GOLDMAN SACHS BDC, INC. The following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. References to "we," "us," "our," and the "Company," meanGoldman Sachs BDC, Inc. orGoldman Sachs BDC, Inc. together with its consolidated subsidiaries, as the context may require. The terms "GSAM ," "Goldman Sachs Asset Management," our "Adviser" or our "Investment Adviser" refer toGoldman Sachs Asset Management, L.P. , aDelaware limited partnership. The term "GS Group Inc. " refers to The Goldman Sachs Group, Inc. "GS & Co. " refers toGoldman Sachs & Co. LLC and its predecessors. The term "Goldman Sachs" refers toGS Group Inc. , together withGS & Co. ,GSAM and its other subsidiaries and affiliates. The discussion and analysis contained in this section refer to our financial condition, results of operations and cash flows. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Please see "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with this discussion and analysis. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under "Cautionary Statement Regarding Forward-Looking Statements" appearing elsewhere in this report.
OVERVIEW
We are a specialty finance company focused on lending to middle-market
companies. We are a closed-end management investment company that has elected to
be regulated as a business development company ("BDC") under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). In addition, we
have elected to be treated as a regulated investment company ("RIC"), and we
expect to qualify annually for tax treatment as a RIC under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with our
taxable year ended December 31, 2013 . From our formation in 2012 through March
31, 2023 , we originated more than $6.91 billion in aggregate principal amount of
debt and equity investments prior to any subsequent exits and repayments. We
seek to generate current income and, to a lesser extent, capital appreciation
primarily through direct originations of secured debt, including first lien,
unitranche debt, including last-out portions of such loans, and second lien
debt, and unsecured debt, including mezzanine debt, as well as through select
equity investments.
"Unitranche" loans are first lien loans that extend deeper in a borrower's
capital structure than traditional first lien debt and may provide for a
waterfall of cash flow priority between different lenders in such loan. In a
number of instances, we may find another lender to provide the "first-out"
portion of a unitranche loan while we retain the "last-out" portion of such
loan, in which case, the "first-out" portion of the loan would generally receive
priority with respect to the payment of principal, interest and any other
amounts due thereunder as compared to the "last-out" portion that we would
continue to hold. In exchange for taking greater risk of loss, the "last-out"
portion generally earns a higher interest rate than the "first-out" portion of
the loan. We use the term "mezzanine" to refer to debt that ranks senior in
right of payment only to a borrower's equity securities and ranks junior in
right of payment to all of such borrower's other indebtedness. We may make
multiple investments in the same portfolio company.
We may also originate "covenant-lite" loans, which are loans with fewer
financial maintenance covenants than other obligations, or no financial
maintenance covenants. Such covenant-lite loans may not include terms that allow
the lender to monitor the performance of the borrower or to declare a default if
certain criteria are breached. These flexible covenants (or the absence of
covenants) could permit borrowers to experience a significant downturn in their
results of operations without triggering any default that would permit holders
of their debt (such as us) to accelerate indebtedness or negotiate terms and
pricing. In the event of default, covenant-lite loans may recover less value
than traditional loans as the lender may not have an opportunity to negotiate
with the borrower prior to such default.
We invest primarily in U.S. middle-market companies, which we believe are
underserved by traditional providers of capital such as banks and the public
debt markets. In this report, we generally use the term "middle market
companies" to refer to companies with between $5 million and $200 million of
annual earnings before interest expense, income tax expense, depreciation and
amortization ("EBITDA") excluding certain one-time, and non-recurring items that
are outside the operations of these companies. However, we may from time to time
invest in larger or smaller companies. We generate revenues primarily through
receipt of interest income from the investments we hold. In addition, we may
generate income from various loan origination and other fees, dividends on
direct equity investments and capital gains on the sales of investments. Fees
received from portfolio companies (directors' fees, consulting fees,
administrative fees, tax advisory fees and other similar compensation) are paid
to us, unless, to the extent required by applicable law or exemptive relief
therefrom, we only receive our allocable portion of such fees when invested in
the same portfolio company as another client account managed by our Investment
Adviser (collectively with us, the "Accounts"). The companies in which we invest
use our capital for a variety of purposes, including to support organic growth,
fund acquisitions, make capital investments or refinance indebtedness.
Our origination strategy focuses on leading the negotiation and structuring of
the loans or securities in which we invest and holding the investments in our
portfolio to maturity. In many cases, we are the sole investor in the loan or
security in our portfolio. Where there are multiple investors, we generally seek
to control or obtain significant influence over the rights of investors in the
loan or security. We generally seek to make investments that have maturities
between three and ten years and range in size between $10 million and $75
million , although we may make larger or smaller investments on occasion.
For a discussion of the competitive landscape we face, please see "Item 1A. Risk
Factors-Competition-We operate in a highly competitive market for investment
opportunities" and "Item 1. Business-Competitive Advantages" in our annual
report on Form 10-K for the year ended December 31, 2022 .
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Table of Contents KEY COMPONENTS OF OPERATIONS Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment, the amount of capital we have available to us and the competitive environment for the type of investments we make. As a BDC, we may not acquire any assets other than "qualifying assets" specified in the Investment Company Act, unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Pursuant to rules adopted by theSecurities and Exchange Commission (the "SEC"), "eligible portfolio companies" include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than$250 million .
Revenues
We generate revenues in the form of interest income on debt investments and, to
a lesser extent, capital gains and distributions, if any, on equity securities
that we may acquire in portfolio companies. Some of our investments may provide
for deferred interest payments or payment-in-kind ("PIK") income. The principal
amount of the debt investments and any accrued but unpaid interest generally
becomes due at the maturity date.
