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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-03 compared with 2021-03-12 · 31 added, 23 removed, 37 unchanged (59% of the section changed)

10 unchanged sentences

and interest rate fluctuations.

Uncertainty with respect to the ongoing economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets, and the effects of this volatility could materially

impact our market risks.

Uncertainty with respect to the ongoing economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our market risks.

For additional information concerning the COVID-19 pandemic and its potential impact on our business and our operating results, see Part I, Item 1A.

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As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period.

Due to the inherent

uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period.

Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is possible that the difference could be material.

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Our net investment income is affected by fluctuations in various interest rates, including LIBOR and prime rates.

In connection with the COVID-19 pandemic, the U.S.

Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased.

In a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results.

Recently the U.S.

Federal Reserve has indicated a change in monetary policy and that intends to increase interest rates during 2022.

Increasing interest rates could have the effect of increasing our total investment income once interest rates increase above contractual interest rates floors to which our portfolio companies are subject.

Conversely, we would expect the cost of our floating rate credit facilities to increase as well, offsetting the positive effect on our net interest income.

We typically expect that interest rates on the investments held in our portfolio will be based on LIBOR, with many of these investments also having a LIBOR floor.

As of December 31, 2020, 96.8%, or $490,502,019 (at cost), of our debt portfolio investments bore interest at variable rates, which are LIBOR-based and subject to certain floors, and $4,187,933 of our debt portfolio investments bore interest at fixed rates.

With the pending sunset of LIBOR, we expect to base interest rates on the Prime rate or Secured Overnight Financing Rate (“SOFR”).

As of December 31, 2021, 94.5%, or $606,581,921 (at cost), of our debt portfolio investments bore interest at variable rates, which are LIBOR-based and subject to certain floors, and none of our debt portfolio investments bore interest at fixed rates.

As a policy, any interest in excess of the cash cap, if applicable, as determined on an individual loan basis will accrue to principal and be treated as PIK interest.

A hypothetical 200 basis point increase or decrease in the interest rates on our variable-rate debt investments could increase our investment income by a maximum of $9,564,426 and decrease our investment income by a maximum of $0, due to certain floors, on an annual basis.

Borrowings under the Credit Facilities bear interest, at our election at the time of drawdown, at a rate per annum equal to the LIBOR rate for the applicable interest period plus 3%.

The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021.

It is unclear if at that time whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.

In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible.

On March 5, 2021, FCA and LIBOR’s administrator, the ICE Benchmark Administration (“IBA”) announced that all 35 LIBOR tenors (in the five LIBOR currencies, i.e., USD, GBP, EUR, JPY and CHF) will be discontinued or declared non-representative as of either:

(a) immediately after December 31, 2021, or (b) immediately after June 30, 2023.

Despite the announcement confirming that certain LIBOR tenors will not be phased out until June 2023, regulators continue to emphasize the importance of LIBOR transition planning.

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted.

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.

In addition, if LIBOR ceases to exist, we may need to renegotiate agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate, in order to replace

LIBOR with the new standard that is established, which may have an adverse effect on our overall financial condition or results of operations.

Following the replacement of LIBOR, some or all of these agreements may bear interest a lower interest rate, which could have an adverse impact on our results of operations.

Moreover, if LIBOR ceases to exist, we may need to renegotiate certain terms of our credit facilities.

If we are unable to do so, amounts drawn under our credit facilities may bear interest at a higher rate, which would increase the cost of our borrowings and, in turn, affect our results of operations.

The global COVID-19 pandemic may also adversely impact the timing of many firms’ LIBOR transition planning.

We continue to assess the potential impact of the COVID-19 pandemic on our LIBOR transition plans.

Borrowings under the Credit Agreement bear interest, at our election at the time of drawdown, at a rate per annum equal to the LIBOR rate (with a LIBOR floor of 0.50%) for the applicable interest period plus 3%.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings;

all seven Swiss franc LIBOR settings;

the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings;

the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings;

and the 1-week and 2-month US dollar LIBOR settings) and (ii) the overnight and 1, 3, 6 and 12-month US LIBOR settings would cease to exist after June 30, 2023;

and (iii) the FCA would consult on whether the remaining LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them.

Central banks and regulators in a number of major jurisdictions (for example, United States, United Kingdom, European Union, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for interbank offered rates.

To identify a successor rate for U.S.

dollar LIBOR, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed.

The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR.

SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S.

Treasury securities, and is based on directly observable U.S.

Treasury-backed repurchase transactions.

On July 29, 2021, the ARCC formally recommended SOFR as its preferred alternative replacement rate for LIBOR.

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom.

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR or alternative reference rates could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us.

In addition, when LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate, in order to replace LIBOR with the new standard that is established, which may have an adverse effect on our overall financial condition or results of operations.

As such, some or all of these credit agreements may bear a lower interest rate, which would adversely impact our financial condition or results of operations.

Moreover, when LIBOR ceases to exist, we may need to renegotiate certain terms of the Credit Agreement.

If we are unable to do so, amounts drawn under the

Credit Agreement may bear interest at a higher rate, which would increase the cost of our borrowings and, in turn, affect our results of operations.

Because we currently borrow, and plan to borrow in the future, funds 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 the funds borrowed.

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What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk