Sixth Street Specialty Lending(TSLX) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's unaudited consolidated financial statements for the period ended March 31, 2023 are presented Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Investments at Fair Value | $2,918,584 | $2,787,925 | | Total Assets | $2,972,680 | $2,836,947 | | Total Liabilities | $1,616,675 | $1,495,378 | | Total Net Assets | $1,356,005 | $1,341,569 | | Net Asset Value Per Share | $16.59 | $16.48 | - Total investments at fair value increased by $130.66 million from December 31, 2022, to March 31, 2023, reflecting growth in the investment portfolio[15] - Net Asset Value Per Share increased from $16.48 at December 31, 2022, to $16.59 at March 31, 2023[15] Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Amounts in thousands, except per share) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Investment Income | $96,505 | $67,429 | | Total Expenses | $53,411 | $31,367 | | Net Investment Income | $42,937 | $35,712 | | Total Net Unrealized and Realized Gains (Losses) | $10,015 | $5,173 | | Increase in Net Assets Resulting from Operations | $52,952 | $40,885 | | Earnings per common share—basic | $0.65 | $0.54 | - Total Investment Income increased by 43.1% year-over-year, driven by higher interest from investments[18] - Net Investment Income increased by 20.2% year-over-year, despite a significant increase in total expenses, primarily due to higher interest expenses[18] Consolidated Schedules of Investments Investment Portfolio Composition by Type (Fair Value, Amounts in thousands) | Investment Type | March 31, 2023 | Percentage of Total | December 31, 2022 | Percentage of Total | | :--- | :--- | :--- | :--- | :--- | | First-lien debt investments | $2,651,509 | 90.8% | $2,517,894 | 90.3% | | Second-lien debt investments | $44,805 | 1.6% | $40,762 | 1.5% | | Mezzanine debt investments | $11,093 | 0.4% | $10,158 | 0.4% | | Equity and other investments | $157,507 | 5.4% | $167,685 | 6.0% | | Structured credit investments | $53,670 | 1.8% | $51,426 | 1.8% | | Total Investments | $2,918,584 | 100.0% | $2,787,925 | 100.0% | Investment Portfolio Composition by Industry (Fair Value) | Industry | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Internet Services | 15.0% | 13.9% | | Business Services | 12.7% | 14.4% | | Financial Services | 12.2% | 12.8% | | Human Resource Support Services | 11.5% | 11.9% | | Retail and Consumer Products | 11.8% | 11.4% | | Healthcare | 10.1% | 9.9% | | Oil, Gas and Consumable Fuels | 4.9% | 3.9% | | Education | 5.6% | 5.8% | | Hotel, Gaming and Leisure | 4.2% | 4.5% | | Communications | 3.3% | 2.7% | | Manufacturing | 1.3% | 1.3% | | Transportation | 1.2% | 1.2% | | Automotive | 1.1% | 1.2% | | Other | 3.2% | 3.3% | | Chemicals | 0.7% | 0.7% | | Office Products | 0.6% | 0.7% | | Marketing Services | 0.4% | 0.4% | | Insurance | 0.2% | — | | Pharmaceuticals | 0.0% | 0.0% | - The portfolio remains heavily concentrated in first-lien debt investments, accounting for 90.8% of the total fair value as of March 31, 2023[113] Consolidated Statements of Changes in Net Assets Changes in Net Assets (Amounts in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Balance at December 31 | $1,341,569 | $1,275,848 | | Net investment income | $42,937 | $35,712 | | Net change in unrealized gains (losses) | $4,777 | $(8,495) | | Net realized gains (losses) | $5,238 | $13,668 | | Dividends declared from distributable earnings | $(44,764) | $(39,522) | | Balance at March 31 | $1,356,005 | $1,283,985 | - Net assets increased by $14.44 million during the three months ended March 31, 2023, primarily due to net investment income and positive net realized and unrealized gains, partially offset by dividends[49] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $(73,504) | $81,150 | | Net Cash Provided by (Used in) Financing Activities | $73,594 | $(73,623) | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $90 | $7,527 | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $25,737 | $23,494 | - Operating activities used $73.50 million in cash for the three months ended March 31, 2023, a significant shift from providing $81.15 million in the prior year, primarily due to increased purchases