Q1 2021 Saratoga Investment Corp Earnings Call
[music].
No that today's call is being recorded.
During today's presentation, all parties Lapiana listen only mode.
Only management's prepared remarks, well open the lines for questions.
This time I would like to turn the call over to Saratoga Investment Corp, Chief financial and compliance Officer Mr. Henri Steenkamp Pete. So please go ahead.
Thank you.
I'd like to welcome everyone to Saratoga investment Corp. fiscal first quarter 2021 earnings Conference call. Today's conference calls includes forward looking statements and projections. We ask you to refer to our most recent filings with the FCC four important factors that could cause actual results to differ materially from these.
Forward looking statements and projections, we do not undertake to update our forward looking statements unless required to do so by little.
Today, we will be referencing a presentation during our call you can find out fiscal first quarter 2021 shareholder presentation in the events and presentations section of our Investor Relations website, a link to our IR pages in the earnings press release distributed last night.
A replay of this conference call will also be available from one PM today through July 16th piece <unk> earnings press release for details.
I'd now like to turn the call over to our chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you had ray and welcome everyone.
This past quarter with a full three months of the club at 19 impact has been challenging for our portfolio companies and Saratoga.
Despite the unprecedented impact of cold at 19 across our businesses and the world. We believe Saratoga on our portfolio companies are positioned well at this point in time to whether this calamitous health and economic environment.
I look forward to presenting our most recent results I'm enjoying solid structure of our capitalization and recently improved liquidity on todays call.
We continue to focus on ensuring the safety of our employees and the employees of our portfolio companies, while optimizing the management of all are ongoing business activities.
The company is working collaboratively with all our constituents to navigate the significant challenges.
Decided by the Cobot 19 pandemic.
I do especially FICA professional staffing employees and works so tirelessly to the past months as well as our shareholders, who have stood by us and these difficult times.
We believe that were historically conservative approach to investing leverage utilization maintenance of solid levels of liquidity conservative spill over management and some good fortune that's put us in a strong position the balance sheet strength to face these uncertain and challenging times.
No business can anticipate with clarity how long that displacement in the market a global economy will last we have confidence that our capital structure liquidity organization and management experience will enable us to efficiently and effectively navigate this challenging current and uncertain future environment.
To briefly recap the past quarter on slide two.
First we continue to strengthen our financial foundation this quarter by maintaining a relatively high level of investment credit quality with over 90% of our loan investments retaining our highest credit rating after incorporating the impact of changes to market spreads.
D.A. multiples and or revise portfolio company performance related to cold at 19.
He said packs led to a 6.1% unrealized mark down on our overall portfolio.
Representing almost three months opposed to cope with results. We believe our performance exceeds reported industry average of results that were reported two months ago.
Generating a return on equity at 9.9% on a trailing 12 month basis in Q1 that of the cold at 19 impact to the portfolio.
This is the highest orally of all the bdcs for the past year and significantly exceeds the BDC industry average of a negative 12.2%.
And registering a gross unlevered IR or 16.7% on total realizations of 483 million.
Second our assets under management declined slightly to 483 million. This quarter was <unk>, 0.6% decrease from 486 million as of last quarter.
On an 18% increase from 409 million as of the same time last year.
Despite the unprecedented uncertainty in turmoil in the markets. We originated a healthy 39 million of new investments offset by 9 million of repayments importantly, our new originations afforded to do portfolio company investments.
Our capital structure portfolio performance and recently improved liquids liquidity have enabled us to remain open for business and important differentiator in today's market.
Sure as we look ahead of the numerous challenges the cope at 19 pandemic presents to the economy, and particularly small businesses balance sheet strength liquidity and it'd be preservation are paramount.
Vote for our portfolio companies and ourselves.
Our current capital structure at quarter end was strong with 282 million of Mark to market equity supporting $60 billion at long term covenant free non FDIC debt.
At quarter end.
Regulatory leverage of 569%.
Financially exceeds 150% requirement.
