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Fair Value Measurements
 3 Months Ended
Dec. 31, 2023
Fair Value Measurements [Abstract]  
Fair Value Measurements

Note 4. Fair Value Measurements

 

The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy, and certain prior period amounts have been reclassified to conform to the current period presentation. The three levels are defined below:

 

  ● Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.

 

  ● Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

  ● Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

In addition to using the above inputs in investment valuations, the Company continues to employ a valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value. 

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of December 31, 2023 (dollars in thousands):

 

   Fair Value Hierarchy as of December 31, 2023 
Investments:  Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $
-
   $19,996   $82,396   $102,392 
Senior Secured Notes   
-
    8,997    
-
    8,997 
Equity/Warrants   22,231    6,296    81,523    110,050 
Total  $22,231   $35,289   $163,919   $221,439 
Investments measured at net asset value(1)                  783 
Total Investments, at fair value                 $222,222 

 

(1)Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amount presented in the Consolidated Statements of Assets and Liabilities.

 

The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2023 (dollars in thousands): 

 

   Fair Value Hierarchy as of September 30, 2023 
Investments:  Level 1   Level 2   Level 3   Total 
Senior Secured First Lien Term Loans  $
-
   $20,505   $82,499   $103,004 
Senior Secured Notes   
-
    8,922    
-
    8,922 
Equity/Warrants   24,709    6,217    82,817    113,743 
Total  $24,709   $35,644   $165,316   $225,669 
Investments measured at net asset value(1)                  792 
Total Investments, at fair value                 $226,461 

 

(1)Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amount presented in the Consolidated Statements of Assets and Liabilities.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended December 31, 2023 (dollars in thousands):

 

    Senior Secured
First Lien
Term Loans		     Equities/
Warrants		     Total  
Balance as of September 30, 2023   $ 82,499     $ 82,817     $ 165,316  
Purchases and other adjustments to cost     7,760       6,752       14,512  
Sales (including repayments or maturities)     (8,802 )     (7,852 )     (16,654 )
Net realized gains/(losses) from investments     (12 )     278       266  
Net unrealized gains/(losses)     951       (472 )     479  
Transfer in/(out)    
-
      
-
      
-
  
Balance as of December 31, 2023   $ 82,396     $ 81,523     $ 163,919  

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended December 31, 2022 (dollars in thousands):

 

    Senior Secured
First Lien
Term Loans		     Senior Secured
Second Lien
Term Loans		     Senior Secured
Notes		     Equities/
Warrants		     Total  
Balance as of September 30, 2022   $ 74,252     $ 2,607      
-
     $ 69,816     $ 146,675  
Purchases and other adjustments to cost     2,900      
-
      
-
       4,282       7,182  
Sales (including repayments or maturities)     (1,046 )     (2,607 )    
-
       (14,644 )     (18,297 )
Net realized gains/(losses) from investments     3       5       (42 )    
-
       (34 )
Net unrealized gains/(losses)     (1,448 )     (5 )     1,659       (391 )     (185 )
Transfer in/(out)    
-
      
-
      
-
      
-
      
-
  
Balance as of December 31, 2022   $ 74,661     $ -       1,617     $ 59,063     $ 135,341  

 

Net change in unrealized gain (loss) for the three months ended December 31, 2023 and 2022 included in earnings related to Level 3 investments still held as of December 31, 2023 and 2022 was approximately $2.1 million and $2.3 million, respectively.

 

Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.

 

Sales represent net proceeds received from investments sold, including any repayments or maturities.

 

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. During the three months ended December 31, 2023, no investments were transferred in or out of Level 3. During the three months ended December 31, 2022, one of our investments transferred out of Level 3 and no investments transferred into Level 3. 

 

The following table presents the quantitative information about Level 3 fair value measurements of our investments, as of December 31, 2023 (dollars in thousands):

 

   Fair Value   Valuation Methodology  Unobservable Input  Range
(Weighted Average)		  Impact to
Valuation From
An Increase In
Input
Senior Secured First Lien Term Loans  $68,020   Income Approach  Market Yield  9.0% - 36.0% (14.88%)  Decrease
Senior Secured First Lien Term Loans   13,520   Market Approach  EBITDA Multiple  1.6x - 5.0x (2.8x)  Increase
Senior Secured First Lien Term Loans   856   Market Approach  LTM EBITDA Multiple  6.3x - 7.3x (6.8x)  Increase
Equity/Warrants   36,411   Cost Approach  Collateral Value  N/A  N/A
Equity/Warrants   10,759   Market Approach  LTM Multiple  6.3x - 7.3x (6.8x)  Increase
Equity/Warrants   34,124   Market Approach  EBITDA Multiple  1.3x - 36.8x (4.1x)  Increase
Equity/Warrants   229   Income Approach  DLOM (Discount for lack of Marketability)  3.0x - 3.1x (3.1x)  Decrease
Total  $163,919             

 

The following table presents the quantitative information about Level 3 fair value measurements of our investments, as of September 30, 2023 (dollars in thousands):

 

    Fair Value     Valuation Methodology   Unobservable Input   Range
(Weighted Average)		   Impact to
Valuation From
An Increase In
Input
Senior Secured First Lien Term Loans   $ 69,943     Income Approach   Market Yield   8.50% - 32.0% (13.78%)   Decrease
Senior Secured First Lien Term Loans     751     Market Approach   Revenue Multiple   0.3x - 0.3x (0.3x)   Increase
Senior Secured First Lien Term Loans     10,939     Market Approach   EBITDA Multiple   1.7x - 5.0x (3.1x)   Increase
Senior Secured First Lien Term Loans     866     Market Approach   LTM EBITDA Multiple   5.8x - 6.8x (6.3x)   Increase
Equity/Warrants     38,870     Cost Approach   Collateral Value   N/A   N/A
Equity/Warrants     11,734     Market Approach   LTM Multiple   5.8x – 6.8x (6.3x)   Increase
Equity/Warrants     22,007     Market Approach   EBITDA Multiple   1.8x – 36.8x (2.8x)   Increase
Equity/Warrants     10,000     Recent Purchase   Purchase Price   N/A – N/A (N/A)   N/A
Equity/Warrants     206     Income Approach   DLOM (Discount for lack of Marketability)   3.0x – 3.2x (3.1x)   Decrease
Total   $ 165,316                  

 

The significant unobservable inputs used in the fair value measurement of the Company’s debt and derivative investments are market yields. Increases in market yields would result in lower fair value measurements.

 

The significant unobservable inputs used in the fair value measurement of the Company’s equity/warrants investments are comparable company multiples of revenue or EBITDA for the latest twelve months (“LTM”), next twelve months (“NTM”) or a reasonable period a market participant would consider. Increases in EBITDA multiples in isolation would result in higher fair value measurement.

 

In September 2017, the Company entered into an agreement with Global Accessories Group, LLC (“Global Accessories”), in which the Company exchanged its full position in Lydell Jewelry Design Studio, LLC for a 3.8% membership interest in Global Accessories, which is included in the Consolidated Schedule of Investments. As part of the agreement, the Company is entitled to contingent consideration in the form of cash payments (“Earnout”), as well as up to an additional 5% membership interest (“AMI”), provided Global Accessories achieves certain financial benchmarks through calendar year ended 2022. The Earnout and AMI were initially recorded with an aggregate fair value of $2.4 million on the transaction date using the Income Approach and were included on the Consolidated Statements of Assets and Liabilities in other assets. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. Any changes in fair value will be recognized in earnings. As of December 31, 2023 and September 30, 2023, the Company deemed the contingent consideration to be uncollectible.