Edward Ross: Great question, Mickey. At the moment, we’re kind of sticking with our one-to-one target leverage from a GAAP perspective. We are okay if from time to time we go above that. But generally, the target would be one to one. And so it really hasn’t changed our focus. Clearly, we have the ability, and as you know, the SBIC funds are, right, has drop downs or levered more two to one. We feel very comfortable with higher leverage. But from just strategy perspective and how we think about it, I think being kind of more conservative and just thinking about one to one makes more sense to us at this juncture.
Mickey Schleien: And, Ed, does that reflect some concern you have about the economy? And you still have a meaningful allocation to second lien and subordinated debt or is it something else that’s on your mind?
Edward Ross: No, I think we prefer to operate in a kind of less than market leverage. We don’t think we need to use leverage to perform well. And so it’s – we kind of like a little bit less than market leverage just overall. But it’s not a reflection of concerns in the portfolio or recession or what have you. It’s more just kind of how we’ve operated in the past and we don’t see a need to change that at this point.
Mickey Schleien: Okay, I appreciate that. Those are all my questions. Thanks for your time.
Edward Ross: Thank you, Mickey. Good talking to you.
Operator: [Operator Instructions] The next question comes from Erik Zwick with Hovde Group. Please go ahead.
Erik Zwick: Good morning. Wanted to start first with just a question on the PIC income. It looks like it was down quarter over quarter in Q4. So wondering if it’s just maybe some positive development with a company or two that had been paying PIC income before and returned to cash pay or kind of maybe what moved that quarter over quarter?
Edward Ross: Sure. Great question. I think the primary driver there was exactly what you just said. One of our strategic pruning situations was a company that had moved to PIC during the third quarter. And we obviously work to try to exit that credit and we’re successful in doing so. So, that’s the biggest driver. I don’t — I’m not sure there are other big drivers in there. I think that’s the main one.
Erik Zwick: Got it. That makes sense. Thanks, Ed. And then just turning to kind of the pipeline and the opportunities you’re seeing today, we’ve heard from other BDCs that operate further up market, the upper middle market and middle market that competition has become a little bit more intense. Curious what you’re seeing kind of in your lower middle market focus in terms of spread leverage covenants relative to maybe 6 or 12 months ago. Have you noticed a market change there?
Edward Ross: I do think relative to 12 months ago, I mean, it’s a different environment. There was — 12 months ago, there were a lot of folks that were think about banks, quite frankly a fair number of private lenders that were not far from just being on the sidelines. That situation has changed. And I think most people, other than certain banks that have retracted are in the market. And so there is an increased level of competition from 12 months ago. And I think you are seeing that in spreads. In spreads if I were to pick a number, it’s probably 50 basis points. And it depends on what structure right for us, whether it’s a $1 first lien investment or if it’s a first out, last out structure. But generally speaking, there is an increase in the level of competition because I think people a year ago were very worried about what’s next.
And now, just given the resiliency of the economy, I think folks are more, both from an acquisition and M&A perspective on the equity side as well as the lending side, I think folks are more interested in transacting and kind of see the resilience of the economy and are comfortable with that.
Erik Zwick: Got it. And then last one, just thinking about interest rate sensitivity, I know you’ve got a portion of the debt investments that are fixed. So I think the market is still trying to figure out exactly, when the shape of the kind of curve or the kind of short rate interest rates go down, but it seems to be that that’s more likely been going up. So I’m wondering if you could just kind of remind me, the sensitivity to earnings for maybe like each 25 basis point potential cut, how that would impact earnings?
Edward Ross: Shelby, do you want to take this one or you want me to do it either?
Shelby Sherard: Why don’t you take a crack at it?
Edward Ross: Sure.
Shelby Sherard: And then the other thing, Erik, I would point, we do have — for more details, we do have a sensitivity chart disclosed in our 10-K where you can kind of see some calibrations based of a various increases or decreases in underlying interest rates.
Edward Ross: So, Erik, just taking a shot at. So 25 basis points would probably create a reduction of, call it, $1 million in a quarter. These are estimates. Reduction in our NII, assuming no movements in the incentive fees. So if you double that to 50 basis points, it’d be 2.5 and 100 basis points would be $5 million. So that’s how I –hopefully that’s helpful. And I do think there’s a sensitivity table and the 10-K that hopefully will be helpful as well.
Erik Zwick: That’s great. And I’ll definitely [Multiple Speakers]
Shelby Sherard: And the only thing I would add, Erik, is that it’s not entirely linear just because we do have some floors on a variety of our debt investments.
Erik Zwick: No, that’s great color too. I’ll check out the table. And I always like to ask too just because as we know those sensitivity analysis, you’ve got to make some assumptions in terms of if it’s a shock or more gradual and then if there’s twists and occur, things of that nature. So I appreciate the commentary. Thanks, Ed Ross. That’s all for me today.
