But I can assure you, we’re continually looking at our balance sheet and looking at creative ways to prudently stay within that band. But we’re comfortably — I think we’re around 28% as of the last numbers
Ken Onorio: Yes.
Tom Majewski: Yes, around 28% right now. And we try and keep it within there. Sometimes we’ve gone a little above, maybe we’ve gone a little below once in a while. But ideally, we’re close to the midpoint of that band, but I can assure you, we’re always thinking of – of trying to come up with creative things that may be accretive to the company over time. The flip side, when the stock is at a handsome premium at a double-digit premium, sometimes it makes sense to capture a little more common equity at that point, but it’s a balance of both, and we’ll continue to look at opportunities on the right side of our balance sheet.
Matthew Howlett: No, look, look, it’s a high-class problem, debt or equity, but I’d tell you, do you think you could issue — I mean, other markets open today, I mean, could you issue — we’ve seen deals in the 8% five years, seven years.
Tom Majewski: Yes, I don’t like right now just to be really candid, I hope your banker colleagues are listening. You can get a five-year done, one or two other 40 ECC risk [ph] have been out — CLO-oriented have done some stuff in that space. But so five years from today, puts us like right in 2028, right in 2029. I got a 2028 maturity and a 2029 maturity, so I say what about us, who we used to do 10 years of perpetuals. I said, “What about a 10-year click over, I’m joking when I say that, but – well, at in the middle, we’d be open to stuff like that. I haven’t seen much get done in the $25 format. I don’t — I can’t point to anything and we have an active business that invests in these securities from other vehicles and obviously sadly not our own.
I don’t think I’ve seen any public deals come across in $25 market, north of five years. Perhaps with the recent — some of the maybe people more stability in rates going forward, perhaps there’s some paths there. We probably — we always have things in the laboratory here as well, and maybe we’ll come up with some other ideas to be able to get closer to the midpoint of our range but I am sensitive to not crowding up maturity wall into 2028 2029, which if I had to do a five-year today, that’s where I’d have to — that’s where I’d have to put it.
Matthew Howlett: Look, I mean, you have a terrific balance sheet, the lowest leverage in the space. So obviously, worth pointing out. I mean, obviously, we do — we can do the math on how accretive that would be putting leveraging back up modestly. And it just looks very attractive to us, particularly if the yields keep on coming down here. And I wanted to dovetail into the question. You talked about defaults going down next year. I know it’s a big picture thing. But I mean what are you seeing differently that the credit — the leverage loan market may actually seem a default have retraced. — you
Ken Onorio: Just to clarify, I don’t believe I predicted defaults going down next year.
Matthew Howlett: Okay.
Ken Onorio: I did say that trailing 12-month default rate declined a little bit versus the last quarter versus some other recent data measure but that was not a — sadly not a prediction for all of 2024.
Matthew Howlett: Okay.
Ken Onorio: But what the market is missing though to your — to the specific way like — most banks predicted around 3% defaults, I think one bank predicted 5 or plus percent default wow.
Matthew Howlett: Yes, Deutsche
Ken Onorio: That might have been for 2024, if memory serves. But — and we get questions from investors. So every like CLO BB index last I saw us up, I think, 16% year-to-date. During the EIC call, the return on equity is even higher than 16% this year. But compare that to the Ag, give or take, as of the last time I looked at it, is roughly flat for the year. All this floating rate is great. All the rate problems are just not ours, companies and defaults remain well below historic averages. The flip side, all these companies have to pay this higher interest to pay our higher cash flows. And what a lot of people have said is my goodness, debt service coverage ratios of companies are going to get really constrained. And it’s true that company’s debt service is getting tighter.
If your interest rate went from 1% base rate plus a spread to now 5% base rate plus a spread, you got to pay more against that what I think research analysts didn’t give enough kind of figured consideration to. CFOs are pretty smart. Private equity sponsors are pretty smart. I don’t remember the time where a company was $1 short on its debt service and the equity handed the keys over to the lenders. I can’t say it’s never happened, but it kind of sounds silly to even think about, so people have run reports that said, “Well, if rates move to this, my goodness, x percent of the loan market won’t be able to pay its interest anymore. That’s holding everything constant. If things are a little tight, you slow pay your payables for a few weeks. You sell the overseas division, you call some sort of aggressive lender for a 15% mezzanine loan, as long as your revenue and EBITDA are growing and according to the market data that we see, the average below investment-grade company.
And you can see this in our investor deck, it’s way in the back, but it’s in there. This is, I think, it’s LCD, pitch book data, so we have all third-party data that shows revenue and EBITDA for the average below investment-grade company is going up. So if you own a business and the top line is growing and the bottom line is growing, you’re going to hand over the keys because things get a little tight on payments for a couple of months. For two-legged, you borrow from Uncle Charlie to pay your bill that month. Companies find ways. So I think too much of the analysis was keeping things in a steady state level without realizing there’s two legged behind the scenes doing this stuff. And frankly, covenant light. If you had a debt service covenant, you might be settling it, right?
