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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The Company’s investments are carried at fair value and determined in accordance with a documented valuation policy that is applied in a consistent manner. On September 7, 2022, pursuant to Rule 2a-5 of the 1940 Act (“Rule 2a-5”), the Board designated OFS Advisor as the valuation designee to perform fair value determinations relating to the Company’s investments, commencing with the quarter ended September 30, 2022, and the Board maintains oversight of OFS Advisor in its capacity as valuation designee, as prescribed in Rule 2a-5. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions that market participants would use in pricing the subject asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to fair values based on unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active; (iii) inputs other than quoted prices that are observable for the asset or liability; and (iv) inputs that are derived principally from or corroborated by observable market data. Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date. The inputs into the determination of fair value are based upon the best information under the circumstances and may require management to exercise significant judgment or estimation. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The Company generally categorizes its investment portfolio into Level 3, and to a lesser extent Level 2, of the hierarchy. The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. The following table presents the Company’s transfers of Level 2 and Level 3 debt investments for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Transfers from Level 2 to Level 3 | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 3,252 |
Transfers from Level 3 to Level 2 | 5,957 |  |  | 6,403 |  |  | 7,491 |  |  | 6,403 |
Transfers between levels during the reporting periods were due to availability of reliable Indicative Prices in those periods. Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk as a result of economic and political developments, including impacts from rising interest rates and elevated inflation rates, the ongoing war between Russia and Ukraine, the current conflict in Israel, instability in the U.S. and international banking systems, the risk of recession or a shutdown of U.S. government services and related market volatility. Market risk is directly impacted by the volatility and liquidity in the markets in which certain investments are traded and can affect the fair value of the Company’s investments. The following tables present the Company’s investment portfolio measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
Security |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value as of September 30, 2023
Debt investments |  | $ | — |  |  | $ | 21,666 |  |  | $ | 257,578 |  |  | $ | 279,244 |
Equity investments |  | — |  |  | — |  |  | 94,714 |  |  | 94,714 |
Structured Finance Securities |  | — |  |  | — |  |  | 83,289 |  |  | 83,289 |
|  | $ | — |  |  | $ | 21,666 |  |  | $ | 435,581 |  |  | $ | 457,247 |
Security |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value as of December 31, 2022
Debt investments |  | $ | — |  |  | $ | 30,823 |  |  | $ | 282,039 |  |  | $ | 312,862 |
Equity investments |  | — |  |  | — |  |  | 99,196 |  |  | 99,196 |
Structured Finance Securities |  | — |  |  | — |  |  | 88,518 |  |  | 88,518 |
|  | $ | — |  |  | $ | 30,823 |  |  | $ | 469,753 |  |  | $ | 500,576 |
The following tables provides the primary quantitative information about valuation techniques and the Company’s unobservable inputs to its Level 3 fair value measurements as of September 30, 2023 and December 31, 2022. The Company may make changes to the valuation techniques, among techniques otherwise commonly used in accordance with its valuation policies, and/or the weighting of techniques used for particular investments based on changes in facts-and-circumstances and depending on the availability of, or changes in, information in order to produce the best estimate of fair value as of the measurement date. In addition to the techniques and unobservable inputs noted in the tables below and in accordance with OFS Advisor’s valuation policy, OFS Advisor, as valuation designee, may also use other valuation techniques and methodologies when determining the fair value measurements of the Company’s investment assets.
