HPS Corporate Lending Fund Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2023

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the applicable measurement date.

The fair value hierarchy under ASC 820 prioritizes the inputs to valuation methodology used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The levels used for classifying investments are not necessarily an indication of the risk associated with investing in these securities. The three levels of the fair value hierarchy are as follows:

•Level 1: Inputs to the valuation methodology that reflect unadjusted quoted prices available in active markets for identical assets or liabilities as of the reporting date.

•Level 2: Inputs to the valuation methodology other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date.

•Level 3: Inputs to the valuation methodology are unobservable and significant to overall fair value measurement.

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 overall fair value measurement. The Adviser’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.

In addition to using the above inputs in investment valuations, the Company applies the valuation policy approved by its Board that is consistent with ASC 820. Consistent with the valuation policy, the Company evaluates the source of the inputs, including any markets in which its investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value.

Investments whose values are based on the listed closing price quoted on the securities’ principal exchange are classified within Level 1 and include active listed equities. The Adviser does not adjust the quoted price for such instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. These include investment-grade corporate bonds, structured products, and certain bank loans, less liquid listed equities, and high yield bonds. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.

Investments classified within Level 3 have unobservable inputs, as they trade infrequently, or not at all. When observable prices are not available for these investments, the Adviser uses one or more valuation techniques (e.g., the market approach and the income approach) of which sufficient and reliable data is available. Within Level 3, the use of the market approach generally consists of using comparable market data, while the use of the income approach generally consists of the net present value of estimated future cash flows, which may be adjusted as appropriate for liquidity, credit, market and/or other risk factors.

Investments in senior loans primarily include first and second lien term loans, delayed draws and revolving credit. The Adviser analyzes enterprise value based on the weighted average of discounted cash flows, public comparables and merger and acquisition comparables. This analysis is done to ensure, among other things, that the investments have adequate collateral and asset coverage. Once the investment is determined to have adequate asset coverage, the Adviser monitors yields for senior loan investments made from the time of purchase to the month end average yields for similar investments and risk profiles. The Company uses market data, including newly funded transactions, and secondary market data with respect to high-yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield. The change in yield is utilized by the Adviser to discount the anticipated cash flows of the debt investment in order to arrive at a fair value. Further, the Adviser adjusts for material changes in the underlying fundamentals of the issuer, including changes in leverage, as necessary. If the investment does not have adequate coverage, a tranched valuation approach is considered.

Derivative Instruments: Derivative instruments can be exchange-traded or privately negotiated over the-counter (“OTC”) and include forward currency contracts and swap contracts. Forwards currency contracts and swap contracts are valued by the Adviser using observable inputs, such as market-based quotations received from the counterparty, dealers or brokers, whenever available and considered reliable. In instances where models are used, the value of an OTC derivative depends upon the contractual terms of, and specific risks inherent in the contract, as well as the availability and reliability of observable inputs. Such inputs include market prices for reference securities, yield curves, volatility assumptions and correlations of such inputs. Certain OTC derivatives can generally be corroborated by market data and are therefore classified within Level 1 or Level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded.

Further inputs considered by the Adviser in estimating the value of investments may include the original transaction price, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investment or comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets (by the investment or other comparable investments), whether the loan contains call protection and changes in financial ratios or cash flows. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Adviser in the absence of market information. The fair value measurement of Level 3 investments does not include transaction costs that may have been capitalized as part of the security’s cost basis. Assumptions used by the Adviser due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s consolidated results of operations.

Rule 2a-5 under the 1940 Act was recently adopted by the SEC and establishes requirements for determining fair value in good faith for purposes of the 1940 Act. The rule permits boards, subject to board oversight and certain other conditions, to designate certain parties to perform the fair value determinations. The new rule went into effect on March 8, 2021 and had a compliance date of September

8, 2022. In accordance with this rule, the Company’s Board of Trustees has designated our Adviser as the valuation designee primarily responsible for the valuation of the Company’s investments, subject to the oversight of the Board of Trustees.

The following table presents the fair value hierarchy of investments and cash equivalents:


	September 30, 2023
	Level 1		Level 2		Level 3		Total
First lien debt	$	—	$	889,395	$	6,681,145	$	7,570,540
Second lien debt	—		46,014		20,382		66,396
Unsecured debt	—		12,593		2,342		14,935
Structured finance investments	—		29,286		—		29,286
Equity investments	—		—		12,709		12,709
Total investments	$	—	$	977,288	$	6,716,578	$	7,693,866
Cash equivalents	$	159,423	$	—	$	—	$	159,423


	December 31, 2022
	Level 1		Level 2		Level 3		Total
First lien debt	$	—	$	732,325	$	4,882,393	$	5,614,718
Second lien debt	—		36,454		8,794		45,248
Unsecured debt	—		23,906		1,606		25,512
Structured finance investments	—		28,737		—		28,737
Equity investments	—		—		2,306		2,306
Total investments	$	—	$	821,422	$	4,895,099	$	5,716,521
Cash equivalents	$	53,347	$	—	$	—	$	53,347