We generate revenues primarily through receipt of interest income from the
investments we hold. In addition, we may generate revenue in the form of
commitment, origination, structuring, syndication, exit fees or diligence fees,
fees for providing managerial assistance and consulting fees. Portfolio company
fees (directors' fees, consulting fees, administrative fees, tax advisory fees
and other similar compensation) will be paid to us, unless, to the extent
required by applicable law or exemptive relief, if any, therefrom, we receive
our allocable portion of such fees when invested in the same portfolio company
as other Accounts, which other Accounts could receive their allocable portion of
such fee. We do not expect to receive material fee income as it is not our
principal investment strategy. We record contractual prepayment premiums on
loans and debt securities as interest income.
Dividend income on preferred equity investments is recorded on an accrual basis
to the extent that such amounts are payable by the portfolio company and are
expected to be collected. Dividend income on common equity investments is
recorded on the record date for private portfolio companies and on the
ex-dividend date for publicly traded portfolio companies. Interest and dividend
income are presented net of withholding tax, if any.
Expenses
Our primary operating expenses include the payment of the management fee (the "Management Fee") and the incentive fee (the "Incentive Fee") to our Investment Adviser, legal and professional fees, interest and other debt expenses and other operating and overhead related expenses. The Management Fee and Incentive Fee compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other expenses of our operations and transactions in accordance with the investment management agreement (the "Investment Management Agreement") and administration agreement (the "Administration Agreement"), including: • our operational expenses; • fees and expenses, including travel expenses, incurred by our Investment Adviser or payable to third parties related to our investments, including, among others, professional fees (including the fees of consultants and experts) and fees and expenses from evaluating, monitoring, researching and performing due diligence on investments and prospective investments;
•
interest payable on debt, if any, incurred to finance our investments;
•
fees and expenses incurred by us in connection with membership in investment company organizations;
• brokers' commissions;
•
the expenses of and fees for registering or qualifying our shares for sale and of maintaining our registration and registering us as a broker or a dealer;
•
fees and expenses associated with calculating our net asset value ("NAV") (including expenses of any independent valuation firm);
•
legal, auditing or accounting expenses;
•
taxes or governmental fees;
•
the fees and expenses of our administrator, transfer agent or sub-transfer agent;
•
the cost of preparing stock certificates, including clerical expenses of issue, redemption or repurchase of our shares;
•
the fees and expenses of our directors who are not affiliated with our Investment Adviser;
•
the cost of preparing and distributing reports, proxy statements and notices to
our stockholders, the
•
costs of holding stockholder meetings;
•
listing fees;
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•
the fees or disbursements of custodians of our assets, including expenses incurred in the performance of any obligations enumerated by our certificate of incorporation or bylaws insofar as they govern agreements with any such custodian;
• insurance premiums; and
•
costs incurred in connection with any claim, litigation, arbitration, mediation, government investigation or dispute in connection with our business and the amount of any judgment or settlement paid in connection therewith, or the enforcement of our rights against any person and indemnification or contribution expenses payable by us to any person and other extraordinary expenses not incurred in the ordinary course of our business. We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. Costs relating to future offerings of securities would be incremental.
Leverage
Our senior secured revolving credit agreement (as amended, the "Revolving Credit Facility") withTruist Bank , as administrative agent, andBank of America, N.A ., as syndication agent, our 3.75% Notes due 2025 (the "2025 Notes"), and our 2.875% Notes due 2026 (the "2026 Notes") allow us to borrow money and lever our investment portfolio, subject to the limitations of the Investment Company Act, with the objective of increasing our yield. This is known as "leverage" and could increase or decrease returns to our stockholders. The use of leverage involves significant risks. We are permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, is at least 150% after such borrowing (if certain requirements are met). Certain trading practices and investments, such as reverse repurchase agreements, may be considered borrowings or involve leverage and thus may be subject to Investment Company Act restrictions. In accordance with applicableSEC staff guidance and interpretations, when we engage in such transactions, instead of maintaining an asset coverage ratio of at least 150% (if certain requirements are met), we may segregate or earmark liquid assets, or enter into an offsetting position, in an amount at least equal to our exposure, on a mark-to-market basis, to such transactions (as calculated pursuant to requirements of theSEC ). Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. Practices and investments that may involve leverage but are not considered borrowings are not subject to theInvestment Company Act's asset coverage requirement, and we will not otherwise segregate or earmark liquid assets or enter into offsetting positions for such transactions. The amount of leverage that we employ will depend on the assessment by our Investment Adviser and our board of directors (the "Board of Directors" or the "Board") of market conditions and other factors at the time of any proposed borrowing.
PORTFOLIO AND INVESTMENT ACTIVITY
Our portfolio (excluding investments in money market funds, if any) consisted of
the following:
As of
March 31, 2023 December 31, 2022
Amortized Fair Amortized Fair
Cost Value Cost Value
(in millions) (in millions)
First Lien/Senior Secured Debt
$ 3,129.55 First Lien/Last-Out Unitranche 121.04 115.68 120.25
116.23
Second Lien/Senior Secured Debt 221.28 169.87 255.35
174.33
Unsecured Debt 9.39 8.15 8.79 7.63
Preferred Stock 48.26 44.89 48.26 42.38
Common Stock 81.12 36.56 82.01 35.49
Warrants 1.85 0.24 1.85 0.61
Total Investments $ 3,681.51 $ 3,514.90 $ 3,691.04 $ 3,506.22
The weighted average yield by asset type of our total portfolio (excluding
investments in money market funds, if any), at amortized cost and fair value,
was as follows:
As of
March 31, 2023 December 31, 2022
Amortized Fair Amortized Fair
Cost Value Cost Value
Weighted Average Yield(1)
First Lien/Senior Secured Debt(2) 11.9 % 12.6 % 11.4 % 11.9 %
First Lien/Last-Out Unitranche(2) (3) 12.9 16.8 12.5 15.2
Second Lien/Senior Secured Debt(2) 12.1 19.2 10.8 18.9
Unsecured Debt(2) 14.5 16.8 14.4 16.7
Preferred Stock(4) - - - -
Common Stock(4) - - - -
Warrants(4) - - - -
Total Portfolio 11.6 % 12.8 % 11.0 % 12.1 %
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(1)
The weighted average yield at amortized cost of our portfolio excludes the Purchase Discount and amortization related to the Merger and does not represent the total return to our stockholders. (2) Computed based on (a) the annual actual interest rate or yield earned plus amortization of fees and discounts on the performing debt and other income producing investments as of the reporting date, divided by (b) the total investments (including investments on non-accrual and non-income producing investments) at amortized cost or fair value. This calculation excludes exit fees that are receivable upon repayment of certain loan investments. (3) The calculation includes incremental yield earned on the "last-out" portion of the unitranche loan investments. (4) Computed based on (a) the stated coupon rate, if any, for each income-producing investment, divided by (b) the total investments (including investments on non-accrual and non-income producing investments) at amortized cost or fair value. As ofMarch 31, 2023 , the total portfolio weighted average yield measured at amortized cost and fair value was 11.6% and 12.8%, as compared to 11.0% and 12.1%, as ofDecember 31, 2022 . The increase in the weighted average yield at amortized cost and fair value was primarily driven by rising interest rates, increased market volatility and widening of credit spreads. Within the First Lien/Last-Out Unitranche, the increase in weighted average yield at fair value was also primarily driven by the underperformance ofDoxim, Inc. Within Second Lien/Senior Secured Debt, the increase in weighted average yield at amortized cost was primarily driven by the exit of a non-accrual position,National Spine and Pain Centers, LLC .