| Fair Value as of September 30, 2023 |  | Valuation technique |  | Unobservable inputs |  | Range (Weighted average)
Debt investments: |  |  |  |  |  |  |
Senior secured | $ | 234,746 |  |  | Discounted cash flow |  | Discount rates |  | 10.32% - 21.66% (13.18%)
Senior secured | 2,477 |  |  | Market approach |  | EBITDA multiples |  | 7.00x - 7.00x (7.00x)
Senior secured | 20,255 |  |  | Market approach |  | Revenue multiples |  | 0.40x - 1.40x (0.59x)
Subordinated | 100 |  |  | Market approach |  | Revenue multiples |  | 0.23x - 0.23x (0.23x)
Structured Finance Securities: |  |  |  |  |  |  |
Subordinated notes(1) | 48,043 |  |  | Discounted cash flow |  | Discount rates |  | 16.00% - 58.00% (32.24%)
|  |  |  |  | Constant default rate |  | 2.00% - 2.00% (2.00%)
|  |  |  |  | Recovery rate |  | 65.00% - 65.00% (65.00%)
Subordinated notes | 97 |  |  | Market approach |  | Net asset value liquidation(2) |  |
Subordinated notes | 4,840 |  |  | Market approach |  | Transaction Price |  |
Mezzanine debt | 27,502 |  |  | Discounted cash flow |  | Discount margin |  | 6.85% - 10.25% (8.04%)
|  |  |  |  | Constant default rate |  | 2.00% - 3.00% (2.03%)
|  |  |  |  | Recovery rate |  | 65.00% - 65.00% (65.00%)
Mezzanine debt | 2,807 |  |  | Market approach |  | Transaction Price |  |
Equity investments: |  |  |  |  |  |  |
Preferred equity | 11,462 |  |  | Market approach |  | EBITDA multiples |  | 4.58x - 7.50x (6.84x)
Preferred equity | 344 |  |  | Discounted cash flow |  | Discount rates |  | 13.26% - 13.26% (13.26%)
Common equity, warrants and other | 5,445 |  |  | Market approach |  | EBITDA multiples |  | 4.58x - 16.50x (9.55x)
Common equity, warrants and other | 77,105 |  |  | Discounted cash flow |  | Discount rates |  | 10.75% - 10.75% (10.75%)
|  |  | Market approach |  | EBITDA multiples |  | 12.50x - 12.50x (12.50x)
Common equity, warrants and other | 358 |  |  | Market approach |  | Revenue multiples |  | 0.40x - 0.70x (0.70x)
| $ | 435,581 |  |  |  |  |  |  |
(1) The cash flows utilized in the discounted cash flow calculations assume: (i) liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices; and (ii) redeployment of proceeds at the issuing CLO’s assumed reinvestment rate. (2) Net asset value liquidation represents the fair value, or estimated expected residual value, of the Structured Finance Security that has been optionally redeemed.
| Fair Value at December 31, 2022 |  | Valuation technique |  | Unobservable inputs |  | Range (Weighted average)
Debt investments: |  |  |  |  |  |  |
Senior secured | $ | 264,702 |  |  | Discounted cash flow |  | Discount rates |  | 10.21% - 20.71% (12.94%)
Senior secured | 16,110 |  |  | Market approach |  | Revenue multiples |  | 0.46x - 0.70x (0.56x)
Subordinated | 1,226 |  |  | Market approach |  | EBITDA multiples |  | 10.50x - 10.50x (10.50x)
Structured Finance Securities: |  |  |  |  |  |  |
Subordinated notes(1) | 53,688 |  |  | Discounted cash flow |  | Discount rates |  | 12.50% - 34.00% (22.14%)
|  |  |  |  | Constant default rate |  | 2.00% - 2.00% (2.00%)
|  |  |  |  | Recovery rate |  | 65.00% - 65.00% (65.00%)
Mezzanine debt | 26,413 |  |  | Discounted cash flow |  | Discount margin |  | 7.25% - 11.60% (8.58%)
|  |  |  |  | Constant default rate |  | 2.00% - 3.00% (2.03%)
|  |  |  |  | Recovery rate |  | 65.00% - 65.00% (65.00%)
Subordinated notes | 118 |  |  | Market approach |  | Net asset value liquidation(2) |  |
Loan accumulation facility | 8,299 |  |  | Market approach |  | Probability weighted NAV analysis |  |
Equity investments: |  |  |  |  |  |  |
Preferred equity | 6,202 |  |  | Market approach |  | EBITDA multiples |  | 7.25x - 7.25x (7.25x)
Preferred equity | 1,901 |  |  | Market approach |  | Revenue multiples |  | 0.15x - 0.87x (0.87x)
Common equity, warrants and other | 91,070 |  |  | Market approach |  | EBITDA multiples |  | 3.72x - 11.75x (9.63x)
Common equity, warrants and other | 24 |  |  | Market approach |  | Revenue multiples |  | 0.15x - 0.87x (0.15x)
| $ | 469,753 |  |  |  |  |  |  |
