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Fair Value of Financial Instruments
 9 Months Ended
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,
2023202220232022
Transfers from Level 2 to Level 3$— $— $— $3,252 
Transfers from Level 3 to Level 25,957 6,403 7,491 6,403 
Transfers between levels during the reporting periods were due to availability of reliable Indicative Prices in those periods.
Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk as a result of economic and political developments, including impacts from rising interest rates and elevated inflation rates, the ongoing war between Russia and Ukraine, the current conflict in Israel, instability in the U.S. and international banking systems, the risk of recession or a shutdown of U.S. government services and related market volatility. Market risk is directly impacted by the volatility and liquidity in the markets in which certain investments are traded and can affect the fair value of the Company’s investments.
The following tables present the Company’s investment portfolio measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
SecurityLevel 1Level 2Level 3Fair Value as of September 30, 2023
Debt investments$— $21,666 $257,578 $279,244 
Equity investments— — 94,714 94,714 
Structured Finance Securities— — 83,289 83,289 
$— $21,666 $435,581 $457,247 
SecurityLevel 1Level 2Level 3Fair Value as of December 31, 2022
Debt investments$— $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, 2023Valuation techniqueUnobservable inputsRange
(Weighted average)
Debt investments:
Senior secured$234,746 Discounted cash flow Discount rates
10.32% - 21.66% (13.18%)
Senior secured2,477 Market approach EBITDA multiples
7.00x - 7.00x (7.00x)
Senior secured20,255 Market approachRevenue multiples
0.40x - 1.40x (0.59x)
Subordinated100 Market approachRevenue multiples
0.23x - 0.23x (0.23x)
Structured Finance Securities:
Subordinated notes(1)
48,043 Discounted cash flowDiscount 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 notes97 Market approach
Net asset value liquidation(2)
Subordinated notes4,840 Market approachTransaction Price
Mezzanine debt27,502 Discounted cash flowDiscount 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 debt2,807 Market approachTransaction Price
Equity investments:
Preferred equity11,462 Market approachEBITDA multiples
4.58x - 7.50x (6.84x)
Preferred equity344 Discounted cash flowDiscount rates
13.26% - 13.26% (13.26%)
Common equity, warrants and other5,445 Market approachEBITDA multiples
4.58x - 16.50x (9.55x)
Common equity, warrants and other77,105 Discounted cash flowDiscount rates
10.75% - 10.75% (10.75%)
Market approachEBITDA multiples
12.50x - 12.50x (12.50x)
Common equity, warrants and other358 Market approachRevenue 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, 2022Valuation techniqueUnobservable inputsRange
(Weighted average)
Debt investments:
Senior secured$264,702 Discounted cash flowDiscount rates
10.21% - 20.71% (12.94%)
Senior secured16,110 Market approachRevenue multiples
0.46x - 0.70x (0.56x)
Subordinated1,226 Market approachEBITDA multiples
10.50x - 10.50x (10.50x)
Structured Finance Securities:
 Subordinated notes(1)
53,688 Discounted cash flowDiscount 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 debt26,413 Discounted cash flowDiscount 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 notes118 Market approach
Net asset value liquidation(2)
Loan accumulation facility8,299 Market approachProbability weighted NAV analysis
Equity investments:
Preferred equity6,202 Market approachEBITDA multiples
7.25x - 7.25x (7.25x)
Preferred equity1,901 Market approachRevenue multiples
0.15x - 0.87x (0.87x)
Common equity, warrants and other91,070 Market approachEBITDA multiples
3.72x - 11.75x (9.63x)
Common equity, warrants and other24 Market approachRevenue 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 EquityCommon Equity, Warrants and OtherStructured Finance SecuritiesTotal
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 Fees994 — — — 170 1,164 
Accretion of interest income on Structured Finance Securities— — — — 8,534 8,534 
Capitalized PIK interest and dividends687 — 804 — — 1,491 
Amendment fees received(166)— — — — (166)
Purchase and origination of portfolio investments26,378 — 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 EquityCommon Equity, Warrants and OtherStructured Finance SecuritiesTotal
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 Fees1,058 6 — — 186 1,250 
Accretion of interest income on Structured Finance Securities— — — — 7,647 7,647 
Capitalized PIK interest and dividends362 58 230 — — 650 
Amendment fees(206)— — — — (206)
Purchase and origination of portfolio investments85,066 — — 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 33,252 — — — — 3,252 
Level 3 assets, September 30, 2022$280,799 $4,274 $7,502 $87,679 $89,871 $470,125 
The net unrealized depreciation reported in the Company’s consolidated statements of operations for the nine months ended September 30, 2023 and 2022, attributable to the Company’s Level 3 assets still held at those respective period ends, was as follows:
Nine Months Ended September 30,
20232022
Senior secured debt investments$(4,125)$(8,941)
Subordinated debt investments(22)(5,487)
Preferred equity2,474 3,507 
Common equity, warrants and other(7,590)7,657 
Structured Finance Securities(3,622)(12,553)
Net unrealized depreciation on investments held$(12,885)$(15,817)
Other Financial Assets and Liabilities
The Company provides disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments, such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such financial instruments. The PWB Credit Facility and BNP Facility are variable rate instruments and fair value is estimated to approximate carrying value.
The following table sets forth carrying values and fair values of the Company’s debt as of September 30, 2023 and December 31, 2022:
As of September 30, 2023As of December 31, 2022
Description
Carrying Value(1)
Fair Value
Carrying Value(1)
Fair Value
PWB Credit Facility$— $— $— $— 
BNP Facility91,100 91,100 104,700 104,700 
Unsecured Notes Due February 2026123,129 113,799 122,547 109,037 
Unsecured Notes Due October 202853,959 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.