And then you’re going to have some mercenary lenders who got in there and they’re going to be pushing for a default. CLO guys probably got it a little early. We don’t want it to default. Covenant lites are friend against that only 4% of the 4%, give or take, of the loan market is below 80%.
Matthew Howlett: That’s surprising
Tom Majewski: I mean that’s good indication of things below 80%. That’s certainly the market is saying there’s some hair on the name or more — a lot of air in some of the names. But that means 96% of the market is not trading at distressed levels, right? So, either the research is one thing, but the reality I think is different.
Matthew Howlett: Well, I tell you, you know this — you guys know this market extremely well, and you’re doing such a great job with it, and you’ve called it. So, my last question is the cash flows, we always go to this — between the recurring cash flows, the GAAP and when I get the disconnect. Cash flows are back up big in October. I mean what’s driving it? And then when we still have this — I didn’t expect it to last on this huge recurring cash flow still way above the GAAP reported NII. And how long do you see it? Why would the cash flows way up in October? This is the gift that keeps on giving. I mean assuming there’s probably up to be special dividends going forward, just to manage that taxable basis. I mean all this good stuff, I get —
Tom Majewski: You’ve got Ken and I smiling here. The number of e-mails I get from my friends when we announced specials and supplementals, they’re always very happy.
Matthew Howlett: It’s a happy day in special dividend day.
Tom Majewski: Yes. Everyone like– I mean, we’re so close to getting to $20 in distribution since the IPO, which that’s within shooting distance to get that done, which would be great. Just ringing the bell type of a–
Matthew Howlett: Yes, absolutely, big milestones.
Tom Majewski: So, what happens — so loan spreads are up — were up 11 bps on our spread. CLOs are 10-plus times leverage. So, that just generates more cash right there as our CLO debt spreads are fixed. B, there was a period of time when there was a big basis between one-month and three-month LIBOR one-month and three-month SOFR as kind of memory serves 40, 50 basis points, which every time you make a payment on one of these loans, you got to send it a certificate and all kind of the CFO has got to sign some papers, you got to call legal. If you’re saving 50 basis points, you’re going to do it, if you’re saving five basis points, stuff that just paid the three-month rate. Unfortunately, essentially, all CLOs pay only off of three months, so that differential has closed.
We are probably — if you look back, it was 1 July, not this year, maybe last year where it was really out of whack, and maybe it was two years ago, we — one-month, three-month LIBOR was out of whack. That’s now largely behind us. So, that’s also helped. The three-month rates have been pretty stable over the last couple of months, which then helps the ARB just work even better in CLOs. So, — and as you saw, third quarter cash flow — our fourth quarter cash flow is collected better than all of the third quarter, and we still have a few more payments that we’re expecting. A combination of the portfolio growing and the spreads on the loans underlying the CLOs continuing to go up. So, we obviously hope that continues as much as possible. Stuff can happen that moves it around to some degree, sadly, it’s not a trend you can predict forever.
But some of the things that kind of put us off side a little bit, I think, are behind us at this point.
Matthew Howlett: Unbelievable. We’ll enjoy it and keep up the good work, and thanks for answering all those questions. Thanks very much.
Tom Majewski: Thanks very much, Matt. Thank you.
Operator: Thank you. Our next question comes from the line of Steven Bavaria with Inside the Income Factory. Please proceed with your question.
Steven Bavaria: Hi, Tom.
Tom Majewski: Hey, Steve. Good morning.
Steven Bavaria: Good morning. I loved your path — your conversation just now is an old credit guy. Those are all themes I love. But my specific question, most closed-end funds focus a lot on NII coverage of their — for distribution coverage. You folks focus primarily on recurring cash distributions, which, of course, is much higher. Could you just outline for us, what’s the primary difference between — what additional items are in recurring cash distribution that are not part of standard net investment income? And specifically, does it include recurring principal amortization that’s made on your typical loans, not just a bullet loan. It’s got recurring principal amortization. Does that recurring amortization slowdown as part of recurring cash distribution?
Tom Majewski: Sure. Very good question, Steve. The recurring cash flows are equity distributions from CLOs, and if we have CLO debt and other things that pay interest, but excludes distributions from called CLOs period. So it’s basically the NII getting generated out paid in cash from our underlying CLOs. If a CLO — unless all the CLO debt has been paid off, which I don’t — we might have one or two of those, but that’s not really our portfolio. Any principal that comes in on a loan, if the CLO is in the reinvestment period is going to be reinvested into new loans or secondary loans. So that doesn’t come to us. And if it’s after the reinvestment period, it’s going to be used to pay down the AAAs and the AAs and so on and so forth.
