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FAIR VALUE MEASUREMENTS | 6 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS Investment Valuation Process The valuation process is led by the finance department in conjunction with the investment team. The process includes a quarterly review of each investment by our executive officers and investment team. Valuations of each portfolio security are prepared quarterly by the finance department using updated financial and other operational information collected by the investment team. Each investment valuation is then subject to review by the executive officers and investment team. In conjunction with the internal valuation process, we have also engaged multiple independent consulting firms specializing in financial due diligence, valuation, and business advisory services to provide third-party valuation reviews of certain investments. The third-party valuation firms provide a range of values for selected investments, which is presented to CSWC’s executive officers and then subsequently to the Board of Directors. 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. The Board of Directors has the ultimate responsibility for reviewing and determining, in good faith, the fair value of CSWC’s investments in accordance with the 1940 Act. 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, 2022 and March 31, 2022, 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, CSWC determines the fair value of its investments (excluding investments for which fair value is measured at net asset value ("NAV") in good faith using Level 3 inputs, pursuant to CSWC's valuation policy and procedures that are established by the management of CSWC, with assistance from multiple third-party valuation advisors and approved by our 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, the Enterprise Value Waterfall Approach, and the NAV Valuation Method. 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. NAV Valuation Method Under the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, CSWC measures the fair value of the investment predominately based on the NAV of the investment fund as of the measurement date. However, in determining the fair value of the investment, we may consider whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of our investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected future cash flows available to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of its interests in the investment fund. The following fair value hierarchy tables set forth our investment portfolio by level as of September 30, 2022 and March 31, 2022 (in thousands):
|  |  | Fair Value Measurements
|  |  | at September 30, 2022 Using
Asset Category | Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
First lien loans | $ | 852,555 |  |  | $ | — |  |  | $ | — |  |  | $ | 852,555 |
Second lien loans | 50,437 |  |  | — |  |  | — |  |  | 50,437 |
Subordinated debt | 459 |  |  | — |  |  | — |  |  | 459 |
Preferred equity | 52,770 |  |  | — |  |  | — |  |  | 52,770 |
Common equity & warrants | 49,813 |  |  | — |  |  | — |  |  | 49,813 |
Investments measured at net asset value 1 | 50,897 |  |  | — |  |  | — |  |  | — |
Total Investments | $ | 1,056,931 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,006,034 |
|  |  | Fair Value Measurements
|  |  | at March 31, 2022 Using
Asset Category | Total |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
First lien loans | $ | 739,872 |  |  | $ | — |  |  | $ | — |  |  | $ | 739,872 |
Second lien loans | 52,645 |  |  | — |  |  | — |  |  | 52,645 |
