David Golub: So, the answer is it’s better and worse at the same time and on balance I think, better. So, let me unpack that statement. If we’re going to see a continuation of muddling growth and perhaps a continuing slowdown from here and perhaps a recession, those are at the risk of stating the obvious, those are negatives from a credit perspective and those would reasonably be expected to increase credit losses, defaults, non-accruals, worsen performance ratings, increase volatility around credit results, all of which are negatives from a risk reward standpoint. At the same time, we’ve got a number of tailwinds. You mentioned several of them, David. One of them is, rising rates. Merely having 4% higher base rates that in itself pays for a significant amount of credit losses.
A second is higher spreads on new loans. We’ve talked about that spreads are very attractive right now. A third is that we’ve taken a number of fair value mark-to-market adjustments to reflect the higher spread environment and absent credit negative credit events, those are going to start to reverse over time as loans repay or as credit conditions for those companies, those specific companies improve or as spreads start to narrow again. So, we’ve got in respect of your question, we’ve got both kinds of vectors. We’ve got vectors that are pushing in the direction of more risk and we’ve got vectors pushing in the direction of more return. My own sense right now is that the balance is a favorable balance, but I think I got to be humble here and say, you know, we’ve got €“ we can be wrong, right?
I mean, the key assessment here is two-fold. There’s a macro piece and a micro piece. The macro piece is, do you think we’re going to have a period of muddling growth or a period of significant recession? Those are different. And the second, the micro piece is an assessment of how our portfolio is going to hold up in the context of the macro environment. I right now, I’m feeling €“ I’m at the view that muddling growth is more likely than a significant recession and that our portfolio will hold up quite well. I think those are the key criteria, the key variables that investors are going to need to assess.
David Miyazaki: And so when you think about the long cycles that you’ve run through, do you feel like we’re a little better than average or a little below average as far as return on risk go when you put those two together?
David Golub: That’s a really hard question to answer. I’m not sure how to think about that when we think about long cycles. My favorite time to lend Sorry. Go ahead.
David Miyazaki: I was just going to say, I’ll put this into context for you a little bit then. If we think about exposure to middle market lending, and how the attractiveness of the asset class can rise or fall and when rates are declining and covenants are weak and spreads are tight. It tends to lose the return side and at the same time the risk is getting worse because the covenants are getting weak. So, it just seems like right now that despite the fact that we’re coming into a bit of an economic slowdown, recession or muddling either way, that despite that that being apparently in front of us that relative to other points in the cycle of return and risk, the asset class of middle market lending seems €“ it sounds like it’s marginally better than most of the time.
And I’m just kind of thinking about your publicly traded stock on one side would say that because you’re trading a valuation that’s lower than average, that many investors don’t agree with that thesis. And on the other side, I’m curious what your limited partners are saying on the institutional side? Do they feel like middle market lending is a more attractive space? So, that’s kind of where I’m trying to figure out where your thoughts are relative to those two groups?
