Fair Value Measurement

3 Months Ended

Mar. 31, 2024

6. Fair Value Measurement

In accordance with ASC Topic 820, fair value is defined as the price that the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability as of the reporting date.

Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation.

The three-tier hierarchy of inputs is summarized below:

•

Level 1 – Quoted prices in active markets for identical investments.

•

Level 2 – Other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).

•

Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments at the reporting date).

The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. If a fair value measurement uses price data vendors or observable market price quotations, that measurement may be a Level 2 or Level 3 measurement depending on the source of the base price. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability. The determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

Valuation of Investments

Investments are valued at fair value as determined in good faith by the Advisor, subject to the oversight of the Board, based on input from management and independent valuation firms that have been engaged to assist in the valuation of portfolio investments without readily available market quotations. This valuation process is conducted at the end of each fiscal quarter.

Common stocks, warrants and financial derivative instruments, such as futures contracts or options on futures that are traded on a national securities exchange, are stated at the last reported sale or settlement price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy.

Investments for which market quotations are not readily available are valued at fair value as determined in good faith pursuant to Rule

2a-5

under the 1940 Act and ASC Topic 820. As a general principle, the fair value of a security or other asset is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Pursuant to Rule

2a-5,

the Board has designated PIMCO as the valuation designee (“Valuation Designee”) for the Company to perform the fair value determination relating to all Company investments. PIMCO may carry out its designated responsibilities as Valuation Designee through various teams and committees. The Valuation Designee’s policies and procedures govern the Valuation Designee’s selection and application of methodologies for determining and calculating the fair value of Company investments. The Valuation Designee may value Company portfolio securities for which market quotations are not readily available and other Company assets utilizing inputs from pricing sources, quotation reporting systems, valuation agents and other third-party sources (together, “Pricing Sources”).

The fair values of loan investments based upon pricing data vendors or observable market price quotations are generally categorized as Level 2 or Level 3. Loan investments priced using internal models with significant unobservable inputs are categorized as Level 3.

Short-term debt instruments (such as commercial paper) held by the Company having a remaining maturity of 60 days or less may be valued at amortized cost, so long as the amortized cost value of such short-term debt instruments is approximately the same as the fair value of the instrument as determined without the use of amortized cost valuation. These securities are categorized as Level 2 or Level 3 of the fair value hierarchy depending on the source of the base price. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter (absent unusual circumstances) assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuations in general market rates of interest on the value of the instrument.

If third-party evaluated vendor pricing is not available or not deemed to be indicative of fair value, the Company may elect to obtain broker quotes directly from the broker-dealer or passed through from a third-party vendor. In the event that fair value is based upon a single sourced broker quote, these securities are categorized as Level 3 of the fair value hierarchy. Broker quotes are typically received from established market participants. Although independently received, the Company does not have the transparency to view the underlying inputs which support the market quotation. Significant changes in the broker quote would have direct and proportional changes in the fair value of the security.

Discounted cash flow valuation uses an internal analysis based on the Advisor’s expectation of future income and expenses, capital structure, exit multiples of a security, and other unobservable inputs which may include contractual and factual loan factors, estimated future payments and credit rating. Significant changes in the unobservable inputs of the models would result in direct and proportional changes in the fair value of the security. These securities are categorized as Level 3 of the fair value hierarchy.

Proxy pricing procedures set the base price of a fixed income security and subsequently adjust the price proportionally to market value changes of a

pre-determined

security deemed to be comparable in duration, generally a U.S. Treasury or sovereign note based on country of issuance. The base price may be a broker-dealer quote, transaction price, or an internal value as derived by analysis of market data. The base price of the security may be reset on a periodic basis based on the availability of market data and procedures approved by the Valuation Oversight Committee. Significant changes in the unobservable inputs of the proxy pricing process (the base price) would result in direct and proportional changes in the fair value of the security. These securities are categorized as Level 3 of the fair value hierarchy.

The market approach generally involves multiplying a key performance metric of the company, such as earnings before interest, taxes, depreciation and amortization (“EBITDA”), by a valuation multiple observed in a range of comparable companies or transactions. The selection of a population of comparable companies requires judgment, including qualitative and quantitative analysis of the comparability of the companies. The Advisor may also adjust the valuation multiple for differences between the investment and the referenced comparable.

A cost approach is generally used when a recent transaction price for a specific asset is indicative of fair value.

Due to the inherent uncertainty of valuations, however, estimated fair values may differ from the values that would have been used had a readily available market for the securities existed and the differences could be material.