Subordinated debt | 1,317 |  |  | — |  |  | — |  |  | 1,317 |
Preferred equity | 44,663 |  |  | — |  |  | — |  |  | 44,663 |
Common equity & warrants | 40,514 |  |  | — |  |  | — |  |  | 40,514 |
Investments measured at net asset value 1 | 57,603 |  |  | — |  |  | — |  |  | — |
Total Investments | $ | 936,614 |  |  | $ | — |  |  | $ | — |  |  | $ | 879,011 |
1 Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in Consolidated Statements of Assets and Liabilities. For the investment valued at NAV per share at September 30, 2022 and March 31, 2022, the redemption restrictions dictate that we cannot withdraw our membership interest without unanimous approval. We are permitted to sell or transfer our membership interest and must deliver written notice of such transfer to the other member no later than 60 business days prior to the sale or transfer. 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, 2022 and March 31, 2022. 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 at |  | Significant |  |  |  |
| Valuation |  | September 30, 2022 |  | Unobservable |  |  |  | Weighted
Type | Technique |  | (in thousands) |  | Inputs |  | Range |  | Average
First lien loans | Income Approach |  | $ | 803,645 |  |  | Discount Rate |  | 7.1% - 62.7% |  | 13.3%
|  |  |  |  | Third Party Broker Quote |  | 5.6 - 98 |  | 94.8
| Market Approach |  | 48,910 |  |  | Cost |  | 97.6 - 99.0 |  | 98.2
Second lien loans | Income Approach |  | 36,264 |  |  | Discount Rate |  | 13.2% - 30.0% |  | 17.8%
|  |  |  |  | Third Party Broker Quote |  | 88.7 - 88.7 |  | 88.7
| Market Approach |  | 14,173 |  |  | Cost |  | 91.2 - 91.2 |  | 91.2
|  |  |  |  | Exit Value |  | 100.0 - 100.0 |  | 100.0
Subordinated debt | Market Approach |  | 188 |  |  | Cost |  | 100.0 - 100.0 |  | 100.0
| Enterprise Value Waterfall Approach |  | 271 |  |  | EBITDA Multiple |  | 7.5x - 7.5x |  | 7.5x
|  |  |  |  | Discount Rate |  | 21.0% - 21.0% |  | 21.0%
Preferred equity | Enterprise Value Waterfall Approach |  | 52,020 |  |  | EBITDA Multiple |  | 3.9x - 17.1x |  | 10.3x
|  |  |  |  | Discount Rate |  | 12.6% - 36.2% |  | 18.8%
| Market Approach |  | 750 |  |  | Cost |  | 100.0 - 100.0 |  | 100.0
Common equity & warrants | Enterprise Value Waterfall Approach |  | 48,597 |  |  | EBITDA Multiple |  | 5.4x - 13.0x |  | 10.1x
|  |  |  |  | Discount Rate |  | 11.5% - 36.2% |  | 16.8%
| Market Approach |  | 207 |  |  | Cost |  | 100.0 - 100.0 |  | 100.0
| Income Approach |  | 1,009 |  |  | Third Party Broker Quote |  | 76.6 - 76.6 |  | 76.6
Total Level 3 Investments |  |  | $ | 1,006,034 |  |  |  |  |  |  |
|  |  | Fair Value at |  | Significant |  |  |  |
| Valuation |  | March 31, 2022 |  | Unobservable |  |  |  | Weighted
Type | Technique |  | (in thousands) |  | Inputs |  | Range |  | Average
First lien loans | Income Approach |  | $ | 645,034 |  |  | Discount Rate |  | 7.3% - 30.6% |  | 10.7%
|  |  |  |  | Third Party Broker Quote |  | 5.5 - 96.5 |  | 93.2
| Market Approach |  | 94,838 |  |  | Cost |  | 80.2 - 99.0 |  | 98.1
|  |  |  |  | Exit Value |  | 100.0 - 102.0 |  | 101.8
Second lien loans | Income Approach |  | 49,541 |  |  | Discount Rate |  | 10.3% - 37.8% |  | 15.4%
|  |  |  |  | Third Party Broker Quote |  | 97.3 - 97.3 |  | 97.3
| Enterprise Value Waterfall Approach |  | 3,104 |  |  | EBITDA Multiple |  | 8.3x - 8.3x |  | 8.3x
|  |  |  |  | Discount Rate |  | 22.1% - 22.1% |  | 22.1%
Subordinated debt | Income Approach |  | 650 |  |  | Discount Rate |  | 27.4% - 27.4% |  | 27.4%
| Market Approach |  | 172 |  |  | Cost |  | 100.0 - 100.0 |  | 100.0
| Enterprise Value Waterfall Approach |  | 495 |  |  | EBITDA Multiple |  | 8.1x - 8.1x |  | 8.1x