And in June and including the exercise of the Green shoe. This week, we further increased our capital and liquidity by raising the new 43.1 billion dollar public baby bond the first BDC issuing public that since the pandemic began.
It's substantially increases our quarter end BDC cash and our available liquidity to support our existing portfolio companies. In addition to $155 million of available SB I see two facilities, which can be used to finance new opportunities with an all in cost of approximately 2.5%.
We had $9 billion of uncommitted undrawn binding commitments as of yearend and $40 million a discretionary funding commitments.
Finally.
Following substantial efforts by our management team to improve liquidity is since our last earnings call at the beginning of May including our recent baby bond raise and the current resiliency of our portfolio.
The board of Directors has decided to declare 40 cents per share dividend for the quarter ended may 30, Onest twentytwenty.
This dividend has been calibrated at this level relative to the most recent 56 cents per share dividend to reflect on the one hand, a relatively strong quarterly results and recently increased liquidity profile and all the other hand, a lack of short and long term disability portfolio company and the general economy fundamental earnings level.
Yes.
Given the unprecedented and highly effective amounts of liquidity provided by PPP loans that interventions and fiscal stimulus.
We will continue to reassess the amount of our dividends, but at least a quarterly basis as we gain better visibility on the economy and fundamental business performance.
As discussed on our May call, we have historically conservatively managed our risk compliance obligations such a we have no ordinary income spillover obligations, and therefore substantial spillover flexibility and consequent liquidity.
Hey went up this dividend further preserves our spillover liquidity position.
This quarter saw continued solid performance within our key performance indicators as compared to the quarters ended May 30, Onest 2019, and February 29 2020.
Considering the current economic environment.
Our adjusted and I is $5.8 million this quarter up 24% versus 4.6 million last year, but down 15% versus 6.8 million last quarter.
Our adjusted NII per share is 51 cents this quarter down nine cents from 60 cents last year and down 10 cents from 61 cents last quarter.
Latest 12 months return on equity is 9.9% currently the highest in the BDC industry.
And maybe per share is 25 11.
4% and 24 or six last year and down 7% from 27, 13 last quarter significantly exceeding industry performance.
Henry will provide more detail later.
As of the past we remain committed to further advancing the overall long term size and quality of our asset base.
As you can see on slide three our assets under management of steadily risen since we took over the BDC and the quality of our credits remains high.
While we had a slight 0.6% decrease this quarter as compared to last based on fair value and reflecting the unrealized change in fair value for the quarter.
Cost basis increased to 516 million, which is a 27% increase from last year and a 6% increase from last quarter.
With that I would like to Dow turned to call back over to Henry to review, our financial results as well as the composition and performance of our portfolio.
Thank you Chris Slide four highlights how key performance metrics for the quarter ended May 31 2020.
When adjusting for the incentive fee accrual related to need capital gains in the second incentive fee calculation adjusted Eni of $5.8 million was down 15.3% from $6.8 million last quarter and up 24.5% from $4.6 million as compared to last year's Q.
One.
Adjusted and I. Appreciate it was 51 cents down nine cents from 60 cents per share last year and down 10 cents from 61 cents Vishay last quarter.
The increase in adjusted and I from last year, primarily reflects the higher level of investments and result in high interest income with a U M at cost up 27% from last year.
The decrease Eni from last quarter is primarily due to the nonrecurring one off impact from last quarter sale of easy eyes.
The decrease in adjusted and I appreciate from last year was primarily due to the high number of shares outstanding this year.
Weighted average common shares outstanding increased by 44.8% from 7.7 million shares last year Q1 to 11.2 million shares for the past three months ended February 29, 2020, and May 31 2020, respectively.
Adjusted and I yield was 7.9%. This yield is down 220 basis points from 10.1% last year, and 140 basis points from 9.3% last quarter, reflecting primarily the impact of our growing and navy the reduced lie bore over this period and the.
Effect of that currently Undeployed capital.
