Is it going to stay benign for the long term? Unclear. Certainly, we should assume that it’s not going to be as benign as it’s been but the economy seems strong. And certainly, if and when interest rates start coming down, the Fed starts easing that will create some cushion in some of the capital structures that are a little tighter, that are kind of grinding away here kind of with tighter coverage. So right now, we’re in a pretty good position. You’ve seen very low nonaccruals. Again, only a handful of names that are kind of more on the severe watch list but we’re staying watchful and cautious. And certainly, on the new deals that we’re doing and we shared with you that the credit stats were — we’re finding some really great lower risk, attractive return investments.
And as the portfolio grows and gets populated with this vintage, some of the handful of deals that are underperforming will become even less significant in the overall scheme.
Mark Hughes: Yes, understood. And then you mentioned the covenants you think you’re seeing erosion at the upper end of the market but you’re holding pretty firm that those covenants, how do they compare with what you might have seen normal course of business, say, pre-COVID, still pretty rich. Are you going to see some erosion even perhaps within your packages?
Arthur Penn: Yes. Yes, I’d say we’re kind of back to kind of pre-COVID levels with reasonable cushions that protect us — that — and we do get the monthly financial statements. So I’d say we’re back to pre-COVID. Certainly, if you look at 2022 and early ’23, it was tighter. We could get tighter. I kind of — we kind of said that spreads have come down 25%. I think in line with that, the covenants are kind of normalizing to pre-COVID. So — if you remember, going to COVID, we had at that point across our book, about 150 loans across our platform. And between the quarterly maintenance test that we had and have and the monthly financial statements that we get that were obligated to be shared with us, we could during COVID and did during a COVID scenario really get to the table early.
Because of the quarterly maintenance tests which many of the sponsors and companies knew that they were not going to make and because they had to share with us the monthly financial information, really got us to the table early to help be proactive and figure out how to solve problems and figure out what liquidity was needed. So we’re back to the pre-COVID covenants and the information rights which really was — worked out very well for us in the core middle market when COVID hit. And out of the 150 deals — loans that we had across our portfolio, just to refresh, 15 of those are about 10% actually needed cash liquidity to get through COVID. And in all of those cases, the sponsors offer to put capital in to solve the problem. So that’s the benefit of monthly information rights, quarterly maintenance covenants.
When we talk about the core middle market versus the upper middle market and the pluses and the minuses and — we really like this core middle market where these protections and information rights really kind of get us to the table quick.
Operator: We will take our next question from Vilas Abraham with UBS.
Vilas Abraham: I just had a question on repayments. Can you share any kind of line of sight that you have repayments, prepayments for the first half of the year? And presumably, if origination activity continues to be strong, repay should pick up as well? And just kind of talk about that and if that would be a bit of an impediment in getting to your leverage goals.
Arthur Penn: Yes. Look, we are starting to see repayments. It’s not a wave. They’re not — there are certainly nowhere near being equal to our originations. But repayments indicate that M&A is — is maybe starting to percolate a little bit. So pluses and minuses, when we get repaid, we — we say thank you very much for repaying us because sometimes they don’t. So we’re very appreciative when we get repaid. And in many cases, that also means we’re bringing the cash register from the equity co-investment side. So some of that is starting to happen which we’re happy with. And as I said, we’re — we’re — we’re originating new deals. Again, we don’t sit here and say, “Gee, we got to get to 1.5x because the research community wants to see it happen in their model in the next 2 or 3 quarters.
We try to — and what we do is each deal has to make sense on its own 2 feet. It’s a very rigorous process that we go through. We’ll get there when we get there. We’re healthily beating our dividend even as we speak in underlevered environment and also in an environment where JV is also not fully deployed. So we’re earning a healthy cushion to the dividend. We think the rest of this, whether it be on balance sheet leverage or the balance sheet of the JV kind of gives us a war chest to select hopefully, great deals in what should be — what remains what we think are really good vintage. So we’ll get there when we get there. We’re not in a rush because we know if you’re in a rush, that usually doesn’t work out well. And the deal flow will come.
We do think it will be 20 — we think 2024 will be an active year.
Vilas Abraham: Okay, great. And then just my other question, just on yield and spread dynamics. It looked like — it looks like you’re Q4 average yields for new deals were 11.9%. The average portfolio is higher than that. But then quarter-to-date, deals, I think I saw around 13% on weighted average yield. So can you just kind of talk about — it looks like a little bit of choppiness there and kind of what to expect trend-wise there in the near term?
Arthur Penn: Yes, that’s a typo. 13% is a typo; closer to 12% for quarter-to-date. So that’s very much in line with what we’ve been doing.
Operator: We do not have any further questions in the queue. I will now turn the call back to Mr. Art Penn for closing remarks.
Arthur Penn: Thank you. I want to thank everybody for their participation. We look forward to speaking to you next in early May.
Operator: This concludes today’s call. Thank you for your participation. You may now disconnect.