|  |  |  |  | Discount Rate |  | 20.5% - 20.5% |  | 20.5
Preferred equity | Enterprise Value Waterfall Approach |  | 41,563 |  |  | EBITDA Multiple |  | 6.9x - 18.8x |  | 10.6x
|  |  |  |  | Discount Rate |  | 12.5% - 40.8% |  | 17.8%
| Market Approach |  | 3,100 |  |  | Cost |  | 100.0 - 100.0 |  | 100.0
Common equity & warrants | Enterprise Value Waterfall Approach |  | 36,667 |  |  | EBITDA Multiple |  | 4.2x - 11.4x |  | 8.5x
|  |  |  |  | Discount Rate |  | 10.1% - 32.2% |  | 18.1%
| Market Approach |  | 1,757 |  |  | Exit Value |  | 351.4 - 351.4 |  | 351.4
| Income Approach |  | 2,090 |  |  | Third Party Broker Quote |  | 158.7 - 158.7 |  | 158.7
Total Level 3 Investments |  |  | $ | 879,011 |  |  |  |  |  |  |
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 months ended September 30, 2022 and 2021, we had no transfers between 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, 2022 and 2021 (in thousands):
| Fair Value March 31, 2022 |  | Realized & Unrealized Gains (Losses) |  | Purchases of Investments 1 |  | Repayments |  | PIK Interest Capitalized |  | Divestitures |  | Conversion/Reclassification of Security |  | Fair Value September 30, 2022 |  | YTD Unrealized Appreciation (Depreciation) on Investments held at period end
First lien loans | $ | 739,872 |  |  | $ | (8,608) |  |  | $ | 211,433 |  |  | $ | (85,598) |  |  | $ | 1,694 |  |  | $ | — |  |  | $ | (6,238) |  |  | $ | 852,555 |  |  | $ | (10,824) |
Second lien loans | 52,645 |  |  | (4,461) |  |  | 2,862 |  |  | (142) |  |  | 225 |  |  | (692) |  |  | — |  |  | 50,437 |  |  | (2,945) |
Subordinated debt | 1,317 |  |  | (915) |  |  | — |  |  | — |  |  | 57 |  |  | — |  |  | — |  |  | 459 |  |  | (914) |
Preferred equity | 44,663 |  |  | (990) |  |  | 2,859 |  |  | — |  |  | — |  |  | — |  |  | 6,238 |  |  | 52,770 |  |  | (991) |
Common equity & warrants | 40,514 |  |  | 9,568 |  |  | 1,480 |  |  | — |  |  | — |  |  | (1,749) |  |  | — |  |  | 49,813 |  |  | 9,576 |
Total Investments | $ | 879,011 |  |  | $ | (5,406) |  |  | $ | 218,634 |  |  | $ | (85,740) |  |  | $ | 1,976 |  |  | $ | (2,441) |  |  | $ | — |  |  | $ | 1,006,034 |  |  | $ | (6,098) |
| Fair Value March 31, 2021 |  | Realized & Unrealized Gains (Losses) |  | Purchases of Investments 1 |  | Repayments |  | PIK Interest Capitalized |  | Divestitures |  | Conversion/Reclassification of Security |  | Fair Value September 30, 2021 |  | YTD Unrealized Appreciation (Depreciation) on Investments held at period end
First lien loans | $ | 524,161 |  |  | $ | (592) |  |  | $ | 167,042 |  |  | $ | (66,868) |  |  | $ | 1,589 |  |  | $ | — |  |  | $ | — |  |  | $ | 625,332 |  |  | $ | (2,203) |
Second lien loans | 36,919 |  |  | 254 |  |  | 15,543 |  |  | (1,556) |  |  | 654 |  |  | (53) |  |  | — |  |  | 51,761 |  |  | 290 |
Subordinated debt | 11,534 |  |  | 184 |  |  | 169 |  |  | — |  |  | 441 |  |  | — |  |  | — |  |  | 12,328 |  |  | 183 |
Preferred equity | 22,608 |  |  | 609 |  |  | 4,211 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 27,428 |  |  | 610 |
Common equity & warrants | 36,052 |  |  | 10,267 |  |  | 783 |  |  | — |  |  | — |  |  | (5,371) |  |  | — |  |  | 41,731 |  |  | 9,288 |
Total Investments | $ | 631,274 |  |  | $ | 10,722 |  |  | $ | 187,748 |  |  | $ | (68,424) |  |  | $ | 2,684 |  |  | $ | (5,424) |  |  | $ | — |  |  | $ | 758,580 |  |  | $ | 8,168 |
1 Includes purchases of new investments, as well as discount accretion on existing investments.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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