Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies whose securities are owned by us; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and interest rate fluctuations.
The primary risk we believe we are exposed to is interest rate risk. Because we borrow money to make investments, our net investment income is dependent upon the difference between the rates at which we borrow funds, such as under the Credit Facility (which is variable), our 2026 Notes and 2028 Notes (which are fixed), and the rates at which we invest those funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of debt and equity capital to finance our investing activities. We may use interest rate risk management techniques to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.
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We target to have approximately 90% of the loans in our portfolio at variable rates or variable rates with a floor mechanism, and approximately up to 10% at fixed rates. As of March 31, 2023 and 2022, all of our variable-rate loans have rates associated with the current 30-day LIBOR rate and our total debt investment portfolio consisted of the following breakdown based on the principal balance:
As of March 31,
Rates: 2023 2022
Variable rates with a floor 100.0 % 100.0 %
Fixed rates — % — %
Total 100.0 % 100.0 %
We had $35.2 million of outstanding borrowings under the Credit Facility as of March 31, 2023 and no outstanding borrowings as of March 31, 2022. Our 2026 Notes and 2028 Notes had an outstanding principal balance of $127.9 million and $134.6 million, respectively, as of March 31, 2023 and 2022.
Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.50%, plus 2.85% per annum until February 29, 2024, with the margin then increasing to 3.10% for the period from February 29, 2024 to February 28, 2025, and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount.
To illustrate the potential impact of changes in interest rates, we have performed the following hypothetical analysis, which assumes that our balance sheet and interest rates remain constant as of March 31, 2023 and no further actions are taken to alter our existing interest rate sensitivity.
Basis Point Change Increase (Decrease)
in Interest Income Increase (Decrease) in Interest Expense Net Increase (Decrease) in Net Assets Resulting from Operations
Up 300 basis points $ 14,875 $ 1,071 $ 13,804
Up 200 basis points $ 9,916 $ 714 $ 9,202
Up 100 basis points $ 4,958 $ 357 $ 4,601
Down 100 basis points $ (4,958)
$ (357)
$ (4,601)
Down 200 basis points $ (9,800)
$ (714)
$ (9,086)
Down 300 basis points $ (13,460)
$ (891)
$ (12,569)
Although management believes that this analysis is indicative of our existing interest rate sensitivity, it does not adjust for potential changes in credit quality, size and composition of our loan portfolio on the balance sheet and other business developments, including portfolio company defaults, that could affect net increase (decrease) in net assets resulting from operations. Accordingly, actual results could differ significantly from those in the hypothetical analysis in the table above.
We may also experience risk associated with investing in securities of companies with foreign operations. Some of our portfolio companies have operations located outside the U.S. These risks include, but are not limited to, fluctuations in foreign currency exchange rates, imposition of foreign taxes, changes in exportation regulations and political and social instability.
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