Kipp DeVeer: Yes, it’s definitely not 50%. Right. I mean most of what you’re seeing in the earnings really is the base rate, right? And as the portfolio cycles and we’re doing more new investing in new deals, which obviously have the base rate benefit and wider spreads, that number will start to go up. But again, , I think, are both just guessing and to give you — to give you a guess, that’s our guess. We just don’t have that number of .
Unidentified Company Representative: And I guess the other point to make is the base rate has accounted for majority of the increase in overall yield more so than spreads. So spreads are probably 20% or so of the increase versus the base rate. So we’re benefiting naturally — across most of the increase.
Finian O’Shea: Very helpful. Sort of a related follow-up is this sort of activity can lead to more PIK interest, is there a sort of upper bound you manage to or can tolerate as a percentage of revenue or NOI in terms of PIK income?
Kipp DeVeer: Yes. I mean I think we were uncomfortable back during the COVID period. All I would say around the PIK number, we actually had pretty significant PIK interest collected this quarter. So if you actually went through and you said what percentage of the total income today, is PIK it’s a little bit more than 15%. We feel comfortable with that number. I don’t think going back a couple of years frankly, we felt as comfortable with a number into the 20s, which is where we were during COVID and we had pretty explicit guidance to everybody that our goal was to manage that down and we’ve done that successfully. So I don’t know if we’re at the upper limits today. There’s probably a little bit of room from here. But most of the PIC that we would, I think, take on, on a go-forward basis would be with perhaps an increase in amendment activity if we have that, and we’ll just see where the rest of the year and maybe next year takes us.
Operator: Our next question comes from the line of Melissa Wedel with JPMorgan.
Melissa Wedel: Thanks very much. Appreciate you taking my questions today. I’m curious about a couple of things, but particularly around borrower behavior for those folks who are getting to a point of stress or challenge, but maybe aren’t quite at a nonaccrual stage yet. Are you seeing them having any flexibility to take costs out of their P&L at this point? Or do you feel like those actions have already been taken?
Kipp DeVeer: I mean I’ll let give his opinion. Look, I mean, I think one of the things that we reminded people about coming out of COVID was a lot of these middle market businesses, right, didn’t have room to not take a tremendous amount of cost out of their business. And I think if you talk to a lot of the CEOs in our portfolio, they would say COVID forced them to run a much tighter ship a much better business. We haven’t seen that. We got asked a question in the last quarter about you see lots of layoffs and do you see slowing growth? And what do you make of large company layoffs. And I would say the middle market companies have been experiencing that inflationary pressure for a while coming out of COVID, some of the issues around supply of people and frankly, the cost, i.e., wages of people such that they’ve been pretty proactive taking cost out of the business for the last couple of years, right?
I don’t think there’s a tremendous amount of margin there for them to recoup is my own opinion, and can provide his in terms of what he’s seeing day to day. I think a lot of it’s already been done, Melissa. I think unless the economy really gets into a tremendously difficult position, which is kind of not what we’re forecasting, and folks have to really take another cut at that. I think management teams today are trying to operate through the existing environment with an understanding that some of them have had some margin pressure in their business. The bigger problem for them, frankly, is in a lot of situations, companies that are actually performing fine. And just have significantly less cash flow because of the fact that they — in our portfolio and many other leveraged finance portfolios have a fair amount of debt and base rates went from 1% to 5%, and there’s just less cash around.
Unidentified Company Representative: Yes. I mean you have to remember, so far, the overall portfolio is still performing quite well from a fundamental standpoint. And I think we said in the prepared remarks, LTM EBITDA is up 8%. And year-over-year. So to Kipp’s point, it’s — there’s some constraint from interest rates rising from a liquidity standpoint. But…
Kipp DeVeer: You’re right. If your EBITDA is up 8% year-over-year, your inclination probably isn’t all I need to go cut on to cost. Right. And it’s much more about debt service than it is about cost cutting.
Unidentified Company Representative: And a lot of these companies in our portfolio have a nice buffer from a liquidity standpoint in terms of cash on the balance sheet or undrawn revolvers. And you have to remember, 90% of our borrowers are supported by financial sponsors, and we’ve seen a nice history of sponsors supporting their portfolio of companies. So we expect that to continue.
Melissa Wedel: That’s really helpful. As a follow-on to your point about interest rate sensitivity, there was a very brief period during March where we saw base rate tick a little bit lower and then that promptly reversed. But I’m curious about how responsive portfolio companies are able to be or have been in sort of choosing that moment to reset the base rate for the quarter ahead. Anything notable that you saw during that very short period.
Kipp DeVeer: I mean most of the companies in the portfolio have the ability to make 1 or 3-month elections. So some of them will hop between a 1-month election and a 3-month election if they have a strong view as to what’s going on with the short-term rate. But it’s not a real driver that I think is a consideration for most .
Operator: Our next question comes from the line of Casey Alexander with Compass Point.
Casey Alexander: I really want to kind of drive into a little bit of what feels a little bit like a mixed message. Your prepared remarks described a great environment for putting out new capital with excellent terms, excellent conditions, excellent yields. And at the same point in time, you’re kind of acting defensively at the same time. And so what I’m trying to figure out is, do you anticipate taking leverage down further before becoming more offensive? And is it because you potentially see a period ahead with potentially material spread widening where you could really put money out at some incredible rates, terms and conditions?
Kipp DeVeer: Okay. See if it makes you feel good. I did look at the note that you published this morning, while I was waiting for the train. So I anticipated your question. I would tell you that the lesser activity was more driven by the fact that there just was not a lot of deal flow in the quarter. Activity levels were very light. Your point on defensive positioning, I would say 2 things. I’d say, number one, we did have a stated objective to deleverage the balance sheet modestly, which we accomplished, and that’s 1 way to do it. The second point was to your last comment, I do think that we don’t think the environment for investing in high-quality companies at really attractive rates of return is going away anytime soon. So we probably took a pretty patient approach to the quarter.
That being said, we had a couple of transactions that we were excited about that there are obviously reporters reporting on that . So more than anything was just the light activity quarter that drove that.
Casey Alexander: Okay. Great. Secondly, and this is more technical, my follow-up. I noticed that the excise tax fell quarter-over-quarter. Did you guys defer some of the excise tax? Or are you — are we looking at a new kind of level of excise tax going forward that’s lower than it was in the past. I’m just curious at that specific number.