The following table presents certain selected information regarding our investment portfolio (excluding investments in money market funds, if any):
As of
March 31, 2023 December 31, 2022
Number of portfolio companies 133 134
Percentage of performing debt bearing a floating
rate(1) 99.7 % 99.2 %
Percentage of performing debt bearing a fixed
rate(1)(2) 0.3 % 0.8 %
Weighted average yield on debt and income producing investments, at amortized cost(3)
12.2 % 11.7 %
Weighted average yield on debt and income producing investments, at fair value(3)
13.2 % 12.5 %
Weighted average leverage (net debt/EBITDA)(4) 6.0x 6.1x
Weighted average interest coverage(4) 1.6x 1.6x
Median EBITDA(4) $ 52.63 million $ 49.62 million
(1)
Measured on a fair value basis. Excludes investments, if any, placed on
non-accrual.
(2)
Includes income producing preferred stock investments.
(3)
Computed based on (a) the annual actual interest rate or yield earned plus
amortization of fees and discounts on the performing debt and other income
producing investments as of the reporting date, divided by (b) the total
performing debt and other income producing investments (excluding investments on
non-accrual). Excludes the Purchase Discount and amortization related to the
Merger.
(4)
For a particular portfolio company, we calculate the level of contractual
indebtedness net of cash ("net debt") owed by the portfolio company and compare
that amount to measures of cash flow available to service the net debt. To
calculate net debt, we include debt that is both senior and pari passu to the
tranche of debt owned by us but exclude debt that is legally and contractually
subordinated in ranking to the debt owned by us. We believe this calculation
method assists in describing the risk of our portfolio investments, as it takes
into consideration contractual rights of repayment of the tranche of debt owned
by us relative to other senior and junior creditors of a portfolio company. We
typically calculate cash flow available for debt service at a portfolio company
by taking EBITDA for the trailing twelve-month period. Weighted average net debt
to EBITDA is weighted based on the fair value of our debt investments and
excluding investments where net debt to EBITDA may not be the appropriate
measure of credit risk, such as cash collateralized loans and investments that
are underwritten and covenanted based on recurring revenue.
For a particular portfolio company, we also calculate the level of contractual
interest expense owed by the portfolio company and compare that amount to EBITDA
("interest coverage ratio"). We believe this calculation method assists in
describing the risk of our portfolio investments, as it takes into consideration
contractual interest obligations of the portfolio company. Weighted average
interest coverage is weighted based on the fair value of our performing debt
investments, excluding investments where interest coverage may not be the
appropriate measure of credit risk, such as cash collateralized loans and
investments that are underwritten and covenanted based on recurring revenue.
Median EBITDA is based on our debt investments, excluding investments where net
debt to EBITDA may not be the appropriate measure of credit risk, such as cash
collateralized loans and investments that are underwritten and covenanted based
on recurring revenue.
Portfolio company statistics are derived from the most recently available
financial statements of each portfolio company as of the reported end date.
Statistics of the portfolio companies have not been independently verified by us
and may reflect a normalized or adjusted amount. As of March 31, 2023 and
December 31, 2022 , investments where net debt to EBITDA may not be the
appropriate measure of credit risk represented 42.0% and 41.8%, of total debt
investments.
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Our Investment Adviser monitors the financial trends of each portfolio company on an ongoing basis to determine if it is meeting its respective business plan and to assess the appropriate course of action for each company. Our Investment Adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which may include: (i) assessment of success in adhering to the portfolio company's business plan and compliance with covenants; (ii) periodic or regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor to discuss financial position, requirements and accomplishments; (iii) comparisons to our other portfolio companies in the industry, if any; (iv) attendance at and participation in Board meetings or presentations by portfolio companies; and (v) review of monthly and quarterly financial statements and financial projections of portfolio companies. As part of the monitoring process, our Investment Adviser also employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Investment Adviser grades the credit risk of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (e.g., at the time of origination or acquisition), although it may also take into account under certain circumstances the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. The grading system for our investments is as follows:
•
Grade 1 investments involve the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit;
•
Grade 2 investments involve a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing as expected and the risk factors to our ability to ultimately recoup the cost of our investment are neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a grade of 2;
•
Grade 3 investments indicate that the risk to our ability to recoup the initial cost basis of such investment has increased materially since origination or acquisition, including as a result of factors such as declining performance and non-compliance with debt covenants; however, payments are generally not more than 120 days past due; and
•
Grade 4 investments indicate that the risk to our ability to recoup the initial
cost basis of such investment has substantially increased since origination or
acquisition, and the portfolio company likely has materially declining
performance. For debt investments with an investment grade of 4, in most cases,
most or all of the debt covenants are out of compliance and payments are
substantially delinquent. For investments graded 4, it is anticipated that we
will not recoup our initial cost basis and may realize a substantial loss of our
initial cost basis upon exit.