The following tables summarize the fair value of the Company’s investments as of March 31, 2024 and December 31, 2023 (amounts in thousands):


	March 31, 2024
Assets	Level 1		Level 2		Level 3		Total
First Lien Senior Secured	$	—	$	70,337	$	25,187	$	95,524
Second Lien Senior Secured		—		2,872		4,631		7,503
Senior Unsecured		—		—		43,188		43,188
Corporate Bonds		—		18,800		—		18,800
Common Stocks		—		—		584		584
Warrants		—		—		2,212		2,212
Short-Term Investments		—		24,095		—		24,095

Total assets	$	—	$	116,104	$	75,802	$	191,906


	December 31, 2023
Assets	Level 1		Level 2		Level 3		Total
First Lien Senior Secured	$	—	$	69,807	$	25,574	$	95,381
Second Lien Senior Secured		—		2,878		—		2,878
Senior Unsecured		—		—		40,061		40,061
Corporate Bonds		—		28,658		—		28,658
Common Stocks		—		—		263		263
Warrants		—		—		2,181		2,181
Short-Term Investments		—		46,553		—		46,553

Total assets	$	—	$	147,896	$	68,079	$	215,975

Assets or liabilities categorized as Level 2 or Level 3 as of period end have been transferred between Level 2 and 3 since the prior period due to changes in the method utilized in valuing the investments. Transfers from Level 2 to Level 3 are a result of a change, in the normal course of business, from the use of methods used by Pricing Services (Level 2) to the use of a broker quote or valuation technique which utilizes significant unobservable inputs due to an absence of current or reliable market-based data (Level 3). Transfers from Level 3 to Level 2 are a result of the availability of current and reliable market-based data provided by Pricing Services or other valuation techniques which utilize significant observable inputs. In accordance with the requirements of U.S. GAAP, the amounts of transfers into and out of Level 3, if material, are disclosed in the tables below.

The below tables present a summary of changes in fair value of Level 3 assets by investment type (amounts in thousands) for the three months ended March 31, 2024 and 2023:


	Beginning Balance at 12/31/2023		Net Purchases and Drawdowns		In-Kind Contributions		Net Sales and Paydowns			Accrued Discounts/ (Premiums)		Realized Gain/ (Loss)		Net Change in Unrealized Appreciation/ (Depreciation)			Transfers into Level 3		Tranfers out of Level 3		Ending Balance at 3/31/24
Term Loans First Lien Secured	$	25,574	$	0	$	0	($	582	)	$	18	$	7	$	170		$	0	$	0	$	25,187
Term Loans Second Lien Secured		0		4,636		0		0			8		0		(13	)		0		0		4,631
Term Loans Senior Unsecured		40,061		2,394		0		0			83		0		650			0		0		43,188
Common Stocks		263		642		0		(321	)		0		0		0			0		0		584
Unlisted Warrants		2,181		0		0		0			0		0		31			0		0		2,212

Totals	$	68,079	$	7,672	$	0	($	903	)	$	109	$	7	$	838		$	0	$	0	$	75,802


	Beginning Balance at 12/31/2022		Net Purchases and Drawdowns		In-Kind Contributions		Net Sales and Paydowns			Accrued Discounts/ (Premiums)			Realized Gain/ (Loss)			Net Change in Unrealized Appreciation/ (Depreciation)			Transfers into Level 3		Tranfers out of Level 3			Ending Balance at 3/31/23
Term Loans First Lien Secured	$	22,082	$	12,470	$	0	($	109	)	$	36		($	3,747	)	$	5,067		$	6,285	($	6,060	)	$	36,024
Term Loans Second Lien Secured		8,062		698		0		0			(43	)		(13,850	)		11,272			0		0			6,139
Term Loans Senior Unsecured		25,562		1,721		0		0			13			0			(382	)		0		0			26,914

Totals	$	55,706	$	14,889	$	0	($	109	)	$	6		($	17,597	)	$	15,957		$	6,285	($	6,060	)	$	69,077

The following tables present quantitative information about the significant unobservable inputs of the Company’s Level 3 financial instruments. The tables are not intended to be

all-inclusive

but instead captures the significant unobservable inputs relevant to the Company’s determination of fair value (amounts in thousands).

Fair Value
as of
March 31, 2024

Valuation
Techniques

Unobservable
Input

Range

Weighted Average

(1)

Term Loans

25,187

Discounted Cash Flow

Discount Rate

10.88% – 17.01%

12.49%

4,631

Recent Transaction

Purchase Price

n/a

Senior Unsecured

43,188

Discounted Cash Flow

Discount Rate

14.66% – 23.62%

17.04%

Common Stocks

321

Comparable Multiple

EBITDA Multiple

n/a

5.75x

263

Discounted Cash

Flow/Comparable Multiple

Discount

Rate/Revenue Multiple

n/a

19.25%/0.55x

Warrants

2,212

Comparable Multiple

EBITDA Multiple

n/a

10.25x

Total Assets

75,802

Fair Value
as of
December 31, 2023

Valuation
Techniques

Unobservable
Input

Range

Weighted Average

(3)

Term Loans

25,574

Discounted Cash Flow

Discount Rate

10.67% - 16.39%

12.23%

Senior Unsecured

40,061

Discounted Cash Flow

Discount Rate

15.41% - 23.37%

17.50%

Common Stocks

263

Discounted Cash

Flow/Comparable Multiple

Discount

Rate/Revenue Multiple

n/a

17.25%/0.55x

Warrants

2,181

Comparable Multiple

EBITDA Multiple

n/a

10.00x

Total Assets

68,079

(1)	Weighted average is calculated by weighing the significant unobservable input by the relative fair value of each investment in the category.

- Definition

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

+ References + Details

PIMCO Capital Solutions BDC Corp. 10-Q