Arthur Penn: Not really. We’re not macroeconomists. We are micro credit underwriters. For lenders flat, it’s just fine if you’ve underwritten credit appropriately. We underwrite assuming there will be some bump in the road early in the life of a loan. So, we think we’re well-positioned in any environment. But we don’t have any — for macro calls, I’m sure Truist has some expertise and others do, that’s not really our strength.
Mark Hughes: Okay, appreciate it. Thank you, Art.
Arthur Penn: Thank you.
Operator: We will now move to Vilas Abraham from UBS. Please go ahead.
Vilas Abraham: Hey everybody. Thanks for the questions. Can you talk a little bit about the timing of the liability actions PFLT took in Q1? And just how we should think about the average cost of debt trend into Q2?
Arthur Penn: It’s a great question. We’ve been talking about spread tightening and things are moving in a positive direction. Our securitization happened kind of in early February. So, kind of early to mid-quarter. Spreads on CLOs have come down since then. I think we said we were about $230 million over on the AAA on the PFLT securitization. We just priced a AAA, and we just priced the securitization for the JV. PFLT owns 87.5% of the JV with Kemper, and we just priced the AAAs like 193. So, we’re going to get the benefit of some tightening that happened between early February and here we are in early May. So, we like the securitization financing. Again, we’re never going to be smart enough to pick the optimal time. We just know that it’s very good matching for our lower risk first lien assets.
It’s a 12-year money. It’s matched from a fixed standpoint. The structure of the securitizations are such that we never have to worry about a credit officer in a corner office having a bad hair day, they’re very kind of self-correcting. So, we are operating a middle market CLO through COVID. It worked wonderfully during that period. So, we really like the securitization structure. It’s very matched and helps us sleep at night. And we also like our revolvers, and we also like our bonds, but the securitization is a very good tool for this kind of portfolio.
Vilas Abraham: Okay. All right. And then just on the amendment activity, can you comment a little bit about what you’re seeing there. So, other income was a little bit elevated again in Q1. So, just thinking about how we should look at that moving forward?
Arthur Penn: Yes, look, the amendments are part of our business. They always are. It’s not that material at this point. There’s a handful of names that tend to amend every quarter. Some are bigger, some are lower. I think what we’ve seen though and the nice thing about how we lend with the loan to value is so attractive. In many cases, as part of an amendment, we’ll ask the private equity sponsor to inject additional equity beneath us. And in many cases, they do. For instance, rolling back to tape to COVID and COVID in almost every case, the sponsors put equity in to solve the problem. That’s what happens when you have well-structured covenants that have meaning, and that’s what we do versus, let’s say, what’s going on in the upper middle market.
In the core middle market, we see covenants, which get us to the table, which does create that opportunity to get that conversation to ask for more equity or to ask for additional economics, whether those be fees, as you said, or whether they be increased spread. So, having the monthly financial statements and the quarterly maintenance test, the quarterly covenants has been a good thing for us over time, most importantly, protecting and preserving capital. Of course, we make mistakes. We all do, but it’s kind of — we kind of through our structures, really try to minimize them.
Vilas Abraham: Got it. Appreciate the color. Thanks.
Arthur Penn: Thank you.
Operator: We will take our next question from Joe [Indiscernible] Columbus. Please go ahead.
Unidentified Analyst: Good morning. If you can, can you just give some background on the new non-accrual and the one non-accrual that came off?
Arthur Penn: Sure. Thank you. Good question. The non-accrual came off — that came off is a company called MailSouth or Mspark, two different names. It was originally MailSouth that might have been listed in our schedule investments as such, the name change to Mspark. We already marked that down to zero in the prior few quarters. So, that was just — the company was sold. And in fact, we recovered zero. So, that moved off our scheduled investments. And the one that moved on is a company called Walker Edison, Walker Edison did a restructuring a while back. It continues to not perform that well. We’re optimistic though. We think we think the sector over time will heal, but it’s taking a while. So, we proactively put that company on non-accrual.
Unidentified Analyst: And a follow-up Moody’s came out yesterday with a report middle-market CLOs, the smaller companies were, I guess, more affected with higher rates. Just wondering if you could comment on that, Art?
Arthur Penn: Yes. Look, it’s no shock that higher rates, since we’re in a higher rate environment. And that’s — when people were when people originally did these deals, no one anticipated the risk-free rate going where it is. On average, our companies are still covering there in just 2 times, right? So, over 2 times. So, that’s really a testament to how we structure the deals upfront more conservatively when we did most of these deals prior to the interest rate increases, the interest coverage was over 3 times. But now it’s kind of over 2 times, which makes sense. Again, we’ve still seen very light non-accruals and very light amendment activity. And I think that’s really a testament to kind of with the core middle market, where leverage is lower.
