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, including due to inflation; 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 rate at which we borrow funds and the rate 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 from time to time 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.
All of our variable-rate debt investments have rates generally associated with either the current LIBOR, SOFR, or prime rate. As of September 30, 2022, our portfolio of debt investments on a principal basis consisted of the following:
Variable rates 88.5 %
Fixed rates 11.5
Total 100.0 %
To illustrate the potential impact of changes in market interest rates on our net increase in net assets resulting from operations, we have performed the following hypothetical analysis, which assumes that our balance sheet and contractual
66
Table of Contents
interest rates remain constant as of September 30, 2022 and no further actions are taken to alter our existing interest rate sensitivity.
Basis Point Change (A)
Increase
(Decrease) in
Interest Income Increase
(Decrease) in
Interest Expense Net Increase (Decrease) in
Net Assets Resulting from
Operations (B)
Up 200 basis points $ 10,552 $ 2,836 $ 7,716
Up 100 basis points 5,276 1,418 3,858
Up 50 basis points 2,638 709 1,929
Down 50 basis points (2,638) (709) (1,929)
Down 100 basis points (5,276) (1,418) (3,858)
Down 200 basis points (9,739) (2,836) (6,903)
(A) Illustrates the potential impact of changes in market rates as compared to 30-day LIBOR of 3.14% and 30-day SOFR of 3.04% as of September 30, 2022.
(B) Excludes the potential impact of changes in incentive fees.
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 any replacement of LIBOR, that could affect net increase in net assets resulting from operations or otherwise impact our results or 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 fluctuations in foreign currency exchange rates, imposition of foreign taxes, changes in exportation regulations and political and social instability.
67
Table of Contents