Prospect Capital Corporation (PSEC) Q4 2022 Earnings Report, Transcript and Summary

Good day. and welcome to the Prospect Capital Corporation Fiscal Year End and Fourth Quarter Earnings Release and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

Thank you, Sarah. Joining me on the call today, as usual, are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?

Thanks, John. This call is the property of Prospect. Unauthorized use is prohibited. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Actual developments and results are highly likely to vary materially, and we do not undertake to update our forward-looking statements unless required by law. For additional disclosure, please see our earnings press release filed previously and available on our website, prospectstreet.com. As we disclosed, we expect to file our 10-K in the next several days for the reasons set forth in those disclosures. Now I’ll turn the call back over to John.

Thank you, Kristin. In the June quarter, our net investment income, or NII, was $90 million or $0.23 per common share, exceeding our distribution rate per common share by $0.05 and by 28%. Our basic net income applicable to common shareholders was minus $56.6 million or $0.14 per common share, largely due to unrealized mark-to-market depreciation resulting from macro conditions. In the June 2022 fiscal year, we achieved basic net income applicable to common stockholders of $556.6 million or $1.43 per common share, representing a 7% return compared to starting net asset value per common share. Our net asset value stood at $10.48 per common share in June, down $0.33 and 3% from the prior quarter, largely due to unrealized mark-to-market depreciation again from macro conditions. Over the 9 quarters, from the pre-pandemic December 2019 quarter to the March 2022 quarter, Prospect has delivered the highest growth in the business development company industry and net asset value per common share, with NAV per common share increasing by 25% over that time period. Since inception in 2004, Prospect has invested $19.1 billion across 399 investments, exiting 271 of those investments. We have outperformed our peers during the past multiple quarters of macro volatility as a direct result of our previous derisking from not chasing leverage as well as other risk management controls, including avoidance of cyclical portfolio company industries. We are staying true to the strategy that has served us well since 1988, controlling and reducing portfolio and balance sheet risk both to protect the capital entrusted to us and to protect the ability of such capital to generate earnings for our shareholders. In the June quarter, our net debt-to-equity ratio was 56.8%, down 17.3 percentage points from March 2020 and up 2.9 percentage points from the March quarter as we continue to run an underleveraged balance sheet, which has been the case for us, for multiple quarters and years. Over the past 4 years, other-listed BDCs overall have increased leverage, with a typical-listed BDC now at around 123% debt to total equity or approximately 66 percentage points higher than for Prospect. Running at half the debt leverage of the rest of the industry, Prospect has not increased debt leverage, instead electing lower risk from lower debt leverage with a cautious approach given macro dynamics. In May, 2020, we moved our minimum 1940 Act regulatory asset coverage to 150%, equivalent to 200% debt to equity, which not only increased our cushion, but also gave us flexibility to pursue our subsequently announced junior capital perpetual preferred equity issuance, which counts toward ‘40 Act asset coverage, but which gets significant equity treatment by our rating agencies. We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7 to 0.85 debt to equity, and we are currently significantly below such target range. Prospect’s balance sheet is highly differentiated from peers with 100% of Prospect’s debt funding coming from unsecured and non-recourse debt, which has been true for Prospect for over 15 years. Unsecured debt was 69.7% of Prospect’s total debt in June 2022 or about 20 percentage points higher than around half for the typical-listed BDC at 50%. Our unsecured and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers. On the cash shareholder distribution front, we are pleased to report the Board’s declaration of continued, steady, monthly cash distributions. We are announcing monthly cash common shareholder distributions of $0.06 per share for each of September and October. These 2 months represent the 61st and 62nd in a row, consecutive, stable per share rate at $0.06, continuing over 5 years of stable monthly cash shareholder distributions. Consistent with past practice, we plan on a next set of shareholder distribution announcements in November. Our goal over the long term is to sustain this steady monthly cash shareholder distribution as we seek to provide low volatility stability to our shareholders amidst the macro market backdrop that delivers greater volatility elsewhere. Since our IPO 18 years ago, through our October 2022 distribution at the current share count, we will have paid out $19.68 per common share to original shareholders, aggregating over $3.7 billion in cumulative distributions to all common shareholders. Since October 2017, our net investment income per common share, less preferred dividends has aggregated $3.75, while our common shareholder distributions per common share have aggregated $3.42, resulting in our net investment income exceeding distributions during this period by $0.33 per share. We are also pleased to announce continued preferred shareholder distributions on the heels of successful launches of our $1.75 billion, 5.5% preferred programs and $150 million, 5.35% listed preferred. We have raised over $970 million in preferred stock to date with strong support from institutional investors, RIAs and broker-dealers, including the addition of 2 top 5 sized independent broker-dealer systems as well as top wirehouse and regional broker-dealer systems. We are currently focused on multiple initiatives to enhance our net investment income, return on equity, and net asset value in an accretive fashion, including, number one, our $1.75 billion perpetual preferred equity programs, which could potentially be increased in capacity in an accretive fashion. Number two, a greater utilization of our cost-efficient revolving credit facility, with an incremental cost of approximately 4.17% at today’s 1-month LIBOR. Number three, issuing lower-cost notes, including 5-year senior unsecured notes issuances with a 4.5% coupon. Number four, increase of short-term LIBOR rates based on Fed tightening to exceed LIBOR floors and boost our asset yields. And number five, increased originations of senior secured debt and selected equity investments to deliver targeted, risk-adjusted yields and total returns, as we deployed available capital from our current underleveraged balance sheet. We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly when management has purchased stock on the same basis as other shareholders in the open market. Prospect management is the largest shareholder in Prospect and has never sold a share. Our senior management team and employees happily eat our own cooking, currently owning approximately 28% of shares outstanding, representing over $1.1 billion of our common equity as measured at net asset value. Thank you. I will now turn the call over to Grier.

