So, as you think about next year, it’s going to be felt in sectors that typically don’t generate a lot of cash. So, that probably means because they are more capital intensive and industrial manufacturing business, it could be a smaller business that just has less diversity of revenue, may have higher customer concentration. It has less, maybe talent in its senior management. So, we think the stress in the system will be driven by which sectors you are in and the size of your business and then of course, layer in the further up the capital structure you are the kind of the better protected you will be older vintage Jon talked with the tail. Tails will become more of a focus in portfolios. So, if the company was already struggling a little bit next year won’t make it any easier.
So, that kind of was the driver of my comments. And when we talk about it internally, Melissa, we talk about the 3S’. Which will really drive your performance and dispersion, and that’s seniority. That sectors and that scale, those for us, have been the driving factors when we are building the BXSL portfolio.
Melissa Wedel: Thanks Brad. Could you – do you have any broader thoughts about what you expect to see across the space in terms of defaults and non-accruals. It seems like what’s come up so far has been pretty manageable and we have seen some restructurings. Just wonder if you expect that to continue to be sort of a one-off. In nature, if you are expecting some sort of broader weakening, perhaps along the line of the things that you just talked about more capital intensive businesses, smaller certain sectors. Thanks.
Brad Marshall: Well, don’t have a crystal ball. What I would say is and we look at how everyone else is doing too. I think everyone is probably a little bit surprised this year how well their portfolios have done. You haven’t seen a big uptick in non-accruals. I think Teddy gave some stats on the year-over-year growth in earnings of our portfolio companies, which is actually quite strong and obviously non-accrual is 0.0, something and our portfolio is almost non-existent. I would say next year you could see in the market default rates tick up in some sub sectors of healthcare and industrial manufacturing, retail, anything touching kind of the housing market and consumer. So, I would say you have to look at people’s portfolio, composition and that will, I think maybe better answer to your question.
I am sure there are stats that JPMorgan and others have out there for kind of market default rates, which is for 1% or so. So, that may be another kind of number you could use. But it really, really comes down to and I have heard others say this, next year will be more dispersion driven by these areas that I have mentioned.
Melissa Wedel: Thank you.
Operator: [Operator Instruction] We will go next to Mark Hughes with Truist.
Mark Hughes: Yes. Thanks. Good morning. Just following up on that, you mentioned that the higher interest rates are meant to slowdown the economy. Do you think that will work?
Brad Marshall: Yes. I do think it will work. It’s you have started to see kind of a change in the labor market. So, you are starting to see the effects of higher rates. You see it in portfolio companies and the impact on how much excess capital they have to spend on growth. So, all of that is slowly starting to have an impact, whether it has the full desired impact that the Fed is hoping, that will a little bit depend on how long they keep rates elevated. But yes, it will certainly – you have the desired effect. I think what’s debatable, how long and how deep.
Mark Hughes: And you mentioned spreads have come in a little bit, but you – I think attributed that to largely the deal structure. Do you think there has been more competitive pressure? There is a lot of dry powder among private equities, but a lot of dry powder, presumably among direct lenders, is there. Have you felt that or you think you are still insulated from that?