(1) The cash flows utilized in the discounted cash flow calculations assume: (i) liquidation of (a) certain distressed investments and (b) all investments currently in default held by the issuing CLO at their current market prices; and (ii) redeployment of proceeds at the issuing CLO’s assumed reinvestment rate. (2) NAV liquidation represents the fair value, or estimated expected residual value, of the investment. Averages in the preceding two tables were weighted by the fair value of the related instruments. Changes in market credit spreads or events impacting the credit quality of the underlying portfolio company (both of which could impact the discount rate), as well as changes in EBITDA and/or EBITDA multiples, among other things, could have a significant impact on fair values, with the fair value of a particular debt investment susceptible to change in inverse relation to the changes in the discount rate. Changes in EBITDA and/or EBITDA multiples, as well as changes in the discount rate, could have a significant impact on fair values, with the fair value of an equity investment susceptible to change in tandem with the changes in EBITDA and/or EBITDA multiples, and in inverse relation to changes in the discount rate. Due to the wide range of approaches used in developing input assumptions to these valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following tables present changes in investments measured at fair value using Level 3 inputs for the nine months ended September 30, 2023 and September 30, 2022:
| Nine Months Ended September 30, 2023
| Senior Secured Debt Investments |  | Subordinated Debt Investments |  | Preferred Equity |  | Common Equity, Warrants and Other |  | Structured Finance Securities |  | Total
Level 3 assets, December 31, 2022 | $ | 280,813 |  |  | $ | 1,226 |  |  | $ | 8,196 |  |  | $ | 91,000 |  |  | $ | 88,518 |  |  | $ | 469,753 |
Net realized loss on investments | (140) |  |  | (9,210) |  |  | — |  |  | (6,642) |  |  | — |  |  | (15,992) |
Net unrealized appreciation (depreciation) on investments | (3,110) |  |  | 8,084 |  |  | 2,461 |  |  | (844) |  |  | (3,416) |  |  | 3,175 |
Amortization of Net Loan Fees | 994 |  |  | — |  |  | — |  |  | — |  |  | 170 |  |  | 1,164 |
Accretion of interest income on Structured Finance Securities | — |  |  | — |  |  | — |  |  | — |  |  | 8,534 |  |  | 8,534 |
Capitalized PIK interest and dividends | 687 |  |  | — |  |  | 804 |  |  | — |  |  | — |  |  | 1,491 |
Amendment fees received | (166) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (166) |
Purchase and origination of portfolio investments | 26,378 |  |  | — |  |  | 345 |  |  | 356 |  |  | 7,642 |  |  | 34,721 |
Proceeds from principal payments on portfolio investments | (37,777) |  |  | — |  |  | — |  |  | — |  |  | (8,511) |  |  | (46,288) |
Sale and redemption of portfolio investments | (2,710) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (2,710) |
Proceeds from distributions received from portfolio investments | — |  |  | — |  |  | — |  |  | (962) |  |  | (9,648) |  |  | (10,610) |
Transfers out of Level 3 | (7,491) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,491) |
Level 3 assets, September 30, 2023 | $ | 257,478 |  |  | $ | 100 |  |  | $ | 11,806 |  |  | $ | 82,908 |  |  | $ | 83,289 |  |  | $ | 435,581 |
| Nine Months Ended September 30, 2022
| Senior Secured Debt Investments |  | Subordinated Debt Investments |  | Preferred Equity |  | Common Equity, Warrants and Other |  | Structured Finance Securities |  | Total
Level 3 assets, December 31, 2021 | $ | 261,113 |  |  | $ | 17,943 |  |  | $ | 3,765 |  |  | $ | 83,486 |  |  | $ | 75,201 |  |  | $ | 441,508 |
Net realized loss on investments | (122) |  |  | — |  |  | (51) |  |  | (6) |  |  | — |  |  | (179) |
Net unrealized appreciation (depreciation) on investments | (9,416) |  |  | (5,488) |  |  | 3,558 |  |  | 6,050 |  |  | (12,600) |  |  | (17,896) |
Amortization of Net Loan Fees | 1,058 |  |  | 6 |  |  | — |  |  | — |  |  | 186 |  |  | 1,250 |
Accretion of interest income on Structured Finance Securities | — |  |  | — |  |  | — |  |  | — |  |  | 7,647 |  |  | 7,647 |
Capitalized PIK interest and dividends | 362 |  |  | 58 |  |  | 230 |  |  | — |  |  | — |  |  | 650 |
Amendment fees | (206) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (206) |
Purchase and origination of portfolio investments | 85,066 |  |  | — |  |  | — |  |  | 1,290 |  |  | 43,198 |  |  | 129,554 |
Proceeds from principal payments on portfolio investments | (51,060) |  |  | (8,245) |  |  | — |  |  | — |  |  | (9,500) |  |  | (68,805) |
