Penni Roll: Yeah. And obviously, none of us have the perfect crystal ball on rates. But in this case, we did a shorter-duration three and half year term loan. And it is atypical as Kipp said, for us to swap. Historically, we’ve tended to just stick with whatever the base rate is on the liability that we’ve issued. In this case, a view toward the forward curve. And a matching — looking at our portfolio being predominantly floating rate assets. It felt like a good opportunity to swap that with the expectation, at least at the time we did it at rates would come down even if we knew they would stay a little bit higher for longer based on the forward curve.
Kipp DeVeer: Yeah, I think that’s right. I mean I think we’re operating today, Casey, with the belief and everybody has a pretty different view on this, even here these days. The base rate is going to be higher for longer. I would agree with your commentary that the U.S. economy seems while it’s slowing to be pretty okay. Yeah, I don’t think it’s great, but I think it’s pretty okay. And when you think about our portfolio, which I think is more defensively positioned and as we always mentioned, less oriented towards cyclical companies, we’re seeing, as we reported, EBITDA growth in the portfolio while slowing substantially better than the economy. So we’re pretty constructive around the economy. We think that will keep rates higher for longer, to your point.
And I think I’d also just point out maybe to finish, it’s unusual that the Fed is really in the market in a material way during a presidential election, and we happen to have one of those coming up next year. So I would expect a less active Fed next year, which would imply higher for longer, and that’s what we’re managing to.
Casey Alexander : Okay. Thank you for that. My follow-up is that your rate of non-accruals is terrifically low. I don’t know a better adjective to use for it. To what extent had your companies — did your companies actually benefit from recasting their expense basis because of the COVID crisis? And how much are they benefiting from the slow nature of this moving economy that’s allowing them to adjust along the way and that’s benefiting your portfolio with a lower level of non-accruals than you might have expected?
Kipp DeVeer: I mean I think it’s a little bit of all of that. We did make that point coming out of the really the most difficult period of the pandemic because it obviously forced companies to really wait where they were from a cost perspective, that will happen when you have no revenue, right, and you’re close. So I do think there’s some of that. But look, for credit investors, and we’ve been saying this publicly, we think this is a reasonably good environment, right? We’ve set up our portfolios. We don’t need to see a tremendous amount of growth in the portfolio where we have high free cash flow companies, maybe not deleveraging as quickly as they might have hoped with a lower base rate, but still able to deleverage. I think this environment is a trickier one for some of the embedded equity that got put in the ground, particularly in private equity from, call it, 2019 to ’22, where prices were much higher.
Rates were much lower and expectations for growth were there a lot of those things have been, have changed, right? So we’re feeling, again, pretty good. We appreciate the terrifically good commentary. But we’re happy with where the portfolio is at. We think it’s very manageable for us going forward. And we’re just locked in making sure that we’re early on problem companies and doing what we’ve done a long time here. So we feel pretty good about how the company is positioned, as I mentioned in the prepared remarks.
Casey Alexander : Great. Thank you.
Kipp DeVeer: Sure. Thanks for the questions.
Operator: Our next question comes from Vilas Abraham with UBS. Please proceed with your question.
Vilas Abraham : Hey, everyone. Thanks for the question. Can you comment a little bit on the industry mix and the backlog? Looks like a good chunk of it is consumer. And then just maybe more broadly, are you seeing any meaningful divergence in EBITDA trends across industries?
Kipp DeVeer: Yeah. I mean it’s such a short period of time in the backlog. I can — Penni’s pulling it up. It probably represents just a handful of transactions and one that happens to be large in the consumer space. I wouldn’t — I wouldn’t draw a whole lot from, frankly, that small sample set. The origination sort of opportunities are similar now as to how they have been all year and in the past. How we’re seeing the mix of the economy and what’s creating watch list items is the same. For the most part, it tends to be some elements in our health care portfolio, as we and others have talked about in past quarters where some of the practice based and service-based health care companies haven’t been able to raise price as much as some others and have had labor issues and shortage issues there.
We’ve had some of the same concerns. And then I think a certain portion of the portfolio, as I always describe it, as a company to make things, right, that do have good pricing power, had the ability to put through quite a lot of price increases, but all of a sudden, they may have run out of gas on their ability to continue to raise prices on certain items, starting to see a little bit more margin pressure. But more often than not, when you look at our ones and twos, which are kind of our watch list name, it’s only about 7% of the portfolio, it’s pretty diverse. There’s not a lot of common underpinning there. It’s more company specific than anything else.
Vilas Abraham : Got it. That’s helpful. And on leverage, sounds like the message there is on your on balance sheet leverage that you’re kind of comfortable in this — in the zipcode here, right around 1.1 for the foreseeable future. Is that a fair characterization? And are there any conditions do you think in the near or medium term that could change that one way or the other?
Kipp DeVeer: Yeah. No, I mean, I think it’s at the lower end of our target range. But as you know, it kind of comes and goes quarter-to-quarter depending on the activity. I think we feel coming at the lower end because obviously, the earnings are so good at the company that being more levered doesn’t really create a material earnings benefit from here. We actually value having access to the dry powder, thinking about both the new investing environment as well as opportunities in the existing portfolio.
Vilas Abraham : Great. Thank you.
Kipp DeVeer: You’re welcome.
Operator: Our next question is from Robert Dodd with Raymond James. Please proceed with your question.