Well. This this quarter, we experience a net loss on investments up $31.7 million or $2, an 82 cents per weighted average shares resulting in a total decreasing net assets, resulting from operations of 22.7 million or $2.02 per share.
The city $1.7 million net loss on investments was comprised of $52.0 million a net unrealized depreciation on investments will say $5.3 million of net deferred tax benefit on unrealized depreciation in our block is subsidiaries.
The $52 million unrealized depreciation reflects a 6.1% reduction and the total value of the portfolio primarily related to the impact of Cove at 19 that resulted in changes to market spreads EBITDA multiples and or revise portfolio company performance. Following the event since March of this year.
The most significant fair value reductions are summarized in the Mdna in our form 10-Q. There was also filed last night, but in summary, there was no single investment with unrealized appreciation in excess of $4 million and the three largest Q1 reductions when Nolan group with $3.8 million fee to educate.
In services with $3.1 million and our CLM equity investment also with $3.1 million.
They will also five more investments with fair value reductions between one and $2 million each.
Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains.
Our return on equity was 9.9% for the last 12 months, which places us at the top of the industry for this period and well above the industry average of negative 12.2%.
Total expenses, excluding interest and debt financing expenses base management fees and incentive management fees increased from $1.3 million for the quarter ended May 31, 2000 $19 million to $1.4 million for this quarter, but remained unchanged at 1.1% of average total assets.
We have also again added the K.P.I. slides starting from slide 25 through 28 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 11 quotas and the upward trends we have maintained.
Particular note, it's like 28, highlighting how our net interest margin run rate has almost quadrupled since Saratoga took other management of the BDC and has continued to increase in Q1.
Moving onto slide five and they view was $281.6 million as of this quarter end, a 22.7 million dollar decrease from and they'll be up $304.3 million at year end and at 94.8 million dollar increase from NPV of $186.8 million as of the sale.
Quarter last year.
In Navy per share was $25.11 as of quarter end down from 27 say 18 as of yearend and up 4.4% from $24.06 as up 12 months ago.
For the three months ended May 31, 2000, $29.0 million of net investment income and point $3 million of deferred tax benefit on net unrealized gains in Saratoga blockers subsidiaries and.
Let's say by $52 million of net unrealized depreciation.
Net asset value has steadily increased since 2011 and is up 51% in just the past year alone and this growth has been accretive as demonstrated by the increase in NPV per share we continue to benefit from a history of consistent realized and unrealized gains.
On slide six you will see a simpler reconciliation of the major changes in Eni and in a VP shape on a sequential quarterly basis.
Looking at the top and I appreciate decreased from 61 cents per share loss quarter to 51 cents per share in Q1.
Most of the decrease was due to the nonrecurring Nate 14 same decrease in other income and deferred tax expense from the easy I sale last year.
This was offset by a five cents increase in non Siloed interest income.
Moving onto the lower half of the slide this reconciles the $2.02 and Ivy Bisha decrease for the quarter.
The 80 cents generated by our Eni this quarter was offset by the $2, an 82 cents unrealized depreciation on investments.
Slide seven outlines the dry powder available to us as of May 31, 2020, which totaled $225.8 million. This was spread between the available cash I'm, drawing a SBA debentures, Undrawn medicine facility and publicly traded nights.
This quarter and level of available liquidity allows us to grow assets by an additional 47% without the need for external financing with $26 million of it being cash and that's fully accretive to eni when deployed.
And since quarter end, we increased our available BDC liquidity by raising $43.1 million in a 7.25% five year maturity to your non coal baby bond trading under the ticker Ace AK, becoming the first BDC to raise a public baby bonds since covert 19 began.
We remain pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all that date is long term in nature actually all three years plus.
Now, we'd like to move on to slides.
Right through 10 and review the composition and yield of our investment portfolio.
Slide eight shows that our composition and weighted average current yields have changed slightly as compared to the past.