Thank you, John. Our scale platform with over $8.3 billion of assets in undrawn credit at Prospect Capital Corporation continues to deliver solid performance in the current dynamic environment. Our experienced team consists of approximately 100 professionals, representing one of the largest middle market investment groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that spans third-party, private equity sponsor-related lending, direct non-sponsor lending, prospect-sponsored operating and financial buyouts, structured credit and real estate yield investing. Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities, coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged ones. Unlike many other groups, we have maintained and continue to maintain significant dry powder that we expect will enable us to capitalize on such attractive opportunities as they arise. This diversity of origination approaches allows us to source a broad range and high volume of opportunities, then select in a disciplined bottoms-up manner, the opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low, single-digit percentage of such opportunities. Our nonbank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. As of June 2022, our portfolio at fair value comprised 49.9% first lien debt, up 150 basis points from the prior quarter; 19.4% second lien debt, up 90 basis points from the prior quarter; 9.4% subordinated structured notes with underlying secured first lien collateral, down 40 basis points from the prior quarter and 21.3% unsecured debt and equity investments, down 200 basis points from the prior quarter. Resulting in 78.7% of our investments being assets with underlying secured debt to benefit from borrower pledged collateral, that’s up 200 basis points from the prior quarter. Prospects approach is one that generates attractive risk adjusted yields. In our performing interest-bearing investments, we’re generating an annualized yield of11.1% as of June 2022, an increase of 50 basis points from the prior quarter and a significant contributor to NII growth this past quarter. We also hold equity positions in certain investments, they can act as yield enhancers or capital gains contributors as such positions generate distributions. We’ve continued to prioritize senior and secured debt with our originations, to protect against downside risk while still achieving above-market yields through credit selection discipline and a differentiated origination approach. As of June 2022, we held 129 portfolio companies, an increase of 2% in the prior quarter with a fair value of $7.6 billion, an increase of $0.2 billion from the prior quarter. We also continue to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentration, the largest is 18%. As of June 2022, our asset concentration in the energy industry stood at 1.7%. Our concentration in the hotel, restaurant and leisure sector stood at 0.3% and our concentration in the retail industry stood at 0.1%. Nonaccruals as a percentage of total assets stood at approximately 0.4% in June 2022, remaining static from the prior quarter and down 0.5% from June 2020. Our weighted average middle market portfolio net leverage stood at 5.3x EBITDA, substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $110.8 million in June 2022, an increase of $9.7 million and 10% from March 2022 as we continue to achieve solid profit growth with our portfolio companies. Originations in the June 2022 quarter aggregated $477 million. We also experienced $151 million of repayments and exits as a validation of our capital preservation objective, resulting in net originations of $326 million. During the June 2022 quarter, our originations comprised 68.7% middle market lending, 17.7% real estate, 9.6% structured notes, 3.8% middle market lending and buyouts and 0.2% Other. To date, we deployed significant capital in the real estate arena through our private REIT strategy, largely focused on multifamily workforce, stabilized yield acquisitions and more recently, an expansion into senior living, with attractive 5- to 12-year financing. NPRC, our private REIT, has real estate properties that have benefited over the last several years and more recently, from rising rents showing the inflation hedge nature of this business segment. Strong occupancies, high collections, suburban work-from-home dynamics, high-returning value-added renovation programs and attractive financing recapitalizations, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC as of June had exited completely 45 properties at an average net realized IRR to NPRC of 25.1% and average realized cash multiple of invested capital of 2.5x with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance and focusing on favorable, risk-adjusted opportunities. As of June 2022, we held 711 million across 37 non-recourse subordinated structured notes investments. We’ve maintained a static size for our subordinated structured notes portfolio on a dollar basis, electing to grow our other investment strategies and resulting in the structured notes portfolio now comprising less than 10% of our investment portfolio. These underlying structured credit portfolios comprised around 1,700 loans and a total asset base of around $16 billion. As of June 2022, this structured credit portfolio experienced a weighted average trailing 12-month default rate of 25 basis points, up 15 basis points in the prior quarter and representing a 3 basis point outperformance versus the overall market. In the June 2022 quarter, this portfolio generated an annualized cash yield of 21%, up 30 basis points in the prior quarter and a GAAP yield of 10.6%, up 90 basis points from the prior quarter, with the difference representing a significant amortization of our cost basis. As of June, our subordinated structured credit portfolio has generated $1.45 billion in cumulative cash distributions to us, representing around 104% of our original investment. Through June, we have also realized 39 investments, totaling $1.5 billion, with an average realized cash internal rate of return of 13.6% and cash-on-cash multiple of 1.59x. Our subordinated structured credit portfolio consists entirely of majority-owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases, we receive fee rebates because of our majority position. As a majority holder, we control the ability to call a transaction in our sole discretion in the future, and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low. We, as majority investor, can refinance liabilities on more advantageous terms, remove bond baskets in exchange for better terms, some debt investors in the deal and extend or reset the investment period to enhance value. We’ve completed 32 refinancings and resets since December 2017. So far in the current September 2022 quarter, we have booked $159 million in originations at Prospect Capital Corp and experienced $32 million of repayments for $127 million of net originations. Our originations have consisted of 83.4% middle market lending, 9.4% subordinated structured notes and 7.2% real estate. Thank you. I’ll now turn the call over to Kristin.