Our Investment Adviser grades the investments in our portfolio at least
quarterly and it is possible that the grade of a portfolio investment may be
reduced or increased over time. For investments graded 3 or 4, our Investment
Adviser enhances its level of scrutiny over the monitoring of such portfolio
company. The following table shows the composition of our portfolio on the 1 to
4 grading scale:
As of
March 31, 2023 December 31, 2022
Percentage Percentage
Investment Performance Rating Fair Value of Total Fair Value of Total
(in millions) (in millions)
Grade 1 $ 129.89 3.7 % $ - - %
Grade 2 3,249.25 92.4 3,402.96 97.1
Grade 3 115.02 3.3 91.55 2.6
Grade 4 20.74 0.6 11.71 0.3
Total Investments $ 3,514.90 100.0 % $ 3,506.22 100.0 %
The increase in investments with a grade 1 investment performance rating was
driven by investments with an aggregate fair value of $129.89 million being
upgraded from grade 2 due to the potential exit. The increase in investments
with a grade 4 investment performance rating was primarily driven by investments
with an aggregate fair value of $12.05 million being downgraded from grade 2 due
to financial underperformance. The increase in investments with a grade 3
investment performance rating was driven by an investment with fair value of
$29.18 million being downgraded from grade 2 due to financial underperformance,
offset by the repayment of an investment with fair value of $5.87 million .
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The following table shows the amortized cost of our performing and non-accrual
investments:
As of
March 31, 2023 December 31, 2022
Amortized Percentage Amortized Percentage
Cost of Total Cost of Total
(in millions) (in millions)
Performing $ 3,622.88 98.4 % $ 3,613.76 97.9 %
Non-accrual 58.63 1.6 77.28 2.1
Total Investments $ 3,681.51 100.0 % $ 3,691.04 100.0 %
Investments are placed on non-accrual status when it is probable that principal,
interest or dividends will not be collected according to the contractual terms.
Accrued interest or dividends generally are reversed when an investment is
placed on non-accrual status. Interest or dividend payments received on
non-accrual investments may be recognized as income or applied to principal
depending upon management's judgment. Non-accrual investments are restored to
accrual status when past due principal and interest or dividends are paid and,
in management's judgment, principal and interest or dividend payments are likely
to remain current. We may make exceptions to this treatment if the loan has
sufficient collateral value and is in the process of collection.
The following table shows our investment activity by investment type(1):
For the Three Months Ended
March 31, March 31,
2023 2022
($ in millions)
Amount of investments committed at cost:
First Lien/Senior Secured Debt $ 2.10 $ 130.46
Second Lien/Senior Secured Debt - 1.80
Total $ 2.10 $ 132.26
Proceeds from investments sold or repaid:
First Lien/Senior Secured Debt $ 12.52 $ 59.32
First Lien/Last-Out Unitranche 0.11 60.99
Total $ 12.63 $ 120.31
Net increase (decrease) in portfolio $ (10.53 )
1 4
Total new investment commitment amount in new portfolio companies
$ 1.05 $ 39.90 Average new investment commitment amount in new portfolio companies$ 1.05 $ 9.98 Number of existing portfolio companies with new investment commitments 1 11
Total new investment commitment amount in existing portfolio companies
$ 1.05
5.2 5.1
Percentage of new debt investment commitments at cost for floating interest rates
100.0 % 100.0 %
Percentage of new debt investment commitments at cost for fixed interest rates(3)
-% -%
Weighted average yield on new debt and income producing investment commitments(4)
11.1 % 7.4 %
Weighted average yield on new investment commitments(5) 11.1 % 7.3 %
Weighted average yield on debt and income producing investments sold or repaid(6)
11.0 % 7.7 %
Weighted average yield on investments sold or repaid(7) 11.0 % 7.7 %
(1)
Figures for new investment commitments are shown net of capitalized fees,
expenses and original issue discount ("OID") that occurred at the initial close.
Figures for new investment commitments may also include positions originated
during the period but not held at the reporting date. Figures for investments
sold or repaid excludes unfunded commitments that may have expired or otherwise
been terminated without receipt of cash proceeds or other consideration.
(2)
Calculated as of the end of the relevant period and the maturity date of the
individual investments.
(3)
May include preferred stock investments.
(4)
Computed based on (a) the annual actual interest rate on new debt and income
producing investment commitments, divided by (b) the total new debt and income
producing investment commitments. The calculation includes incremental yield
earned on the "last-out" portion of the unitranche loan investments and excludes
investments that are non-accrual. The annual actual interest rate used is as of
the respective quarter end date when the investment activity occurred.
(5)
Computed based on (a) the annual actual interest rate on new investment
commitments, divided by (b) the total new investment commitments (including
investments on non-accrual and non-income producing investments). The
calculation includes incremental yield earned on the "last-out" portion of the
unitranche loan investments. The annual actual interest rate used is as of the
respective quarter end date when the investment activity occurred.
(6)
Computed based on (a) the annual actual interest rate on debt and income
producing investments sold or paid down, divided by (b) the total debt and
income producing investments sold or paid down. The calculation includes
incremental yield earned on the "last-out" portion of the unitranche loan
investments and excludes prepayment premiums earned on exited investments and
investments that are on non-accrual.
(7)
Computed based on (a) the annual actual interest rate on investments sold or
paid down, divided by (b) the total investments sold or paid down (including
investments on non-accrual and non-income producing investments). The
calculation includes incremental yield earned on the "last-out" portion of the
unitranche loan investments and excludes prepayment premiums earned on exited
investments.