We now have 483 million of a U.M. at fair value or $516 million at cost invested in 59 portfolio companies and once yellow fund, especially in percentage has increased to 73% about total investments of which 14% is in first lien lost out positions.
On slide nine you can see how the yield on our core BDC assets, excluding us yellow and syndicated loans as well as our total asset yield has dropped below 10% hit remains healthy this quarter overall yield increased slightly to 9.6% with fair value decreasing but core asset yields decreased from.
9.8% to 9.5% based on cost as library decrease to well below 100 basis points during Q1.
100 basis points is our lowest flow. So we do not expect to see further decreases in LIBOR or really impact our interest income.
The weighted average fair value yield on the celo remained relatively unchanged and the cielo is currently performing and current.
Turning to slide 10 during the first fiscal quarter, we made investments up $39.0 million in two new portfolio companies and 10 follow ons and had $9.4 million in one exit plus amortizations, resulting in a net increase in investments up $29.6 million for the quarter.
Our investments remain highly diversified by type as well as in terms of geography and industry spread over nine distinct industries with a large focus on business healthcare and education services.
The services remain our largest classification and represent investments in companies that provide specific services to other businesses across a wide variety of industries.
As of quarter end the business services classification. Currently includes investments in 23 different companies, who services ranch broadly from education to financial Advisory I T management, two restaurants supply human resources and many other services 16 in total this breakdown is provided enough featured presentation on our website.
Although total investment portfolio, 5.4% consist of equity interests, which remain an important part of our overall investment strategy.
As you can see on slide 11 for the past eight fiscal years, including Q1, we had a combined $59.6 million of net realized gains from the sale of equity interest or sale early redemption of other investments about two thirds of these gains were fully accretive to in Avi due to the unused capital.
Carry forwards that were carried over from when Saratoga took over management of the BDC.
Thats consistent performance highlights our portfolio credit quality has helped grow our and Ivy and is reflected in our healthy long term Aro.
In fact, how six year Aro, we average is now above 10%, including Q1 with Nok one year below 9%.
That concludes my financial and portfolio review I will now turn the call over to my two Michael Gracious, our President and Chief investment Officer for an overview of the investment market.
Thank you Henry I'll take a couple of minutes to describe the current state of the market as we see it.
And then comment on our current portfolio performance and investment strategy in light of a continued impact of cobot 90.
Well the first couple of months of 2020 were very similar to the market environment that has persisted over the last couple of years.
Impact to the pandemic has altered market dynamics considerably.
When we last spoke.
New platform originations in our market had nearly come to a halt.
Most M&A processes have been suspended well buyers and sellers weighted to better understand the impact of the pandemic.
Well most M&A process. The art processes are naturally still on hold we're now beginning to see some new loan inquiries.
The deals that are getting done in the current market or less frequently with new platforms and more often with existing portfolio companies that are either pursuing growth initiatives, we're seeking liquidity.
The new capital that is being deployed in this market is generally at lower leverage thresholds and marginally higher spreads.
In addition, the underwriting bar is much higher than usual, reflecting the current economic uncertainty.
All that said, we think it is an excellent time to invest a new portfolio companies and we are actively seeking such opportunities.
We believe that compelling risk adjusted returns can be achieved by deploying capital in support of those highly select businesses that have demonstrated strength and durability in the midst of this difficult environment.
We have invested in three new platform investments since the onset of the pandemic.
Including one just this week.
From a competitive standpoint lender seem to be generally open for business, although some institutions appear to be practically out of the market for new capital deployment altogether.
This has shifted market dynamics more favorably to lenders, but there are still competition for capital deployment.
We continue to be very actively engaged with our portfolio companies.
We have found that our portfolio companies are generally taking the right steps to help mitigate both the near and long term effective cobot 19 on their businesses.
Many of them, we're also able to avail themselves of the paycheck protection program or PPP loan relief.
All of our loans in our portfolio are paying according to their payment terms except for rasco.
Taco Mac my alarm and rasco investments of experiences count have experienced challenges for sometime now and remain on non accrual.
