Jonathan Cohen: Well, CLO debt tranches, Mickey, have fundamentally different properties from CLO equity tranches. And we’re looking in the context of making these various investments at obviously, the current yield, but we’re also looking at the interest-only component. We’re looking at the principle €“ return of principle prospect, we’re looking at the operation of the waterfall with respect to the equity tranches, specifically the structure of the indenture, which in turn, informs and provides a framework for the operation of that waterfall. We’ve always invested with a focus or we’ve generally invested with a focus on CLO equity tranches is against debt. But we are certainly looking actively at CLO debt tranche investments in this environment.
Mickey Schleien: But Jonathan, what’s driving the difference? I mean you would expect the CLO equity estimated yields to be higher than debt given their risk profile, but the inverse is happening right now, at least on average, what’s driving that?
Jonathan Cohen: Sure. I think you’re referring to the weighted average GAAP effective yields. So I would just point that that’s a GAAP measure of our current portfolio. Not necessarily a reflection of the current state of the market. And obviously, our purchase prices for those various tranches is going to drive that calculation pretty dramatically. We may have purchased an equity tranche or a debt tranche at different moments in time when the market was providing us with a different opportunity set.
Mickey Schleien: Okay. Jonathan, the average price of the collateral in the portfolio actually increased about 75 basis points during the quarter, but the fund reported $0.34 per share of unrealized depreciation. I understand that it was a very volatile quarter and that the relationship is not linear, but what were the main factors driving down fair values during the three months ending December?
Jonathan Cohen: It’s essentially market prices, Mickey, supply and demand characteristics for the CLO equity tranches that we hold as of December 31, which during some periods may or may not, as you say, be particularly well correlated to the pricing of the various collateral pools that reside within those CLO structures. These are simply market factors.
Mickey Schleien: Okay. And Jonathan, to what extent did the spread between one-month and three-month LIBOR or SOFR and the pace of rate increases, which have been dramatic impact cash flows in the calendar quarter? And how do you see that dynamic affecting cash flows this year?
Jonathan Cohen: Sure. It had a pretty meaningful effect this quarter. We see it tightening in a bit for the next quarter, but I see that stabilizing going forward, for sure. That’s obviously a projection based just on the publicly available forward curves, but that’s what we’re seeing.
Mickey Schleien: Okay. And my last question. I noticed that almost $1 million of cash flows were diverted this quarter which we haven’t seen for a while. So I’d like to understand how large the portfolio’s average CCC bucket is? And how much risk do you see in managers tripping their CCC limits this year with the rating agencies potentially continue to downgrade?
Jonathan Cohen: Sorry. Let me go ahead and answer that question for Mickey. We are €“ as Mickey referred to €“ as Mickey referenced, we don’t have a specific projection for the speed of downgrades or the speed of CCC downgrades by the rating agencies for the remainder of 2023. That said, we’re obviously sensitive to the issue of cash flow diversions and we continue to monitor market dynamics closely. Operator, happy to go ahead with the other question now.
Operator: Our next question comes from the line of Matthew Howlett of B. Riley. Your line is open.