Sale and redemption of portfolio investments | (2,845) |  |  | — |  |  | — |  |  | (3,141) |  |  | — |  |  | (5,986) |
Proceeds from distributions received from portfolio investments | — |  |  | — |  |  | — |  |  | — |  |  | (14,261) |  |  | (14,261) |
Transfers out of Level 3 | (6,403) |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,403) |
Transfers into Level 3 | 3,252 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3,252 |
Level 3 assets, September 30, 2022 | $ | 280,799 |  |  | $ | 4,274 |  |  | $ | 7,502 |  |  | $ | 87,679 |  |  | $ | 89,871 |  |  | $ | 470,125 |
The net unrealized depreciation reported in the Company’s consolidated statements of operations for the nine months ended September 30, 2023 and 2022, attributable to the Company’s Level 3 assets still held at those respective period ends, was as follows:
| Nine Months Ended September 30,
| 2023 |  | 2022
Senior secured debt investments | $ | (4,125) |  |  | $ | (8,941) |
Subordinated debt investments | (22) |  |  | (5,487) |
Preferred equity | 2,474 |  |  | 3,507 |
Common equity, warrants and other | (7,590) |  |  | 7,657 |
Structured Finance Securities | (3,622) |  |  | (12,553) |
Net unrealized depreciation on investments held | $ | (12,885) |  |  | $ | (15,817) |
Other Financial Assets and Liabilities The Company provides disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments, such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such financial instruments. The PWB Credit Facility and BNP Facility are variable rate instruments and fair value is estimated to approximate carrying value. The following table sets forth carrying values and fair values of the Company’s debt as of September 30, 2023 and December 31, 2022:
| As of September 30, 2023 |  | As of December 31, 2022
Description | Carrying Value(1) |  | Fair Value |  | Carrying Value(1) |  | Fair Value
PWB Credit Facility | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
BNP Facility | 91,100 |  |  | 91,100 |  |  | 104,700 |  |  | 104,700 |
Unsecured Notes Due February 2026 | 123,129 |  |  | 113,799 |  |  | 122,547 |  |  | 109,037 |
Unsecured Notes Due October 2028 | 53,959 |  |  | 47,850 |  |  | 53,806 |  |  | 47,058 |
SBA-guaranteed debentures | 31,870 |  |  | 30,692 |  |  | 50,697 |  |  | 49,470 |
Total debt | $ | 300,058 |  |  | $ | 283,441 |  |  | $ | 331,750 |  |  | $ | 310,265 |
(1) Carrying value is calculated as the outstanding principal amount less unamortized deferred debt issuance costs. The following tables present the fair value measurements of the Company's debt and indicate the fair value hierarchy of the significant unobservable inputs utilized by the Company to determine such fair values as of September 30, 2023 and December 31, 2022:
| September 30, 2023
Description | Level 1(1) |  | Level 2 |  | Level 3(2) |  | Total
PWB Credit Facility | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
BNP Facility | — |  |  | — |  |  | 91,100 |  |  | 91,100 |
Unsecured Notes Due February 2026 | — |  |  | — |  |  | 113,799 |  |  | 113,799 |
Unsecured Notes Due October 2028 | 47,850 |  |  | — |  |  | — |  |  | 47,850 |
SBA-guaranteed debentures | — |  |  | — |  |  | 30,692 |  |  | 30,692 |
Total debt, at fair value | $ | 47,850 |  |  | $ | — |  |  | $ | 235,591 |  |  | $ | 283,441 |
| December 31, 2022
Description | Level 1(1) |  | Level 2 |  | Level 3(2) |  | Total
PWB Credit Facility | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
BNP Facility | — |  |  | — |  |  | 104,700 |  |  | 104,700 |
Unsecured Notes Due February 2026 | — |  |  | — |  |  | 109,037 |  |  | 109,037 |
Unsecured Notes Due October 2028 | 47,058 |  |  | — |  |  | — |  |  | 47,058 |
SBA-guaranteed debentures | — |  |  | — |  |  | 49,470 |  |  | 49,470 |
Total debt, at fair value | $ | 47,058 |  |  | $ | — |  |  | $ | 263,207 |  |  | $ | 310,265 |
(1) For Level 1 measurements, fair value is estimated by using the closing price of the security on the Nasdaq Global Select Market. (2) For Level 3 measurements, fair value is estimated by discounting remaining payments at current market rates for similar instruments at the measurement date and considering such factors as the legal maturity date.

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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