Reserve's numerous actions to increase interest rates in order to control inflation have created further uncertainty for the economy and for our borrowers. Although our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers. It is difficult to predict the full impact of recent changes and any future changes in interest rates or inflation. Many of our portfolio companies may be susceptible to economic downturns or recessions and may be unable to repay our loans during these periods. Therefore, during these periods our non-performing assets may increase and the value of our portfolio may decrease if we are required to write down the values of our investments. Adverse economic conditions may also decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
Reference Rate Reform
LIBOR and certain other floating rate benchmark indices to which our floating rate loans and other loan agreements are tied, including, without limitation, the Euro Interbank Offered Rate, or EURIBOR, the Stockholm Interbank Offered Rate, or STIBOR, the Australian Bank Bill Swap Reference Rate, or BBSY, the Canadian Dollar Offered Rate, or CDOR, the Swiss Average Rate Overnight, or SARON, and the Copenhagen Interbank Offering Rate, or CIBOR, or collectively, IBORs, are the subject of recent national, international and regulatory guidance and proposals for reform. As ofDecember 31, 2021 , theICE Benchmark Association , or IBA, ceased publication of all non-USD LIBOR and the one-week and two-month USD LIBOR and, as and previously announced, intends to cease publication of remainingU.S. dollar LIBOR settings immediately afterJune 30, 2023 . Further, onMarch 15, 2022 , the Consolidated Appropriations Act of 2022, which includes the Adjustable Interest Rate (LIBOR) Act, was signed into law in theU.S. This legislation establishes a uniform benchmark replacement process for financial contracts maturing afterJune 30, 2023 that do not contain clearly defined or practicable fallback provisions. The legislation also creates a safe harbor that shields lenders from litigation if they choose to utilize a replacement rate recommended by theBoard of Governors of theFederal Reserve . At this time, it is not possible to predict how markets will respond to SOFR, SONIA, or other alternative reference rates as the transition away from USD LIBOR and GBP LIBOR proceeds. Despite the LIBOR transition in other markets, benchmark rate methodologies inEurope ,Australia ,Canada ,Switzerland , andDenmark have been reformed and rates such as EURIBOR, STIBOR, BBSY, CDOR, SARON, and CIBOR may persist asInternational Organization of Securities Commissions , or IOSCO, compliant reference rates moving forward. However, multi-rate environments may persist in these markets as regulators and working groups have suggested market participants adopt alternative reference rates.
Critical Accounting Estimates
The preparation of the 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 and
estimates should be read in connection with our risk factors described in "Item
1A. Risk Factors."
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The Company is required to report its investments, including those for which
current market values are not readily available, at fair value in accordance
with ASC 820, Fair Value Measurements ("ASC 820"), which defines fair value as
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
applicable measurement date, and Rule 2a-5 under the 1940 Act.
Fair value is based on observable market prices or parameters or derived from
such prices or parameters when such quotations are readily available. In
accordance with Rule 2a-5 under the 1940 Act, a market quotation is "readily
available" only when it is a quoted price (unadjusted) in active markets for
identical instruments that a fund can access at the measurement date, provided
that such a quotation is not considered to be readily available if it is not
reliable. The Company utilizes mid-market pricing (i.e., mid-point of average
bid and ask prices) to value these investments. These market quotations are
obtained from independent pricing services, if available; otherwise generally
from at least two principal market makers or primary market dealers. To assess
the continuing appropriateness of pricing sources and methodologies, the Adviser
regularly performs price verification procedures and issues challenges, as
necessary, to independent pricing services or brokers, and any differences are
reviewed in accordance with the valuation procedures. The Adviser does not
adjust the prices unless it has a reason to believe market quotations are not
reflective of the fair value of an investment. Examples of events that would
cause market quotations to not reflect fair value could include cases when a
security trades infrequently or not at all, causing a quoted purchase or sale
price to become stale, or in the event of a "fire sale" by a distressed
seller. All price overrides require approval from the Board.
Where prices or inputs are not available or, in the judgment of the Board are
not reliable, valuation techniques based on the facts and circumstances of the
particular investment will be utilized. Securities that are not publicly traded
or for which market prices are not readily available are valued at fair value as
determined in good faith by the Board, based on, among other things, the input
of the Adviser, the Audit Committee of the Board (the "Audit Committee") and
independent valuation firms engaged on the recommendation of the Adviser and at
the direction of the Board. These valuation approaches involve some level of
management estimation and judgment, the degree of which is dependent on the
price transparency for the investments or market and the investments'
complexity.
The Company's Board undertakes a multi-step valuation process each quarter in
connection with determining the fair value of the Company's investments for
which reliable market quotations are not readily available, or are available but
deemed not reflective of the fair value of an investment, which includes, among
other procedures, the following:
•The valuation process begins with each investment being preliminarily valued by the Adviser's valuation team in conjunction with the Adviser's investment professionals responsible for each portfolio investment;
•In addition, independent valuation firms engaged by the Board prepare quarter-end valuations of such investments except de minimis investments, as determined by the Adviser. The independent valuation firms provide a final range of values on such investments to the Board and the Adviser. The independent valuation firms also provide analyses to support their valuation methodology and calculations; •The Adviser's Valuation Committee reviews each valuation recommendation to confirm they have been calculated in accordance with the valuation policy and compares such valuations to the independent valuation firms' valuation ranges to ensure the Adviser's valuations are reasonable;
•The Adviser's Valuation Committee makes valuation recommendations to the Audit Committee;
•The Audit Committee reviews the valuation recommendations made by the Adviser's Valuation Committee, including the independent valuation firms' quarterly valuations, and once approved, recommends them for approval by the Board; and
•The Board reviews 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 Audit Committee, the Adviser's Valuation Committee
and, where applicable, the independent valuation firms and other external
service providers.
Valuation of each of our investments will generally be made, as described above,
as of the end of each fiscal quarter. In cases where the Company determines its
net asset value ("NAV") at times other than a quarter end, the Company updates
the value of securities with market quotations to the most recent market
quotation. For securities without market quotations, non-quarterly valuations
will generally be the most recent quarterly valuation unless the Adviser
determines that a significant observable change has occurred since the most
recent quarter end with respect to the investment (which determination may be as
a result of a material event at a portfolio company, material change in market
spreads, secondary market transaction in the securities of an investment or
otherwise). If the Adviser determines such a change has occurred with respect to
one or more investments, the Adviser will determine whether to update the value
for each relevant investment using a range of values from
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an independent valuation firm, where applicable, in accordance with the Company's valuation policy, pursuant to authority delegated by the Board.
As part of the valuation process, the Board takes into account relevant factors in determining the fair value of the Company's investments for which reliable market quotations are not readily available, many of which are loans, including and in combination, as relevant, of: (i) the estimated enterprise value of a portfolio company, (ii) the nature and realizable value of any collateral, (iii) the portfolio company's ability to make payments based on its earnings and cash flow, (iv) the markets in which the portfolio company does business, (v) a comparison of the portfolio company's securities to any similar publicly traded securities, and (vi) overall changes in the interest rate environment and the credit markets that may affect the price at which similar investments may be made in the future. When an external event such as a purchase transaction, public offering or subsequent equity or debt sale occurs, the Board with the assistance of the Adviser, the Audit Committee and Independent valuation firms, considers whether the pricing indicated by the external event corroborates its valuation. The Board has and will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of the Company's portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter, and the Board may reasonably rely on that assistance. However, the Board is responsible for the ultimate valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company's valuation policy and a consistently applied valuation process.
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