Thanks, Grier. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, weighting toward unsecured fixed rate debt, avoidance of unfunded asset commitments and lack of near-term maturities demonstrate both balance sheet strengths as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 30 years into the future. Our total unfunded eligible commitments to noncontrolled portfolio companies totals approximately $44 million, representing approximately 0.6% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately $655 million. We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue under a bond an equity ATM, acquire another BDC and many other lists of firsts. In 2020, we also added our programmatic perpetual preferred issuance to that list of first, followed in 2021 by our listed perpetual preferred as another first in the industry. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet. As of June 2022, we held approximately $4.99 billion of our assets as unencumbered assets, representing approximately 65% of our portfolio. The remaining assets are pledged to Prospect Capital funding, a non-recourse SPV where in April 2021, we completed an upsizing and extension of our revolver to a refreshed 5-year maturity. We currently have $1.5 billion of commitments from 43 banks, an increase of 13 lenders from March 2021 and demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry. The facility revolves until April 2025, followed by a year of amortization with interest distributions continuing to be allowed to us. Our drawn pricing is now LIBOR plus 2.05%, a decrease of 15 basis points from before. Our undrawn pricing between 35% and 60% utilization has been reduced by 30 basis points. We also now have an improvement in our borrowing base due to a change in concentration baskets, which we estimate increased our borrowing base by approximately $150 million. Of our floating rate assets, 94.1% have LIBOR floors with a weighted average floor of 1.29%. Short-term rates have now exceeded those floors, giving us the benefit of increased asset yields from Fed rate hikes. Outside of our revolver and benefiting from our unencumbered assets that we’ve issued at Prospect Capital Corporation, including in the past few years, multiple types of investment-grade unsecured debt, including convertible bonds, institutional bonds, baby bonds and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions and no cross defaults with our revolver. We enjoy an investment-grade BBB- rating from S&P, an investment-grade Baa3 rating from Moody’s, an investment-grade BBB- rating from Kroll and investment-grade BBB rating from Egan-Jones and an investment-grade BBB (low) rating from DBRS. In 2021, we received the later investment-grade rating, taking us to 5 investment-grade ratings more than any other company in our industry. All of these ratings have stable outlooks. We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration up 30 years. Our debt maturities extend through 2052. With so many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years. In the June 2022 quarter, we have continued utilizing our low-cost revolving credit with an incremental 4.17% cost. We also have continued with our weekly programmatic InterNotes issuance on an efficient funding basis. To date, we have raised over $970 million in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred, including $142 million in the June 2022 quarter and $232 million to date in the current September 2022 quarter, with the ability potentially to upsize such programs based on significant balance sheet capacity. We now have 6 separate unsecured debt issuances aggregating $1.5 billion, not including our program notes, with maturities extending through October 2028. As of June 2022, we had $348 million of program notes outstanding with staggered maturities through March 2052. At June 30, 2022, our weighted average cost of unsecured debt financing was 4.35%, remaining constant from March 31, 2022 and a decrease of 0.51% from June 30, 2021. Including usage of our revolving credit facility at June 30, 2022, our weighted average cost of all debt financing was 3.69%, a decrease of 0.08% from March 31, 2022, and a decrease of 0.74% from June 30, 2021. In 2020, we added a shareholder loyalty benefit to our dividend reinvestment plan, or DRIP, that allows for a 5% discount to the market price for DRIP participants. As many brokerage firms either do not make DRIPs automatic or have their own synthetic DRIPs with no such 5% discount benefit, we encourage any shareholder interested in DRIP participation to contact your broker. Make sure to specify you wish to participate in the Prospect Capital Corporation DRIP plan through DTC at a 5% discount and obtain confirmation of same from your broker. Our preferred holders can also elect to DRIP at a price per share of $25. Now I’ll turn the call back over to John.