The following tables presents change in the fair value of investments for which Level 3 inputs were used to determine fair value:


	Three Months Ended September 30, 2023
	First Lien Debt		Second Lien Debt		Unsecured Debt		Equity Investments		Total Investments
Fair value, beginning of period	$	6,104,163	$	20,039	$	1,975	$	4,729	$	6,130,906
Purchases of investments (1)	778,508		—		329		8,533		787,370
Proceeds from principal repayments and sales of investments	(96,696)		—		—		(197)		(96,893)
Accretion of discount/amortization of premium	8,596		37		1		—		8,634
Net realized gain (loss)	21		—		—		29		50
Net change in unrealized appreciation (depreciation)	20,516		306		37		(385)		20,474
Transfers into Level 3 (2)	2,272		—		—		—		2,272
Transfers out of Level 3 (2)	(136,235)		—		—		—		(136,235)
Fair value, end of period	$	6,681,145	$	20,382	$	2,342	$	12,709	$	6,716,578
Net change in unrealized appreciation (depreciation) related to financial instruments still held as of September 30, 2023	$	18,897	$	306	$	37	$	(385)	$	18,855


	Nine Months Ended September 30, 2023
	First Lien Debt		Second Lien Debt		Unsecured Debt		Equity Investments		Total Investments
Fair value, beginning of period	$	4,882,393	$	8,794	$	1,606	$	2,306	$	4,895,099
Purchases of investments (1)	2,071,394		1,879		772		11,446		2,085,491
Proceeds from principal repayments and sales of investments	(266,254)		—		—		(374)		(266,628)
Accretion of discount/amortization of premium	24,198		95		(9)		—		24,284
Net realized gain (loss)	981		—		—		(373)		608
Net change in unrealized appreciation (depreciation)	107,110		151		(27)		(296)		106,938
Transfers into Level 3 (2)	2,272		9,463		—		—		11,735
Transfers out of Level 3 (2)	(140,949)		—		—		—		(140,949)
Fair value, end of period	$	6,681,145	$	20,382	$	2,342	$	12,709	$	6,716,578
Net change in unrealized appreciation (depreciation) related to financial instruments still held as of September 30, 2023	$	98,971	$	151	$	(30)	$	(296)	$	98,796

(1)Purchases include PIK interest, if applicable.

(2)Transfers between levels, if any, are recognized at the beginning of the period in which the transfers occur. For the three and nine months ended September 30, 2023, transfers into or out of Level 3 were primarily due to decreased or increased price transparency, respectively.


	Three Months Ended September 30, 2022
	First Lien Debt		Second Lien Debt		Unsecured Debt		Equity Investments		Total Investments
Fair value, beginning of period	$	2,154,718	$	8,780	$	—	$	67	$	2,163,565
Purchases of investments(1)	1,626,852		—		725		2,001		1,629,578
Proceeds from principal repayments and sales of investments	(7,931)		—		—		—		(7,931)
Accretion of discount/amortization of premium	3,023		4		3		—		3,030
Net realized gain (loss)	(45)		—		—		—		(45)
Net change in unrealized appreciation (depreciation)	(66,587)		3		(3)		1		(66,586)
Transfers into Level 3(2)	—		—		—		—		—
Transfers out of Level 3(2)	—		—		—		—		—
Fair value, end of period	$	3,710,030	$	8,787	$	725	$	2,069	$	3,721,611
Net change in unrealized appreciation (depreciation) related to financial instruments still held as of September 30, 2022	$	(66,587)	$	3	$	(3)	$	1	$	(66,586)


	Nine Months Ended September 30, 2022
	First Lien Debt		Second Lien Debt		Unsecured Debt		Equity Investments		Total Investments
Fair value, beginning of period	$	—	$	—	$	—	$	—	$	—
Purchases of investments(1)	3,888,670		8,776		725		2,068		3,900,239
Proceeds from principal repayments and sales of investments	(100,312)		—		—		—		(100,312)
Accretion of discount/amortization of premium	5,520		7		3		—		5,530
Net realized gain (loss)	(34)		—		—		—		(34)
Net change in unrealized appreciation (depreciation)	(83,814)		4		(3)		1		(83,812)
Transfers into Level 3(2)	—		—		—		—		—
Transfers out of Level 3(2)	—		—		—		—		—
Fair value, end of period	$	3,710,030	$	8,787	$	725	$	2,069	$	3,721,611
Net change in unrealized appreciation (depreciation) related to financial instruments still held as of September 30, 2022	$	(83,814)	$	4	$	(3)	$	1	$	(83,812)

(1)Purchases include PIK interest, if applicable.

(2)Transfers between levels, if any, are recognized at the beginning of the period in which the transfers occur. For the three and nine months ended September 30, 2022, there were no transfers into or out of Level 3.

The following table presents quantitative information about the significant unobservable inputs of the Company’s Level 3 financial instruments. The table is not intended to be all-inclusive but instead captures the significant unobservable inputs relevant to the Company’s determination of fair value.