of investments[52] - Financing activities provided $73.59 million in cash, mainly from net borrowings on debt, offsetting the cash used in operations[52] Notes to Consolidated Financial Statements 1. Organization and Basis of Presentation - Sixth Street Specialty Lending, Inc is a Delaware corporation, formed on July 21, 2010, primarily to lend to and invest in middle-market companies in the United States[54] - The Company has elected to be regulated as a Business Development Company (BDC) under the 1940 Act and as a Regulated Investment Company (RIC) under the Internal Revenue Code[54] - The Company's shares began trading on the NYSE under the symbol 'TSLX' following its IPO on March 21, 2014[55] 2. Significant Accounting Policies - Investments without readily available market prices are valued at fair value as determined in good faith by the Board of Directors, based on input from the Adviser, Audit Committee, and independent third-party valuation firms[62][65][66] - The Company applies ASC Topic 820, Fair Value Measurement, categorizing valuations into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[66][67] - Derivative instruments, including interest rate swaps, are recognized at fair value, with changes in fair value for hedging instruments recorded as components of interest expense[71] - Loans are generally placed on non-accrual status when payments are 30 days or more past due or collectability is doubtful, with accrued and unpaid interest typically reversed[82] 3. Agreements and Related Party Transactions - The Company has an Administration Agreement with its Adviser, Sixth Street Specialty Lending Advisers, LLC, for administrative services, with expenses of $0.6 million incurred for both the three months ended March 31, 2023 and 2022[97][101] - Under the Investment Advisory Agreement, the Company pays a Management Fee (1.5% annual rate on gross assets) and Incentive Fees (100% of pre-Incentive Fee net investment income above a 1.5% quarterly hurdle rate, and 17.5% of cumulative realized capital gains)[102][103][106] Management and Incentive Fees (Amounts in millions) | Fee Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Management Fees (gross of waivers) | $10.7 | $9.3 | | Management Fees waived | $0.3 | $0.0 | | Incentive Fees (total) | $11.2 | $9.3 | | Incentive Fees (realized and payable) | $9.5 | $7.9 | | Incentive Fees (accrued for Capital Gains) | $1.8 | $1.4 | 4. Investments at Fair Value Investments at Fair Value by Type (Amounts in thousands) | Investment Type | March 31, 2023 Fair Value | March 31, 2023 Amortized Cost | December 31, 2022 Fair Value | December 31, 2022 Amortized Cost | | :--- | :--- | :--- | :--- | :--- | | First-lien debt investments | $2,651,509 | $2,646,516 | $2,517,894 | $2,529,317 | | Second-lien debt investments | $44,805 | $47,613 | $40,762 | $42,743 | | Mezzanine debt investments | $11,093 | $8,276 | $10,158 | $7,497 | | Equity and other investments | $157,507 | $142,708 | $167,685 | $142,103 | | Structured credit investments | $53,670 | $54,722 | $51,426 | $53,066 | | Total Investments | $2,918,584 | $2,899,835 | $2,787,925 | $2,774,726 | Net Unrealized Gain (Loss) on Investments (Amounts in thousands) | Investment Type | March 31, 2023 Net Unrealized Gain (Loss) | December 31, 2022 Net Unrealized Gain (Loss) | | :--- | :--- | :--- | | First-lien debt investments | $4,993 | $(11,423) | | Second-lien debt investments | $(2,808) | $(1,981) | | Mezzanine debt investments | $2,817 | $2,661 | | Equity and other investments | $14,799 | $25,582 | | Structured credit investments | $(1,052) | $(1,640) | | Total Investments | $18,749 | $13,199 | - Non-qualifying assets under the 1940 Act represented 10.3% of total assets as of March 31, 2023, compared to 9.7% as of December 31, 2022[30][45] 5. Derivatives - The Company uses interest rate swaps to hedge fixed rate debt obligations and certain fixed rate debt investments, with all swaps centrally cleared through a registered commodities exchange[116] Net Payments on Interest Rate Swaps (Amounts in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Paid | $(11,726) | $(6,330) | | Total Received | $5,718 | $9,246 | | Net | $(6,008) | $2,916 | - For the three months ended