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RESULTS OF OPERATIONS
Our operating results were as follows:
For the Three Months Ended
March 31, March 31,
2023 2022
($ in millions)
Total investment income $ 107.40 $ 78.30
Net expenses 58.64 27.32
Net investment income before taxes 48.76 50.98
Income tax expense, including excise tax 0.77
0.83
Net investment income after taxes 47.99
50.15
Net realized gain (loss) on investments (36.26 ) (2.66 ) Net unrealized appreciation (depreciation) on investments 18.21
(8.16 ) Net realized and unrealized gain (losses) on forward contracts, translations and other transactions
(1.49 ) 1.06
Net realized and unrealized gains (losses) (19.54 ) (9.76 ) Income tax (provision) benefit for realized and unrealized gains (0.39 ) (0.23 ) Net increase in net assets from operations$ 28.06
Net increase in net assets from operations can vary from period to period as a result of various factors, including acquisitions, the level of new investment commitments, the recognition of realized gains and losses and changes in unrealized appreciation and depreciation in the investment portfolio. OnOctober 12, 2020 , we completed our Merger with GS MMLC. The Merger was accounted for as an asset acquisition in accordance with ASC 805-50, Business Combinations - Related Issues. The consideration paid to GS MMLC's stockholders was less than the aggregate fair values of the assets acquired and liabilities assumed, which resulted in a purchase discount (the "Purchase Discount"). The Purchase Discount was allocated to the cost of GS MMLC investments acquired by us on a pro-rata basis based on their relative fair values as of the closing date. Immediately following the Merger with GS MMLC, we marked the investments to their respective fair values and, as a result, the Purchase Discount allocated to the cost basis of the investments acquired was immediately recognized as unrealized appreciation on our Consolidated Statement of Operations. The Purchase Discount allocated to the loan investments acquired will amortize over the life of each respective loan through interest income with a corresponding adjustment recorded as unrealized depreciation on such loans acquired through their ultimate disposition. The Purchase Discount allocated to equity investments acquired will not amortize over the life of such investments through interest income and, assuming no subsequent change to the fair value of the equity investments acquired and disposition of such equity investments at fair value, we will recognize a realized gain with a corresponding reversal of the unrealized appreciation on disposition of such equity investments acquired. As a supplement to our financial results reported in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), we have provided, as detailed below, certain non-GAAP financial measures to our operating results that exclude the aforementioned Purchase Discount and the ongoing amortization thereof, as determined in accordance with GAAP. The non-GAAP financial measures include (i) Adjusted net investment income after taxes; and (ii) Adjusted net realized and unrealized gains (losses). We believe that the adjustment to exclude the full effect of the Purchase Discount is meaningful because it is a measure that we and investors use to assess our financial condition and results of operations. Although these non-GAAP financial measures are intended to enhance investors' understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The aforementioned non-GAAP financial measures may not be comparable to similar non-GAAP financial measures used by other companies. For the Three Months Ended March 31, March 31, 2023 2022 ($ in millions) Net investment income after taxes$ 47.99 $ 50.15 Less: Purchase Discount amortization 0.92
4.31
Adjusted net investment income after taxes$ 47.07
Net realized and unrealized gains (losses)$ (19.54 ) $ (9.76 ) Less: Net change in unrealized appreciation (depreciation) due to the Purchase Discount (1.42 ) (4.31 ) Less: Realized gain (loss) due to the Purchase Discount 0.50 -
Adjusted net realized and unrealized gains (losses)
$ (5.45 ) 55
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Investment Income
Our investment income was as follows:
For the Three Months Ended
March 31, March 31,
2023 2022
($ in millions)
Interest $ 98.64 $ 71.77
Dividend income 0.11 0.07
Payment-in-kind income 7.76 5.24
Other income 0.89 1.22
Total Investment Income $ 107.40 $ 78.30
In the table above:
•
Interest income from investments increased from $71.77 million for the three
months ended March 31, 2022 to $98.64 million for the three months ended March
31, 2023 . The increase is primarily driven by the increase in rising base
interest rates on our variable rate investments and the increase in the size of
our portfolio, slightly offset by the decrease in repayment activities. The
amortized cost of the portfolio increased from $3,514.21 million as of March 31,
2022 to $3,681.51 million as of March 31, 2023 . Included in interest income is
accelerated accretion of upfront loan origination fees and unamortized discounts
of $3.37 million for the three months ended March 31, 2022 and $0.22 million for
the three months ended March 31, 2023 .
•
PIK income from investments increased from$5.24 million for the three months endedMarch 31, 2022 to$7.76 million for the three months endedMarch 31, 2023 . The increase was due to the increase in the number of investments earning PIK income. Expenses Our expenses were as follows: For the Three Months Ended March 31, March 31, 2023 2022 ($ in millions) Interest and other debt expenses$ 27.26 $ 15.67 Incentive fees 22.30 8.19 Management fees 8.92 8.82 Professional fees 0.88 0.88 Directors' fees 0.21 0.20 Other general and administrative expenses 1.06 1.11 Total Expenses$ 60.63 $ 34.87 Fee waivers (1.99 ) (7.55 ) Net Expenses$ 58.64 $ 27.32 In the table above: • Interest and other debt expenses increased from$15.67 million for the three months endedMarch 31, 2022 to$27.26 million for the three months endedMarch 31, 2023 . The increase is driven by the rising base interest rates and the increase in debt borrowing.
•
Incentive fees increased from$8.19 million for the three months endedMarch 31, 2022 to$22.30 million for the three months endedMarch 31, 2023 . The increase is primarily driven by the performance of the investment portfolio for the twelve quarters endedMarch 31, 2023 as compared to the twelve quarters endedMarch 31, 2022 . For additional information, see Note 3 "Significant Agreements and Related Party Transactions" in our consolidated financial statements included in this report.