	September 30, 2023
					Range
	Fair Value(1)		Valuation Technique	Unobservable Input	Low		High		Weighted Average(2)
Investments in first lien debt	$	5,372,388	Yield analysis	Discount rate	8.17	%	29.29	%	12.18	%
Investments in second lien debt	20,382		Yield analysis	Discount rate	13.00	%	14.44	%	14.27	%
Investments in unsecured debt	2,118		Yield analysis	Discount rate	13.46	%	14.94	%	14.21	%
Investments in preferred equity	2,061		Yield analysis	Discount rate	14.70	%	16.67	%	15.60	%
Investments in common equity	194		Discounted cash flow	Discount rate	15.00	%	15.00	%	15.00	%
				Exit multiple	10.00x		10.00x		10.00x


	December 31, 2022
					Range
	Fair Value(1)		Valuation Technique	Unobservable Input	Low		High		Weighted Average(2)
Investments in first lien debt	$	3,848,793	Yield analysis	Discount rate	8.14	%	17.70	%	11.47	%
Investments in unsecured debt	704		Yield analysis	Discount rate	14.70	%	14.70	%	14.70	%
Investments in equity	2,108		Yield analysis	Discount rate	7.08	%	16.95	%	11.96	%
	198		Discounted cash flow	Discount rate	15.00	%	15.00	%	15.00	%
				Exit multiple	10.00x		10.00x		10.00x

(1)As of September 30, 2023, included within the fair value of Level 3 assets of $6,716,578 is an amount of $1,319,435 for which the Adviser did not develop the unobservable inputs (examples include third-party pricing and transaction prices). As of December 31, 2022, included within the fair value of Level 3 assets of $4,895,099 is an amount of $1,043,296 for which the Adviser did not develop the unobservable inputs (examples include third-party pricing and transaction prices).

(2)Weighted averages are calculated based on fair value of investments.

The significant unobservable input used in the yield analysis is the discount rate based on comparable market yields. The significant unobservable inputs used in the income approach are the discount rate used to discount the estimated future cash flows expected to be received from the underlying investment. Significant increases in discount rates would result in a significantly lower fair value measurement. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market comparable transactions or market multiples would result in an increase or decrease in the fair value.

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 the Company’s investments may fluctuate from period to period. Additionally, the fair value of the Company’s investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale, it could realize significantly less than the value at which the Company has recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

Financial Instruments Not Carried at Fair Value

The following table presents fair value measurements of the Company’s debt obligations as of September 30, 2023 and December 31 2022 had they been accounted for at fair value:

Debt


	September 30, 2023				December 31, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
HLEND A Funding Facility	$	600,542	$	600,542	$	453,663	$	453,663
HLEND B Funding Facility	490,509		490,509		482,084		482,084
HLEND C Funding Facility	487,500		487,500		—		—
HLEND D Funding Facility	—		—		—		—
Revolving Credit Facility	751,169		751,169		704,819		704,819
November 2025 Notes(1)	167,054		168,584		168,462		170,628
November 2027 Notes(1)	151,634		152,765		153,958		156,354
March 2026 Notes(1)	270,419		273,400		—		—
March 2028 Notes(1)	119,941		121,605		—		—
September 2027 Notes(1)	73,555		74,552		—		—
September 2028 Notes(1)	244,492		248,016		—		—
Short-Term Borrowings	—		—		379,081		379,081
Total	$	3,356,815	$	3,368,642	$	2,342,067	$	2,346,629

(1)The carrying value of the Company's November 2025 Notes, November 2027 Notes, March 2026 Notes, March 2028 Notes, September 2027 Notes and September 2028 Notes are presented net of unamortized debt issuance costs of $(1.4) million, $(1.5) million, $(2.1) million, $(1.0) million, $(0.7) million and $(2.6) million, respectively, as of September 30, 2023 and includes the decrease in the notes carrying value of $(1.6) million, $(1.9) million, $(3.5) million $(3.1) million, $(0.7) million and $(2.9) million, respectively, as a result of the qualifying fair value hedge relationship as described above. The carrying value of the Company's November 2025 Notes and November 2027 Notes are presented net of unamortized debt issuance costs of $(1.9) million and $(1.7) million, respectively, as of December 31, 2022 and includes the change in the notes carrying value of $0.3 million and $0.7 million, respectively, as a result of the qualifying fair value hedge relationship as described above.

The following table presents the fair value hierarchy of the Company’s debt obligations as of September 30, 2023 and December 31, 2022:


	September 30, 2023		December 31, 2022
Level 1	$	—	$	—
Level 2	—		—
Level 3	3,368,642		2,346,629
Total	$	3,368,642	$	2,346,629

As of September 30, 2023 and December 31, 2022, the carrying amounts of the Company’s assets and liabilities, other than investments at fair value and debt, approximate fair value due to their short maturities. Fair value is estimated by discounting remaining payments using applicable current market rates, which take into account changes in the Company’s marketplace credit ratings, if applicable, or market quotes, if available.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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