March 31, 2023, the Company recognized $0.2 million in net unrealized gains on interest rate swaps not designated as hedging instruments, and $7.3 million in unrealized losses on swaps designated as hedging instruments[120] - As of March 31, 2023, $16.2 million in cash was pledged as collateral for derivative agreements, included in restricted cash[123] 6. Fair Value of Financial Instruments Fair Value Hierarchy of Investments (Amounts in thousands) | Investment Type | March 31, 2023 Level 1 | March 31, 2023 Level 2 | March 31, 2023 Level 3 | March 31, 2023 Total | | :--- | :--- | :--- | :--- | :--- | | First-lien debt investments | $— | $22,660 | $2,628,849 | $2,651,509 | | Second-lien debt investments | $— | $— | $44,805 | $44,805 | | Mezzanine debt investments | $— | $— | $11,093 | $11,093 | | Equity and other investments | $9,539 | $11,199 | $136,769 | $157,507 | | Structured credit investments | $— | $53,670 | $— | $53,670 | | Total investments at fair value | $9,539 | $87,529 | $2,821,516 | $2,918,584 | - A significant majority of investments (96.7% at March 31, 2023) are classified as Level 3, indicating valuations based on unobservable inputs[125] Key Unobservable Inputs for Level 3 Debt Investments (March 31, 2023) | Investment Type | Valuation Technique | Unobservable Input | Range (Weighted Average) | Impact to Valuation from an Increase to Input | | :--- | :--- | :--- | :--- | :--- | | First-lien debt investments | Income approach | Discount rate | 9.9% — 18.0% (14.8%) | Decrease | | Second-lien debt investments | Income approach | Discount rate | 15.3% — 22.6% (21.8%) | Decrease | | Mezzanine debt investments | Income approach | Discount rate | 13.9% — 18.0% (16.0%) | Decrease | 7. Debt - The Revolving Credit Facility commitments increased to $1.585 billion as of April 25, 2022, with an uncommitted accordion feature allowing an increase up to $2.0 billion[137] - The 2023 Notes ($150.0 million principal amount) matured on January 22, 2023, and were fully repaid in cash[149] Debt Obligations (Amounts in thousands) | Debt Type | March 31, 2023 Outstanding Principal | March 31, 2023 Carrying Value | December 31, 2022 Outstanding Principal | December 31, 2022 Carrying Value | | :--- | :--- | :--- | :--- | :--- | | Revolving Credit Facility | $981,889 | $969,469 | $719,328 | $706,156 | | 2024 Notes | $347,500 | $328,969 | $347,500 | $325,492 | | 2026 Notes | $300,000 | $264,598 | $300,000 | $260,188 | | Total Debt | $1,629,389 | $1,563,036 | $1,516,828 | $1,441,796 | Interest Expense and Weighted Average Interest Rate | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Interest Expense | $28,486 | $9,602 | | Average debt outstanding (in millions) | $1,569.4 | $1,211.0 | | Weighted average interest rate | 6.7% | 2.3% | - The Company's asset coverage ratio was 183.3% as of March 31, 2023, and 188.6% as of December 31, 2022, remaining in compliance with the 1940 Act's 150% requirement[160] 8. Commitments and Contingencies Portfolio Company Commitments (Amounts in thousands) | Commitment Type | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Portfolio Company Commitments | $330,354 | $338,043 | - The Company had $330.35 million in commitments to fund investments in current portfolio companies as of March 31, 2023[166] - No material pending or threatened litigation was identified as of March 31, 2023[168] 9. Net Assets - In August 2022, the Company issued 4,360,125 shares of common stock ($77.6 million) to settle $79.2 million principal amount of 2022 Convertible Notes[170] Shares Issued via Dividend Reinvestment Plan | Period | Shares Issued | | :--- | :--- | | Q1 2023 | 362,578 | | Q1 2022 | 299,138 | - The Board authorized a stock repurchase program of up to $50 million, most recently refreshed on May 8, 2023, but no shares were repurchased during the three months ended March 31, 2023 and 2022[174][175] 10. Earnings per share Earnings Per Common Share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Earnings per common share—basic | $0.65 | $0.54 | | Earnings per common share—diluted | $0.65 | $0.51 | - Basic and diluted EPS increased year-over-year, reflecting higher net assets resulting from operations[176] 11. Dividends Dividends Declared Per Share | Dividend Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Supplemental | $0.09 | $0.11 | | Base | $0.46 | $0.41 | | Total Dividends Declared | $0.55 | $0.52 | - Total dividends declared per share increased from $0.52 in Q1 2022 to $0.55 in Q1 2023, with an increase in the base dividend and a slight decrease in the supplemental dividend[179] 12. Income Taxes - The Company maintains its RIC status by distributing at least 90% of its investment company taxable income, generally relieving it from corporate-level U.S. federal income taxes[89] Taxable Income (Amounts in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Taxable Income (estimate) | $52,891 | $52,180 | - A net expense of $0.4 million was recorded for U.S. federal excise tax for both the three months ended March 31, 2023 and 2022[92][188] 13. Financial Highlights Per Share Data and Ratios | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net asset value, beginning of period | $16.48 | $16.84 | | Net investment income | $0.53 | $0.47 | | Total from operations | $0.65 | $0.54 | | Dividends declared from net investment income | $(0.55) | $(0.52) | | Net Asset Value, End of Period | $16.59 | $16.88 | | Total return based on market value with reinvestment of dividends | 6.11% | 1.83% | | Ratio of net expenses to average net assets | 15.89% | 9.91% | | Ratio of net investment income to average net assets | 12.73% | 11.16% | | Portfolio turnover | 8.81% | 13.55% | - Total return based on market value with reinvestment of dividends significantly increased to 6.11% in Q1 2023 from 1.83% in Q1 2022[190] - The ratio of net expenses to average net assets increased to 15.89% in Q1 2023 from 9.91% in Q1 2022, partly due to the absence of Management Fee waivers in the prior year[190][193] 14. Subsequent Events - No subsequent events requiring disclosure or recognition in the consolidated financial statements occurred through the date of issuance of the report, except as already disclosed[192] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and liquidity for Q1 2023 Overview - Sixth Street Specialty Lending, Inc is a Delaware corporation regulated as a BDC and RIC, focused on lending to U.S. middle-market companies[195][196] - Since July 2011, the Company has originated over $26.0 billion in investments, retaining approximately $9.4 billion on its balance sheet[196] - Core portfolio companies (91.4% of total investments by fair value) had weighted average annual revenue of $165.5 million and EBITDA of $53.8 million as of March 31, 2023[197] Investment Framework - The Company focuses on companies with enterprise values between $50 million and $1 billion, seeking high marginal cash flow, recurring revenue, and sustainable competitive advantages[201] - As of March 31, 2023, 92.4% of the portfolio was invested in secured debt, with 90.8% in first-lien debt, emphasizing top-of-capital-structure investing[204] - Risk mitigation strategies include call protection on 80.8% of debt investments and floating interest rates on 99.2% of debt investments, with 100.0% of these subject to interest rate floors[206] Relationship with our Adviser and Sixth Street - Sixth Street, a global investment business with over $65 billion in AUM, provides extensive investment resources and expertise to the Company through its Adviser[207] - The SEC granted an exemptive order allowing the Company to co-invest with Sixth Street affiliates in middle-market loan originations, particularly for larger capital commitments[210][211] Key Components of Our Results of Operations - Revenues are primarily generated from interest income on debt investments, with 99.2% of debt investments bearing floating rates and 100.0% of these subject to interest rate floors as of March 31, 2023[217] - For the three months ended March 31, 2023, 3.1% of total investment income was comprised of PIK interest[217] - Primary operating expenses include fees to the Adviser (Management and Incentive Fees), Administration Agreement reimbursements, and interest expense on outstanding debt[224] - The Company uses leverage to increase investment capacity, limited by the 1940 Act's 150% asset coverage ratio requirement[226] Market Trends - Regulatory changes (e.g, Basel