•
For the three months endedMarch 31, 2023 , our Investment Adviser voluntarily waived incentive fees by$1.99 million . For the three months endedMarch 31, 2022 , our Investment Adviser voluntarily waived incentive fees by$7.55 million . For additional information, see Note 3 "Significant Agreements andRelated Party Transactions" in our consolidated financial statements included in this report.
Net Realized Gains (Losses) and Net Change in Unrealized Appreciation (Depreciation) on Investments
The realized gains and losses on fully exited and partially exited portfolio companies consisted of the following:
For the Three Months Ended
March 31, March 31,
2023 2022
(in millions)
Bolttech Mannings, Inc. $ - $ (2.04 )
National Spine and Pain Centers, LLC (36.27 ) -
Experity, Inc. - (0.62 )
Other, net 0.01 - (1)
Net realized gain (loss) on investments
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(1)
Amount rounds to less than
For the three months endedMarch 31, 2023 , net realized losses were driven by the exit of our investments in one portfolio company. InFebruary 2023 , we fully exited our second lien debt investment and common stock investment inNational Spine and Pain Centers, LLC , which resulted in a realized loss of$36.27 million . Any changes in fair value are recorded as a change in unrealized appreciation (depreciation) on investments. For further details on the valuation process, refer to Note 2 "Significant Accounting Policies-Investments" in our consolidated financial statements. Net change in unrealized appreciation (depreciation) on investments consisted of the following: For the Three Months Ended March 31, March 31, 2023 2022 ($ in millions) Unrealized appreciation$ 43.20 $ 12.08 Unrealized depreciation (24.98 ) (20.23 ) Net Change in Unrealized Appreciation (Depreciation) on Investments$ 18.22 $ (8.15 ) The net change in unrealized appreciation (depreciation) on investments consisted of the following: For the Three Months Ended March 31, 2023 Portfolio Company: ($ in millions)
1.09
Volt Bidco, Inc. (dba Power Factors) 0.74
Iracore International Holdings, Inc. 0.63
CloudBees, Inc. 0.59
Doxim, Inc. (1.31 )
Wine.com, LLC (1.52 )
Ansira Partners, Inc. (1.66 )
MPI Engineered Technologies, LLC (2.57 )
Zep Inc. (2.99 )
Other, net(1) (11.05 )
Total $ 18.22
(1)
Includes gross unrealized appreciation of
Net change in unrealized appreciation (depreciation) in our investments for the three months endedMarch 31, 2023 was primarily driven by the reversal of unrealized depreciation in connection with the aforementioned exit of our second lien debt investment and common stock investment inNational Spine and Pain Centers, LLC , partially offset by the unrealized depreciation resulting from the increase in market volatility and widening credit spreads. For the Three Months Ended March 31, 2022 Portfolio Company: ($ in millions) Convene 237 Park Avenue, LLC (dba Convene) $ 3.01 Zarya Intermediate, LLC (dba iOFFICE) 1.18 Iracore International Holdings, Inc. 1.12 ATX Parent Holdings, LLC - Class A Units 1.04 CloudBees, Inc. 0.86 Wine.com, LLC (1.12 ) Doxim, Inc. (1.45 ) Diligent Corporation (1.57 ) Smarsh, Inc. (2.02 ) Zep Inc. (2.78 ) Other, net(1) (6.42 ) Total $ (8.15 ) (1)
Includes gross unrealized appreciation of
Net change in unrealized appreciation (depreciation) in our investments for the
three months ended
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The primary use of existing funds and any funds raised in the future is expected to be for our investments in portfolio companies, cash distributions to our stockholders or for other general corporate purposes, including paying for operating expenses or debt service to the extent we borrow or issue senior securities.
We expect to generate cash primarily from the net proceeds of any future offerings of securities, future borrowings and cash flows from operations. To the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our Board of Directors otherwise determines that leveraging our portfolio would be in our best interest and the best interests of our stockholders, we may enter into credit facilities in addition to our existing credit facilities, as discussed below, or issue other senior securities. We would expect any such credit facilities may be secured by certain of our assets and may contain advance rates based upon pledged collateral. The pricing and other terms of any such facilities would depend upon market conditions when we enter into any such facilities as well as the performance of our business, among other factors. As a BDC, with certain limited exceptions, we are only permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, is at least 150% after such borrowing (if certain requirements are met). See "-Key Components of Operations-Leverage." As ofMarch 31, 2023 andDecember 31, 2022 , our asset coverage ratio based on the aggregate amount outstanding of our senior securities was 181% and 174%. We may also refinance or repay any of our indebtedness at any time based on our financial condition and market conditions. We may enter into investment commitments through signed commitment letters that may ultimately become investment transactions in the future. We regularly evaluate and carefully consider our unfunded commitments usingGSAM's proprietary risk management framework for the purpose of planning our capital resources and ongoing liquidity, including our financial leverage.
Equity Issuances
We may from time to time issue and sell shares of our common stock through
public or at-the-market ("ATM") offerings. On May 26, 2022 , we entered into (i)
an equity distribution agreement by and among us, GSAM and Truist Securities,
Inc. and (ii) an equity distribution agreement by and among us, GSAM and SMBC
Nikko Securities America, Inc. For the three months ended
OnMarch 9, 2023 , we completed a follow-on offering (the "March Offering") under our shelf registration statement, issuing 6,500,000 shares of our common stock at a price to the underwriters of$15.09 per share. Net of offering and underwriting costs, we received cash proceeds of$97.59 million .
For further details, see Note 9 "Net Assets" to our consolidated financial statements included in this report.
