Matt Stewart: Hi, it’s Matt Stewart. I think just it was a result of the deal flow that we saw during the quarter. As Armen mentioned, we did have a little bit more sponsor heavy originations this quarter, which came with a little bit lower spread in the 600 to 650 range. So I wouldn’t view that as an indication of where we will be in the future with our non-sponsor origination capabilities as well. But I think it was just more around the makeup of the originations this quarter being more sponsor heavy than not.
Melissa Wedel: Okay. Appreciate that. And then, I guess a follow-up to that point, and given Armen’s comments earlier about caution still being warranted in this environment, so there being some optimism about the opportunity set. Does the team have a view right now as to whether non-sponsor would be more attractive because of better spread, lower leverage, or is this an environment where you really do want to use towards strong sponsor support?
Armen Panossian: Yes. This is Armen. I wouldn’t say that there is a big picture preference one way or the other. I think there arguments can be made for both being a good way to create downside protection. In the case of the non-sponsored side, you got to think about those borrowers. They are taking on leverage to achieve a strategic initiative usually around growth. And with the cost of leverage as high as it is for a non-sponsored deal, it would be sort of 12% to 14% or 15%. Just given where spreads are and given where base rates are, you can imagine that non-sponsored deal activity is a little slow because the return on equity for taking on that debt for this new initiative may not be what it used to be. And so those strategic investments that businesses would make in a lower rate environment are slowing down in the current rate environment.
So that’s part of the reason for, I would say, the slowdown in origination activity on the non-sponsored side. On the sponsored side, I don’t think you could paint every sponsor or every company with the same brushstroke. There are — certainly are very attractive businesses that are being underwritten conservatively by private equity sponsors, and the equity checks are routinely more than 50% in the current vintage of private equity deals. So the quality of deal flow is actually quite attractive. The spreads are a little bit tighter than non-sponsored, but I would say the risk adjusted returns in sponsored deal flow is probably the most attractive it’s been in a very long time. Getting 11.5% to 12% coupons where a sponsor is writing a 60% equity check feels pretty good relative to sort of historical standards.
And if you are able to underwrite the business, assuming sort of a downside case recession in 2024 or 2025. It’s a good — I would say it’s a good vintage in sponsored led deal flow that we’re looking at right now.
Operator: And our next question will come from Erik Zwick with Hovde Group. Please go ahead.
Erik Zwick: Good morning. Just one question for me today, looking at the diversification of your portfolio by industry, I noticed a specialty retailer at about 5.4% and given there’s some concern over consumer and spending and saving levels today, just curious if you could provide a little detail in terms of your portfolio companies, what segment of the consumer market they’re serving and whether you’re noticing any changes, either positive or negative, in terms of the recent performance of those portfolio companies.
Armen Panossian: Yes. For specialty retail, it’s really a couple of chunky investments that are more sort of branded retail. We’re not really big into retail as would be more typical of a retail industry. And one of our retail, a large position in our retail book, Melissa and Doug is a repayment that will be coming. So I think you will see that number kind of come down pretty materially. We are seeing, I wouldn’t say a tremendous weakness in retail, but big picture as we look at some industry-wide statistics, we are seeing some weakness in the consumer. It’s not to the level of distress, but it is I would say troubling. I mean if you look at — for example, if you look at new home sales or homebuilders and you look at their cancellation rates, they have picked up in the quarter ended September 30, the read-through the building product is not a good one.
So we’re looking at more macro indicators and seeing that the consumer is probably stronger than we thought it would be, but still — but weakening. If you look at credit card receivables, charge-offs or delinquencies, those are all starting to pick up a little bit in the recent months. So we are, I would say, cautious around the retail segment and not really looking to add. And you would, I think, find that in the next couple of quarters, our retail what’s going to come down.