III, Volcker Rule) have reduced traditional lenders' capacity in the middle-market, creating favorable opportunities for direct originations by BDCs[228] - High demand for debt capital from private equity-backed companies and the labor-intensive nature of middle-market lending further expand opportunities for specialized private lenders[228][229] Portfolio and Investment Activity Portfolio Composition and Yields | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | First-lien debt investments | 90.8% | 90.3% | | Second-lien debt investments | 1.6% | 1.5% | | Mezzanine debt investments | 0.4% | 0.4% | | Equity and other investments | 5.4% | 6.0% | | Structured credit investments | 1.8% | 1.8% | | Weighted average total yield of debt and income producing securities at fair value | 13.9% | 13.5% | | Weighted average interest rate of debt and income producing securities | 13.4% | 13.1% | Investment Activity (Amounts in millions) | Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Gross originations | $1,079.4 | $304.5 | | Syndications/sell downs | $903.3 | $225.2 | | Total new investment commitments | $176.1 | $79.3 | | Principal amount of investments funded | $138.9 | $52.8 | | Principal amount of investments sold or repaid | $50.8 | $144.4 | | Number of new investment commitments in new portfolio companies | 7 | 2 | | Weighted average interest rate of new investment commitments | 12.4% | 9.5% | Investment Performance Rating (Fair Value, Amounts in millions) | Rating | March 31, 2023 Fair Value | March 31, 2023 Percentage | December 31, 2022 Fair Value | December 31, 2022 Percentage | | :--- | :--- | :--- | :--- | :--- | | 1 | $2,507.9 | 85.9% | $2,472.8 | 88.7% | | 2 | $390.9 | 13.4% | $293.6 | 10.5% | | 3 | $— | — | $21.3 | 0.8% | | 5 | $19.8 | 0.7% | $0.2 | 0.0% | Results of Operations Operating Results (Amounts in millions) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total investment income | $96.5 | $67.4 | | Net expenses | $53.2 | $31.4 | | Net investment income | $42.9 | $35.7 | | Net realized gains (losses) | $5.2 | $13.7 | | Net change in unrealized gains (losses) | $4.8 | $(8.5) | | Net increase in net assets resulting from operations | $52.9 | $40.9 | - Interest from investments increased to $93.1 million in Q1 2023 from $65.4 million in Q1 2022, primarily due to higher reference rates[244] - Interest expense significantly increased to $28.5 million in Q1 2023 from $9.6 million in Q1 2022, driven by higher average interest rates (6.7% vs 2.3%) and increased average debt outstanding ($1,569.4 million vs $1,211.0 million)[246] - Net realized gains decreased to $4.8 million in Q1 2023 from $13.7 million in Q1 2022, while net change in unrealized gains shifted from a loss of $(8.5) million to a gain of $4.8 million[254] - Exited investments since 2011 generated an average realized gross internal rate of return of 17.7% (weighted by capital invested)[258] Financial Condition, Liquidity and Capital Resources - Liquidity is primarily derived from equity issuances, credit facility advances, and cash flows from operations, with primary uses for investments, operating costs, debt service, and dividends[266] - As of March 31, 2023, the Company had $25.7 million in cash and cash equivalents (including $16.2 million restricted cash) and approximately $0.5 billion of availability on its Revolving Credit Facility[268][269] - The asset coverage ratio was 183.3% as of March 31, 2023, maintaining compliance with the 1940 Act's 150% requirement[267] Off-Balance Sheet Arrangements Portfolio Company Commitments (Amounts in millions) | Commitment Type | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Portfolio Company Commitments | $330.4 | $338.0 | - The Company had $330.4 million in commitments to fund investments in current portfolio companies as of March 31, 2023[301] Contractual Obligations Contractual Payment Obligations (Amounts in millions) | Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Revolving Credit Facility | $981.9 | $— | $— | $981.9 | $— | | 2024 Notes | $347.5 | $— | $347.5 | $— | $— | | 2026 Notes | $300.0 | $— | $— | $300.0 | $— | | Total Contractual Obligations | $1,629.4 | $— | $347.5 | $1,281.9 | $— | Distributions - To maintain RIC status, the