The impact of Cobot 19 on our portfolio remains uncertain.
Well virtually every business has had some level of impact in the near term the ultimate impact of the Corona virus on any individual portfolio company remains unknown as the uncertainties with the virus and the possible long term economic impacts persist.
Our Q1 valuations reflect a 6.1% reduction in the total value of the portfolio primarily related to the impact of cobot 19 that resulted in changes to market spreads EBITDA multiples and or revise portfolio company performance. Following the events since March 2020.
We believe this strong performance reflects certain attributes of our portfolio that we expect will help us as we navigate through this economic environment.
And we remain confident thus far in the overall durability of our portfolio.
73% of our portfolio is in first lien debt.
And generally supported by strong enterprise values in industries that we have that have historically performed well in stress situations.
We have no direct energy exposure.
In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and.
And have historically demonstrated strong revenue retention.
However, there are still plenty of uncertainties, and therefore potential future adverse effects of cobot 19 on market conditions, and the overall economy, including but not limited to the related declines in market multiples.
Increases in underlying market credit spreads and company specific negative impacts on operating performance could lead to unrealized and potentially unrealized depreciation being recognized in our portfolio in the future.
Well no business can anticipate with clarity how the long term displacement in the market and global economy will last.
We continue to believe that are well constructed capital structure and liquidity will help us navigate the challenges presented by the Corona virus.
We believe sticking to our strategy has and will continue to serve us best especially in the market. We currently face.
Our approach has always been to focus on the quality of our underwriting and as you can see on slide 12. This has this approach has resulted in our portfolio performance being at the top of the BDC space with net realized gains of $59.6 million since taking over management of the portfolio in 2010.
A strong underwriting culture remains paramount at Saratoga.
We approach each investment working directly with management and ownership to thoroughly assess the long term strength of the company and its business model.
We endeavor to pure as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics.
We always have sought durable businesses and invested capital with the objective are producing the best risk adjusted accretive returns for our shareholders over the long term.
Our internal credit quality rating, reflecting the impact of cobot 19 shows 90% of our portfolio at our highest credit rating as a quarter end.
We believe our underwriting approach has contributed to our overall strong portfolio performance and successful returns.
And as also positions us well for this current economic downturn.
We believe these results reflect the current strength of our underwriting approach.
Team and portfolio and the quality of opportunities that typically exist in our markets.
Now looking at leverage on Slide 13, you can see the industry debt multiples decrease somewhat in calendar Q1.
With 57% of multiples above fivex.
Versus 80% of deals last year.
Total leverage for our portfolio was 4.46 times, increasing slightly from last quarter.
As we frequently highlight rather than just considering leverage our focus remains on investing in credits with attractive risk return profiles, an exceptionally strong business models, where we are confident that the enterprise value the businesses will sustainably exceed the last dollar of our investment.
In addition, this slide illustrates our consistent ability to generate new investments over the long term despite difficult market dynamics.
During the last two quarters, we added four new portfolio companies and made 15 follow on investments as well as one more platform investment thus far in July.
There are a number of factors that give us measured confidence that despite the current precipitous decline in deal activity.
We can continue to grow or a U.M. steadily in this environment as well as over the long term.
First we continue to grow our reach into the marketplace as is evidenced by several investments we have recently made with newly formed relationships.
Second we have developed numerous deep long term relationships with active and establish firms that look to us as their preferred source of financing.
Third competition has become marginally less aggressive in this environment.
And last.
We expect the pace of payoffs to diminish significantly until financing markets recover and the impact of Kobin 19 is more fully known.
Moving on to slide 14, our team skillset experience and relationships continue to mature and our significant focus on business development has led to new strategic relationships that have become sources for new deals.
The number of new business opportunities has been greatly impacted by cobot 19.
However, we are beginning to see some rebound in inquiries and the deal pipeline is more active this past month.