Thank you, Kristin. We can now answer any questions. Question-and-Answer Session

[Operator Instructions] Our first question comes from Finian O’Shea with Wells Fargo. Finian O’Shea: First question on the CLO book, can you talk about if you’ve changed the way you are valuing those instruments or perhaps is the auditor disagreement more related to the specific variable inputs such as the defaults, reinvestment spreads, et cetera?

Sure. I can take that question. We are currently evaluating the design framework of our internal controls as it relates to our CLOs, and we have not made any changes to how we value from prior periods. And we anticipate no changes to any number of disclosure in any filing for any period other than as it will be addressed in Item 9A of our current 10-K. Finian O’Shea: Okay. That’s helpful. And I guess just for avoidance of doubt, you’ve had this CLO book for some time. And if the valuation process is consistent, it sounds like more a matter of controls on sort of the process? Or any color you could add there?

Yes, you are correct. This is isolated to the design framework of controls and management’s assessment of that. It is not about the substantive numbers. And no changes are anticipated to our valuation process other than to make sure we have this framework designed effectively. Finian O’Shea: Okay. That’s helpful. And just a follow-up, if I may. On the preferred stock, it looks like that product is selling very well. I think Grier noted some added brokerage systems. Is -- can you talk about the sort of for 1 upper bound of how much you would compose the capital structure of preferred stock? And then also as a second part, sort of what you would invest that in if the book would look the same, but proportionately larger or if this would mostly go to expand the REIT or anything else?