Common Stock Repurchase Plan
InNovember 2021 , our Board of Directors approved and authorized a new common stock repurchase plan (the "10b5-1 Plan"), which provides for us to repurchase up to$75.00 million of shares of our common stock if our common stock trades below the most recently announced quarter-end NAV per share, subject to certain limitations. The 10b5-1 Plan became effective onAugust 17, 2022 and commenced onSeptember 16, 2022 . The 10b5-1 Plan will expire onAugust 17, 2023 . The 10b5-1 Plan was temporarily suspended in accordance with its terms in connection with the March Offering onMarch 1, 2023 and remains suspended as ofMay 4, 2023 . Further, no purchases will be effected during the applicable restricted period under Regulation M as a result of an offering of securities by us or for a period of 60 days after the expiration of any overallotment option included in any common equity offering. For the three months endedMarch 31, 2023 , we did not repurchase any of our common stock pursuant to the 10b5-1 Plan or otherwise.
For further details, see Note 3 "Significant Agreements and Related Party Transactions" to our consolidated financial statements included in this report.
Dividend Reinvestment Plan
We have a voluntary dividend reinvestment plan (the "DRIP") that provides for automatic reinvestment of all cash distributions declared by our Board of Directors unless a stockholder elects to "opt out" of the plan. As a result, if our Board of Directors declares a cash distribution, then the stockholders who have not "opted out" of the DRIP will have their cash distributions automatically reinvested in additional shares of common stock, rather than receiving the cash distribution. Due to regulatory considerations,GS Group Inc. has opted out of the dividend reinvestment plan, andGS & Co. has opted out of the dividend reinvestment plan in respect of any shares of our common stock acquired through our 10b5-1 Plan.
For further details, see Note 9 "Net Assets" to our consolidated financial statements included in this report.
All correspondence concerning the plan should be directed to the plan agent atComputershare Trust Company , N.A, P.O. Box 43078,Providence, RI 02940-3078, with overnight correspondence being directed to the plan agent atComputershare Trust Company , N.A,150 Royall St. , Suite 101,Canton, MA 02021; by calling 855-807-2742; or through the plan agent's website at www.computershare.com/investor. 58
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Participants who hold their shares through a broker or other nominee should direct correspondence or questions concerning the DRIP to their broker or nominee.
Contractual Obligations
We have entered into certain contracts under which we have future commitments. Payments under the Investment Management Agreement, pursuant to whichGSAM has agreed to serve as our Investment Adviser, are equal to (1) a percentage of value of our average gross assets and (2) a two-part Incentive Fee. Under the Administration Agreement, pursuant to whichState Street Bank and Trust Company has agreed to furnish us with the administrative services necessary to conduct our day-to-day operations, we pay our administrator such fees as may be agreed between us and our administrator that we determine are commercially reasonable in our sole discretion. Either party or the stockholders, by a vote of a majority of our outstanding voting securities, may terminate the Investment Management Agreement without penalty on at least 60 days' written notice to the other party. Either party may terminate the Administration Agreement without penalty upon at least 30 days' written notice to the other party. The following table shows our contractual obligations as ofMarch 31, 2023 : Payments Due by Period (in millions) Less Than More Than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years 2025 Notes$ 360.00 $ -$ 360.00 $ - $ - 2026 Notes$ 500.00 $ -$ 500.00 $ - $ - Revolving Credit Facility(1)$ 1,083.34 $ - $ -$ 1,083.34 $ - (1) We may borrow amounts in USD or certain other permitted currencies. Debt outstanding denominated in currencies other than USD has been converted to USD using the applicable foreign currency exchange rate as of the applicable reporting date. As ofMarch 31, 2023 , we had outstanding borrowings denominated in USD of$984.17 million , in Euros (EUR) of 37.70 million, in British Pounds (GBP) of 46.75 million and Canadian Dollar (CAD) of 0.82 million.
Revolving Credit Facility
OnSeptember 19, 2013 , we entered into a senior secured revolving credit agreement (as amended, the "Revolving Credit Facility") with various lenders.Truist Bank serves as administrative agent andBank of America N.A . serves as syndication agent under the Revolving Credit Facility. We amended and restated the Revolving Credit Facility on numerous occasions betweenOctober 3, 2014 andMay 5, 2022 . The aggregate committed borrowing amount under the Revolving Credit Facility is$1,695.00 million . The Revolving Credit Facility includes an uncommitted accordion feature that allows us, under certain circumstances, to increase the borrowing capacity of the Revolving Credit Facility to up to$2,250.00 million . Borrowings denominated in USD, including amounts drawn in respect of letters of credit, bear interest (at the Company's election) of either (i) Term SOFR plus a margin of either (x) 2.00%, (y) 1.875% (subject to maintenance of certain long-term corporate debt ratings) or (z) 1.75% (subject to certain gross borrowing base conditions), in each case, plus an additional 0.10% credit adjustment spread or (ii) an alternative base rate, which is the highest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate for such day plus 1/2 of 1.00% and (iii) the rate per annum equal to (x) the greater of (A) Term SOFR for an interest period of one (1) month and (B) zero plus (y) 1.00%, plus a margin of either (x) 1.00%, (y) 0.875% (subject to maintenance of certain long-term corporate debt ratings) or (z) 0.75% (subject to certain gross borrowing base conditions). Borrowings denominated in non-USD bear interest of the applicable term benchmark rate or daily simple SONIA plus a margin of either 2.00%, 1.875% or 1.75% (subject to the conditions applicable to borrowings denominated in USD that bear interest based on the applicable term benchmark rate or daily simple SONIA) plus, in the case of borrowings denominated in Pound Sterling (GBP) only, an additional 0.1193% credit adjustment spread. With respect to borrowings denominated in USD, we may elect either Term SOFR, or an alternative base rate at the time of borrowing, and such borrowings may be converted from one benchmark to another at any time, subject to certain conditions. Interest is payable in arrears on the applicable interest payment date as specified therein. We pay a fee of 0.375% per annum on committed but undrawn amounts under the Revolving Credit Facility, payable quarterly in arrears. Any amounts borrowed under the Revolving Credit Facility will mature, and all accrued and unpaid interest will be due and payable, onMay 5, 2027 .
For further details, see Note 6 "Debt - Revolving Credit Facility" to our consolidated financial statements included in this report.