Company must distribute at least 90% of its investment company taxable income and net tax-exempt income annually[307] - To avoid a 4% U.S. federal excise tax, the Company must distribute at least 98% of net ordinary income and 98.2% of capital gain net income annually[309][310] - The Company has an 'opt out' dividend reinvestment plan, where stockholders' cash dividends are automatically reinvested in additional shares unless they elect to receive cash[314] Related-Party Transactions - The Company has business relationships with affiliated parties, including the Investment Advisory Agreement, the Administration Agreement, and an agreement with an affiliate of TPG Global, LLC regarding trademarks[315][318] Critical Accounting Policies - Critical accounting policies, including investment portfolio valuation, are detailed in the Annual Report on Form 10-K for the year ended December 31, 2022[315] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to valuation, interest rate, and currency risks are outlined Valuation Risk - The Company primarily invests in illiquid debt and equity securities of private companies, which lack readily available market prices and are valued at fair value by the Board, introducing judgment and potential for significant differences upon liquidation[317] Interest Rate Risk - As of March 31, 2023, 99.2% of debt investments bore floating rates (all with interest rate floors), and credit facilities also bear floating rates, with interest rate swaps hedging fixed-rate notes to align with the floating-rate portfolio[320] Annualized Impact of Hypothetical Base Rate Changes (Amounts in millions) | Basis Point Change | Interest Income | Interest Expense | Net Interest Income | | :--- | :--- | :--- | :--- | | Up 300 basis points | $83.1 | $48.9 | $34.2 | | Up 200 basis points | $56.0 | $32.6 | $23.4 | | Up 100 basis points | $28.0 | $16.3 | $11.7 | | Down 25 basis points | $(7.0) | $(4.1) | $(2.9) | | Down 50 basis points | $(14.0) | $(8.1) | $(5.9) | Currency Risk - Investments denominated in foreign currencies expose the Company to foreign exchange rate movements, which may be hedged using instruments like forward contracts or by borrowing in the local currency under the Revolving Credit Facility[323] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[324] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[325] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently subject to any material legal proceedings as of March 31, 2023 - As of March 31, 2023, the Company is not aware of any material pending or threatened litigation[326] Item 1A. Risk Factors Key risks include increased leverage, regulatory impacts, and potential conflicts of interest - Stockholders approved a reduced minimum asset coverage ratio from 200% to 150% on October 8, 2018, allowing the Company to potentially increase its maximum debt-to-equity ratio from one-to-one to two-to-one, which magnifies potential for gain or loss[329][330][339] - Regulations governing BDCs, such as the 70% qualifying asset requirement, affect the Company's ability to raise additional capital and may limit investment opportunities[331][333] - The Management Fee and Incentive Fee structure may create an incentive for the Adviser to use leverage or make riskier, more speculative investments, potentially increasing investment losses, especially during economic downturns[346][347][348][350] Effects of Leverage on Stockholder Returns (as of March 31, 2023) | Assumed Return on Our Portfolio (net of expenses) | Corresponding return to stockholder | | :--- | :--- | | -10% | -24.0% | | -5% | -13.0% | | 0% | -2.0% | | 5% | 8.9% | | 10% | 19.9% | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - Not applicable[351] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - Not applicable[352] Item 4. Mine Safety Disclosures There were no mine safety disclosures to report for the period - Not applicable[353] Item 5. Other Information There is no other information to report for the period - Not applicable[354] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q - The exhibits include certifications from the CEO and CFO (31.1, 31.2, 32) and various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[357]