Sure. Well, we’re very pleased with the continued success of our preferred program. I think we hold somewhere between 65% and 80% market share of the nontraded channel for preferred issuance with the 2 prior successful offerings experiencing liquidity events with the sale of those REITs. And really, when you see the volatility of 2022 impacting traded comps, many of which do not enjoy the same par protection or sort of real liquidity attached to them, the benefits of this program for purchasers really shines through in more dynamic and volatile markets. From a capacity standpoint, we had increased the initial -- sort of primary prospectus under which we have issued from $1.0 billion to $1.5 billion anticipating an uptick in issuance, both because of the success of what we’ve basically delivered as advertised as well as those aforementioned liquidity events. There’s more sort of pending in the queue, which we think will be very helpful to us as well in coming months. So we did make that increase from $1 billion to $1.5 billion. I think we do have potentially further capacity beyond that. We had originally envisioned of this issuance to be accretive on top of the debt capital markets. And as you know, Prospect was a pioneer in the bond market, essentially creating the bond market for the industry, convertible bonds as well as straight institutional bonds going back a decade ago, benefiting the rest of the industry. When you look at where prevailing rates are and impact on financials, you see obviously an increase in those financing costs for unsecured financing not just for us, but for the entire industry. And so what I think that does is it creates room for enhanced preferred issuance for us, not necessarily on -- in addition to what debt capital markets issuance might have been, but in lieu of. So we’re great beneficiaries of that as the only player in the market who enjoys that access in that program. It takes years to build these programs and to get to critical mass and scale in volume. So we have enormous advantages by virtue of that. In terms of where we would invest capital from issuance, whether the dollar of sources is coming from a bond issuance or preferred doesn’t really matter a whole lot. We’re going to, as always, be evaluating our slate of opportunities. And as you know, because we’re the only true, multi-strategy BDC in the market, really the entire industry are monolines, we’re the only multiline, more diversified, dampens volatility, reduces risk, it gives us more fishing ponds in which to go look for fish. We think that adds to discipline as well. We’re not sort of long and strong any 1 particular area. If we don’t like the risk-adjusted reward, we’ll just head off to a different pond altogether. So it’s not as if increasing preferred issuance means we’re going to be dialing up equity strategies or dialing up certain types of strategies in our book. We’re going to continue to prioritize senior and secured lending. That’s the bread and butter of what we do. It’s -- the majority of our business or corporate credit businesses, it’s about 2/3 roughly of our book with the balance, largely real estate. And structured credit has become quite small, as we pointed out, less than 10% of the assets associated with what Kristin was just talking about as well. So what’s also great about having the preferred issuance is if there’s a severe downturn and become fashionable to project the next recession and when it’s going to happen, and -- we’re not going to do that here. But we’ll have capital, we expect to have capital through this programmatic issuance in a different channel, maybe when others are seeing it dry up. So we’re quite pleased that we started putting the building blocks in place here as an industry innovator. First company in our industry to bring this innovation to bear just like many other innovations and the first ‘40 Act company as well. So we started over 2 years ago, and we’re reaping the benefits of that hard work here in 2022.

Our next question comes from Robert Dodd with Raymond James.

A couple of questions, kind of follow-on to Fin there. On the the CLO -- the valuation framework, I mean, 2 components to that. One, can you give us some color on what’s unique to the CLO valuation framework that it needs to be adjusted, but the other frameworks don’t need to be adjusted. And then can you give -- as you said, I mean, the review and the assessment is ongoing. So what -- so you sounded quite confident, Kristin, that you’re going to build a new framework, so to speak, but the output isn’t going to change. So where does that high level of confidence come from that you know the output before you’ve redone the framework?

Sure, sure. And yes, I am confident, we’re very confident that the output is solid. We’ve had a successful valuation policy in place for quite some time. So to address your question about the CLO book versus the rest of the portfolio, it’s just -- and again, we’re talking about just the design framework of the control, it’s not the actual numbers coming out of the financial statements for any period. So that -- just want to make sure that’s clear. In the design of how we look at our controls, we are still assessing it, so I can’t give too much color, but I can say that they follow different processes. I mean CLOs or structured products that follow a very different methodology, and we have a completely separate narrative controls framework for that versus our middle market deals and other types of portfolio. And so that’s why it’s limited, and it’s a very focused assessment that we’re currently working on.

