Michael Grisius: We have not experienced that. I think the areas that we focus on and one of the reasons that we’ve been attracted to the healthcare market is that it’s been our experience that the persistency of demand for those services is quite strong. So not as affected by any larger macro trends, if you will. We also tend to steer clear of generally healthcare deals where they’re directly dependent on reimbursement rates. Those are generally not the businesses that we focus on if you look at some of the areas that we’re investing in healthcare. So that’s not an experience that we’ve had as well either. I would say it is a broad challenge that almost any middle market, really any business is experiencing now, which is that the labor markets are difficult.
And so labor rates are high, and that certainly is constraining margins to some degree. For our portfolio companies, thankfully, these are high value-add businesses. It’s one of the things that we look at very hard in underwriting. So they tend to have a lot of pricing power and they usually can manage through that in a way where they can preserve their margins. And that’s certainly what we’ve seen in the performance of our portfolio.
Mickey Schleien: That’s helpful and actually is sort of a segue into my next question, which is interest coverage. Can you give us a sense of where the portfolio’s average interest coverage ratio is? And do you have a meaningful amount of portfolio companies with an interest coverage ratio below 1?
Michael Grisius: No, no. And we look at that in underwriting. I can’t give you the total portfolio number. That’s certainly something that we can look at. But we feel very comfortable that the interest coverage across the portfolio is quite strong.
Henri Steenkamp: Yeah. Mickey, and just sort of looking at some — just very high level, I mean the impact of the interest rate change has probably resulted in like a half a turn of interest rate coverage change. It’s not as significant, I think, as one — as some people perhaps think it might be because of the change in rates over the last year or in our portfolio.
Mickey Schleien: Okay. That’s interesting. And just lastly, sort of a housekeeping question. There was a modest decline in portfolio [way] (ph) on average. And I suspect it’s due to Pepper Palace, but I just want to confirm if that’s the case?
Henri Steenkamp: Yeah, that’s right. Yeah, that’s why I highlighted in my comments as well, Mickey. You had a slight decrease from the rate change, but obviously, a lot of the change happened really in Q1-ish. But that was all seen by Pepper Palace, is the impact of putting that on 0%, obviously, which drives the overall yield down like 20 bps or so.
Mickey Schleien: Okay. Those are all my questions this morning. Thank you for your time.
Christian Oberbeck: Thank you, Mickey.
Operator: Thank you. And our next question coming from the line of Sean-Paul Adams with Raymond James. Your line is open.
Sean-Paul Adams: Hi, guys. Good morning. One quick question back to Pepper Palace. It looks like it’s been a troubled asset for a while, but was the major markdown at all the result of any sponsor support relationship deteriorating? Or was it just a continued company-specific problem?
Michael Grisius: There’s been no change in the relationship with the sponsor. We’re working together to try to improve the performance. What did happen though is that the performance declined significantly enough that the sponsor stopped paying our interest in August. And so it needed to go on non-accrual as a result. But the write-down in valuation was reflective of the continued challenges that the business is having.
Sean-Paul Adams: Okay. Thank you. And regarding the spillover, do you guys have any idea of a special dividend or declaration sometime in 2024, because it is going to be quite high by the end of this year?
Christian Oberbeck: Yeah. I mean I think the spillover is increasing. I think as we’ve mentioned in prior calls, we’ve been conservative in our spillover management. And so we don’t have any spillover owed this November. And the next time to reconcile spillover will be by November of 2024. And we haven’t fully determined our plans relative to managing that. But clearly, there’s BDC and RIC rules determining what one does with one’s earnings and spillover.
Sean-Paul Adams: Got it. Thank you. I appreciate it.
Operator: Thank you. And our next question coming from the line of Erik Zwick with Hovde Group. Your line is open.
Erik Zwick: Good morning. I wanted to just start with the commentary that the origination volume in 2Q was kind of slower than it had been in prior quarters, primarily due to a number of the opportunities you’ve reviewed, not meeting credit standards. So maybe kind of two questions there. One, were there any commonalities between kind of the shortcomings versus your criteria and what you’re viewing? Or was it kind of diverse across the company? And two, has that improved so far this quarter? Are you seeing more opportunities that would potentially meet your criteria to add to the portfolio?
Michael Grisius: I would say that, that was the experience with one new platform company was more reflective of just the nature of the business that we’re in, where it’s not something where you can look at trends in one quarter and assign too much to that. I think we overall feel very good about the quality of the pipeline that we have. and expect that we’ll continue to deploy capital in new portfolio companies kind of at a consistent pace with what we’ve done in the past. While deal flow in general is down in the market for all the reasons that we’ve outlined, we’re certainly benefiting from the fact that banks have retreated in a pretty significant way. And so we have people even reaching out to us unsolicited trying to form a relationship with us, and that certainly increased our pipeline in a meaningful way.