Convertible Notes
OnOctober 3, 2016 , we closed an offering of$115.00 million aggregate principal amount of 4.50% unsecured convertible notes, which included$15.00 million aggregate principal amount issued pursuant to the initial purchasers' exercise in full of an over-allotment option (the "Initial Convertible Notes"). OnJuly 2, 2018 , we closed an offering of$40.00 million in additional aggregate principal amount (the "Additional Convertible Notes" and, together with the Initial Convertible Notes, the "Convertible Notes"). The Additional Convertible Notes had identical terms and were fungible with and part of the Initial Convertible Notes. The Convertible Notes bore interest at a rate of 4.50% per year, payable semi-annually in arrears onApril 1 andOctober 1 of each year. The Convertible Notes matured and were fully repaid onApril 1, 2022 in accordance with their terms, using proceeds from the Revolving Credit Facility. For further details, see Note 6 "Debt-Convertible Notes" to our consolidated financial statements included in this report. 59
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2025 Notes
OnFebruary 10, 2020 , we closed an offering of$360.00 million aggregate principal amount of 3.75% unsecured notes due 2025 (the "2025 Notes"). The 2025 Notes were issued pursuant to an indenture between us andComputershare Trust Company , National Association, as Trustee (as successor toWells Fargo Bank, National Association ("Wells Fargo")). The 2025 Notes bear interest at a rate of 3.75% per year, payable semi-annually in arrears onFebruary 10 andAugust 10 of each year, commencing onAugust 10, 2020 . The 2025 Notes will mature onFebruary 10, 2025 and may be redeemed in whole or in part at our option at any time or from time to time at the redemption prices set forth in the indenture. For further details, see Note 6 "Debt-2025 Notes" to our consolidated financial statements included in this report.
2026 Notes
OnNovember 24, 2020 , we closed an offering of$500.00 million aggregate principal amount of 2.875% unsecured notes due 2026 (the "2026 Notes"). The 2026 Notes were issued pursuant to an indenture between us andComputershare Trust Company , National Association, as Trustee (as successor to Wells Fargo). The 2026 Notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, commencing onJuly 15, 2021 . The 2026 Notes will mature onJanuary 15, 2026 and may be redeemed in whole or in part at our option at any time or from time to time at the redemption prices set forth in the indenture. For further details, see Note 6 "Debt-2026 Notes" to our consolidated financial statements included in this report.
Off-Balance Sheet Arrangements
We may become a party to investment commitments and to financial instruments with off-balance sheet risk in the normal course of our business to fund investments and to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As ofMarch 31, 2023 , we believed that we had adequate financial resources to satisfy our unfunded commitments. Our unfunded commitments to provide funds to portfolio companies were as follows: As ofMarch 31 ,December 31, 2023 2022 (in millions)
Unfunded Commitments
First Lien/Senior Secured Debt
6.52
Total $ 325.22 $ 371.05
HEDGING
Subject to applicable provisions of the Investment Company Act and applicable
Commodity Futures Trading Commission ("CFTC") regulations, we may enter into
hedging transactions in a manner consistent with SEC guidance. To the extent
that any of our loans are denominated in a currency other than U.S. dollars, we
may enter into currency hedging contracts to reduce our exposure to fluctuations
in currency exchange rates. We may also enter into interest rate hedging
agreements. Such hedging activities, which will be subject to compliance with
applicable legal requirements, may include the use of futures, options, swaps
and forward contracts. Costs incurred in entering into such contracts or in
settling them, if any, will be borne by us. Our Investment Adviser has claimed
no-action relief from CFTC registration and regulation as a commodity pool
operator pursuant to a CFTC Rule 4.5 with respect to our operations, with the
result that we will be limited in our ability to use futures contracts or
options on futures contracts or engage in swap transactions. Specifically, CFTC
Rule 4.5 imposes strict limitations on using such derivatives other than for
hedging purposes, whereby the use of derivatives not used solely for hedging
purposes is generally limited to situations where (i) the aggregate initial
margin and premiums required to establish such positions does not exceed five
percent of the liquidation value of our portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; or (ii) the aggregate net notional value of such derivatives does not
exceed 100% of the liquidation value of our portfolio. Moreover, we anticipate
entering into transactions involving such derivatives to a very limited extent
solely for hedging purposes or otherwise within the limitations of CFTC Rule
4.5.
In August 2022 , Rule 18f-4 under the Investment Company Act, regarding the
ability of a BDC (or a RIC) to use derivatives and other transactions that
create future payment or delivery obligations (including reverse repurchase
agreements and similar financing transactions), became effective. Under the
newly adopted rule, BDCs that make significant use of derivatives are subject to
a value-at-risk leverage limit, a derivatives risk management program, testing
requirements and requirements related to board reporting. These new requirements
will apply unless the BDC qualifies as a "limited derivatives user," as defined
under the adopted rules. Under the new rule, a BDC may enter into an unfunded
commitment agreement that is not a derivatives transaction, such as an agreement
to provide financing to a portfolio company, if the BDC has, among other things,
a reasonable belief, at the time it enters into such an agreement, that it will
have sufficient cash and cash equivalents to meet its obligations with respect
to all of its unfunded commitment agreements, in each case as it becomes due.
Under the final rule, when we trade reverse repurchase agreements or similar
financing transactions, including certain tender option bonds, we need to
aggregate the amount of any other senior securities representing indebtedness
(e.g., bank borrowings, if applicable) when calculating our asset coverage
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ratio. We currently operate as a "limited derivatives user" and these requirements may limit our ability to use derivatives and/or enter into certain other financial contracts.
CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. For a description of our critical accounting policies, see Note 2 "Significant Accounting Policies" to our consolidated financial statements included in this report. We consider the most significant accounting policies to be those related to our Valuation of Portfolio Investments, Revenue Recognition, Non-Accrual Investments, Distribution Policy, and Income Taxes.
RECENT DEVELOPMENTS
On
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