Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.23.1
Fair Value Measurements
 3 Months Ended
Mar. 31, 2023
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
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:
March 31, 2023
Level 1 Level 2 Level 3 Total
First lien debt $ —  $ 784,648  $ 5,774,333  $ 6,558,981 
Second lien debt —  28,267  18,048  46,315 
Unsecured debt —  14,975  1,915  16,890 
Structured finance investments —  28,824  —  28,824 
Equity investments —  —  2,469  2,469 
Total investments $ —  $ 856,714  $ 5,796,765  $ 6,653,479 
Cash equivalents $ 92,622  $ —  $ —  $ 92,622 
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 table presents change in the fair value of investments for which Level 3 inputs were used to determine fair value:
Three Months Ended March 31, 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)
861,403  —  377  579  862,359 
Proceeds from principal repayments and sales of investments (30,581) —  —  (52) (30,633)
Accretion of discount/amortization of premium 7,981  33  9  —  8,023 
Net realized gain (loss) (893) —  —  (353) (1,246)
Net change in unrealized appreciation (depreciation) 58,744  (242) (77) (11) 58,414 
Transfers into Level 3 (2)
—  9,463  —  —  9,463 
Transfers out of Level 3 (2)
(4,714) —  —  —  (4,714)
Fair value, end of period $ 5,774,333  $ 18,048  $ 1,915  $ 2,469  $ 5,796,765 
Net change in unrealized appreciation (depreciation) related to financial instruments still held as of March 31, 2023 $ 57,176  $ (242) $ (79) $ (11) $ 56,844 
(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 months ended March 31, 2023, transfers into or out of Level 3 were primarily due to decreased or increased price transparency, respectively.
Three Months Ended March 31, 2022
First Lien
Debt		 Equity Investments Total Investments
Fair value, beginning of period $ —  $ —  $ — 
Purchases of investments(1)
896,754  67  896,821 
Proceeds from principal repayments and sales of investments (55,373) —  (55,373)
Accretion of discount/amortization of premium 759  —  759 
Net realized gain (loss) 14  —  14 
Net change in unrealized appreciation (depreciation) (1,931) —  (1,931)
Transfers into Level 3(2)
—  —  — 
Transfers out of Level 3(2)
—  —  — 
Fair value, end of period $ 840,223  $ 67  $ 840,290 
Net change in unrealized appreciation (depreciation) related to financial instruments still held as of March 31, 2022 $ (1,931) $ —  $ (1,931)
(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 months ended March 31, 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.
March 31, 2023
Range
Fair Value(1)
Valuation
Technique		 Unobservable
Input		 Low High
Weighted
Average(2)
Investments in first lien debt $ 4,978,384  Yield analysis Discount rate 8.41  % 18.32  % 11.88  %
Investments in second lien debt 8,686  Yield analysis Discount rate 13.90  % 13.90  % 13.90  %
Investments in unsecured debt 1,915  Yield analysis Discount rate 13.43  % 15.28  % 14.32  %
Investments in preferred equity 2,160  Yield analysis Discount rate 8.28  % 17.79  % 13.07  %
Investments in common equity 309  Discounted cash flow Discount rate 7.50  % 15.00  % 11.96  %
Exit multiple  10.00x  10.00x  10.00x
Cap Rate 5.25  % 5.25  % 5.25  %
(1)As of March 31, 2023, included within the fair value of Level 3 assets of $5,796,765 is an amount of $805,311 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.

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 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
Debt
March 31, 2023 December 31, 2022
Carrying
Value		 Fair Value Carrying
Value		 Fair Value
HLEND A Funding Facility $ 604,569  $ 604,569  $ 453,663  $ 453,663 
HLEND B Funding Facility 512,560  512,560  482,084  482,084 
HLEND C Funding Facility 100,000  100,000  —  — 
HLEND D Funding Facility —  —  —  — 
Revolving Credit Facility 684,589  684,589  704,819  704,819 
November 2025 Notes(1)
169,019  171,424  168,462  170,628 
November 2027 Notes(1)
154,733  157,730  153,958  156,354 
March 2026 Notes(1)
276,923  279,400  —  — 
March 2028 Notes(1)
124,892  126,012  —  — 
Short-Term Borrowings 373,745  373,745  379,081  379,081 
Total $ 3,001,030  $ 3,010,029  $ 2,342,067  $ 2,346,629 
(1)The carrying value of the Company's November 2025 Notes, November 2027 Notes, March 2026 Notes and March 2028 Notes are presented net of unamortized debt issuance costs of $1.7 million, $1.6 million, $2.5 million and $1.1 million, respectively, as of March 31, 2023 and includes the increase in the notes carrying value of $0.7 million, $1.4 million, $3.4 million and $2.0 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 March 31, 2023 and December 31, 2022:
March 31, 2023 December 31, 2022
Level 1 $ —  $ — 
Level 2 —  — 
Level 3 3,010,029  2,346,629 
Total $ 3,010,029  $ 2,346,629 

As of March 31, 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.