Got it. Second one on -- maybe more point to narrow than Fin’s question. I mean, John, you gave -- John, during your prepared remarks, you talked about no plans to change the target leverage of debt to equity with the preferred treated as equity, obviously, 0.7 to 0.85. With the preferred program potentially increasing to 1.5 now and maybe eventually even more, that would -- if you were in the midpoint of that pure debt-to-equity range, that would imply that the total leverage on common equity could get as high as 1.5x or something like that. So can you give us any color on what’s the comfort level for regulatory leverage? I understand how the rating agencies look at it. I also understand how a common equity shareholder looks at it slightly differently. So can you give us the comfort range on that side as well?

Yes, yes. I’m happy to do that. So we are far away from any regulatory line, asset coverage, leverage and the like. And I don’t have the exact numbers in my head. Grier, do you?

Yes, yes. I’m having a hard time getting anywhere close to 1.5, Robert. So we have -- 1.5 assuming we get to that issuance level, which, given our expanded volumes is may be a reasonable assumption. We have very kind of a small $150 million traded. That’s 1.65. We’re not at even $3 billion of debt. That’s at 4.65 divided by $4.1 billion of common, that’s only 1.13. That’s a far cry from 1.5, nowhere close to it, number one.

The 1.5, to be clear, comes from your current equity, add to 1.5 preferred and put a 0.8x leverage multiple because that was -- that’s in the range that was given for equity. That was what the potential debt could be?

Okay. Well, we haven’t Yes, we -- as I just said, I don’t see us issuing bonds at current levels, right? And I don’t see us adding indebtedness there. We do have our revolving credit facility. That’s been a source of efficient funding for us. We were able to reduce our cost of capital this past quarter, which wager -- many of our peers said the opposite occurring. So we had a liability benefit and not just in asset income enhancement benefit to our book. So I think that’s a pretty big assumption there, Robert. I wouldn’t necessarily make that, that we’re going to be going at 0.8 multiplied by whatever the preferred dollar. As I said, I see the preferred as in lieu of in current market conditions unsecured debt issuance, not on top of. So that’s the first item.

In effect, the target leverage range, again, treating the preferred as equity. Is the target leverage range actually lowered versus the number that was -- that John gave in his prepared remarks.

Well, he gave a number, including the benefit preferred, which really is from a credit standpoint, equity, it is perpetual, right? And we do not have to pay that back in cash. Right. So there’s 2 aspects here. There is credit -- go ahead

Leverage on common shareholders, right? Leverage, senior to common stock, so it magnifies impacts to common stock. That’s all I’m trying to get at is what’s your comfort level on the leverage on common because that has a magnifying impact, up or down, right, on either earnings growth or et cetera. And I’m trying to get a handle on what’s your comfort level for that regulatory figure from a common shareholder perspective.

Understood. So on the calculation I just did of $1.5 billion preferred plus $150 million of our traded plus we’re not even $3 billion, but used $3 billion. That resulted about 1.13. I think you’re going to see us as wary from the expectations, it seems like really going above, say, 1.25 regulatory. But again, all regulatory leverage is not created equal. So yes, a preferred is senior to common. That’s true, but it’s also way less risky to comment than any type of debt with a cash settlement maturity. So we factored that in as well. There are also rating agency considerations. Each -- we have 5 investment-grade ratings more than any other company in our industry and maintain an active dialogue and each has different metrics by which they evaluate the business. And we’re going to be very cautious there as well pertaining to any metrics, and there’s various types of hybrid treatment typically given to the preferred. So -- and remember also when you talk about issuance, some of it is to -- you simply are retiring debt. So total numbers aren’t necessarily going up, right? So we just retired about a $70 million stub piece of a bond in July. That didn’t result in an increase in regulatory leverage. That’s just retired. We have in the first quarter of -- calendar quarter of 2023, just under 300 million. We’ve plenty of capital to handle that. But if you take that out with 300 million of preferreds, you didn’t increase any regulatory leverage there either. So let’s be careful about use of proceeds on retiring our leverage in that, necessarily just assume that increases in regulatory leverage go 1 for 1 with every issuance dollar. Makes sense?

That makes sense, and that’s why I asked you what your target was. End of Q&A

This concludes our question-and-answer session. I would like to turn the conference back over to John Barry for any closing remarks.

Okay. Thank you, everyone. Have a wonderful afternoon, and we’ll see you at the next call. Thank you very much. Bye now.