Notably over the past 12 months, almost a quarter of term sheets issued and four of our new portfolio companies are from newly formed relationships, reflecting solid progress as we expand our business development efforts.
The continued activity in our deal funnel evidence is the strength of our origination platform, while the count of our new portfolio companies.
Which has largely been steady underscores how we continued to maintain our investment discipline.
Passing on a deal that is in front of use hard but maintaining discipline is ingrained in our culture and we will continue to say no if opportunities to do not fit our credit profile.
As you can see on slide 15, our overall portfolio credit quality remains solid.
On the chart in the right you can see total gross unlevered IR are on our $487 million of combined weighted SP I see and BDC unrealized investment is 9.9% since Saratoga took over management, reflecting the impact of cobot 19 fair value reductions this quarter.
As Henry mentioned earlier and reflected in our form 10-Q. These markdowns are across a wide variety of of companies and does not change your view of their fundamental long term performance.
As expected other than our COO, the two largest unrealized depreciation or in our Nolan group and see to education investments both of which are more dependent on in person human interaction.
Our investment approach has yielded exceptional realized returns to gross on levers I or our unrealized investments made by the Saratoga investment management team of 16.7% on approximately $483 million of realizations.
Single repayment in Q1 had an eye or or 13.1%.
Moving on to Slide 16, you can see our first SP I see license is fully funded with $227.8 million invested as of yearend.
Our second SP I see license has already been funded with $50 million of equity.
Of which 70.1 million of equity NSPI SBA debentures had been deployed.
There are still 1.4 million of cash and 80 million of debentures currently available against that equity.
And looking back at Q1, the way the portfolio has has proven itself to be well constructed.
And resilient against the impact of Cobot 19.
Straight the strength of our team platform and portfolio.
And our overall underwriting and due diligence procedures.
Credit quality remains our primary focus.
And while the world has changed significantly over the past three plus months.
We remain intensely focused on preserving asset value.
And remain confident in our team.
And the future for Saratoga.
This concludes my review of the market and I'd like to turn the call back over Chris.
Thank you Mike.
As outlined on slide 17, following self Saratoga Investment's recent baby bond rates and the current performance of its portfolio. The board of directors has decided to declare a 40 cents per share dividend for the quarter ended may 30, Onest 2020.
This dividend dividend has been calibrated at this level relative to the prior 56 cents per share dividend to reflect on the one hand relatively strong quarterly results recently improved liquidity profile on the other and the lack of short and long term disability in the context of how the massive recent liquidity infusions domestically from.
BP loans fed interventions in fiscal stimulus will ultimately play out from the economy and business operations.
The board of directors will continue to reassess the side at least a quarterly basis.
Moving to slide 18, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of minus 26% below the BDC index at minus 22%.
Just 12 months total return was impacted by Kovac 19, which is cause volatility severe market dislocations and liquidity constraints in many markets, particularly impacting the smaller bdcs with latest 12 month returns for Bdcs with any of the below 300 million between negative 23% and negative 62.
And.
Our longer term performance is outlined on our next slide 19.
Over three and five year returns our screen Pfizer returns place us in the top 10, and 15, respectively. All Bdcs for both time horizons over the past three years are zero percent return actually exceeded the negative 15% return of the index, while over the past five years or 50% return exceeded the end.
Next is negative 4% return.
On Slide 20, you can further CRM outperformance placed in the context of the broader industry and specific to certain key performance metrics.
We remain above the industry average across diverse categories, including interest yield on the portfolio latest 12 months and III yield latest 12 months return on equity and latest 12 months and abbey per share growth.
We continue to focus on our latest 12 months return on equity and NPV per share outperformance, which are both at the top of the industry and reflects the growing value our shareholders are receiving.
Not only are we wanted a few BDC is to have grown NHC. We've done it accretively also growing NPV per share.
Moving onto slide 21, all of our initiatives discussed on this call are designed to make Saratoga investment highly competitive BDC is attractive to the capital markets community. We believe that are differentiating characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more.
Two cents.
Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 11%, which has decreased percentage wise as a result of recent equity issuances and not buy shares sold by management other than transfers among managers for compensation related purposes.
Access to low cost in long term liquidity with which to support our portfolio and make accretive investments.
Our second FDIC license, providing sub 2.5% cost liquidity.
A triple B investment grade rating and a new public baby bond issuance in June.
Solace historic earnings per share and then I'll yield.
Strong historic return on equity accompanied by growing and Avi and NPV per share putting us at the top of the industry for both.
Hi quality expansion of the you.
At an attractive risk profile.
In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry.
We remain confident that are experienced management team historically strong underwriting standards and tested investment strategy will service well in battling through the substantial changes in the current and future environment.
And that our balance sheet capital structure, and liquidity will benefit Saratoga shareholders in the near and long term.
In closing I'd like again to thank all of our shareholders for their ongoing support I would like to now open the call for questions.
Thank you ask a question you would need to press star one on your telecom.
Switching to your question Chris on key.
Please standby lobby capacity can do last day.
My first question comes from Tim Hayes with B. Riley FBR. Your line is now open.
Hey, good morning, guys hope, you're all doing well.
My first question here.
Do you have an estimate of just how much of the unrealized depreciation was due to credit spread widening versus fundamental performance.
Good morning, Tim.
I would I would tell you that about this a rough estimate about two thirds of the write downs in our portfolio were attributed to spread widening and about a third.
Can be attributed to either.
Reduction in performance were expected reduction in performance at this point.
Okay got it that's helpful and.
That.
The third bucket that's related to fundamental performance are there any common threads here it whether it's.
Performance.
Companies at the low versus the BDC level or if its sponsored versus non sponsored companies or just the types of industries that are more exposed to kind of what's going on right now.
I would say, it's the latter.
It's such unprecedented times issue I'm sure can appreciate.
We were evaluating companies, we certainly weren't saying Oh, let's run a scenario where the world shuts down.
But but I would say that the businesses that are being most effective in our experience are those that.
Require a fair amount of human interaction.
So I think we referenced for instance, C and noland those or businesses that we feel really good about their fundamentals.
Nothing has changed and really across the portfolio. This experience hasn't caused us to change your view of the fundamental strong care credit characteristics of our portfolio, but in those specific cases.
They do require.
In Olin's case, that's a that's a company that provides a really excellent value proposition to.
Customer base Thats in the lodging sector.
And that's certainly being impacted right now in see twos case, it's tutoring services and.
I think can tell people have more visibility on.
School attendance and in sync with that.
High School kids attending tutoring in person.
They'll still be.
Working through that but we feel fundamentally that that both of those businesses are very strong and we're going to wait to see how.
And what the cobot impact will be overtime.
That's helpful. I appreciate that Michael.
With these credits were no lenders C were they.
Of that 10% bucket or roughly 10% bucket that was downgraded.
On your internal metrics or can you maybe touch on.
And what other companies if not those that you had downgraded internally and if it's more again, just a function of Ics.
Near term headwinds given that the human interaction need for these businesses or if it's been reflecting longer term outlooks for some of these companies.
The the downgrades that.
Changed from last.
Quarter are.
Reflecting.
Current environment, not not necessarily reflecting any fundamental change in the long term outlook for the business really just reflecting.
Yeah, the particular businesses that are experiencing a bit more difficulty in this environment.
I don't know that.
Does that address that question, yes that that is helpful and.
No. The culprits you kind of alluded to earlier the ones that have been on non accrual for a while rasco and Taco Mac and my alarm but.
Are there any others that are now more on your watch list.
Given kind of longer term outlook for these mentioned is rather than the.
Near term disruptions that you can point to.
There's no specific business beyond the couple that we mentioned that we would put into that category necessarily but I would caution you that as we think about the world right now theres so much uncertainty.
I think we've done a really good job assembling a portfolio that has.
Super strong recurring revenue.
Characteristics, but having said that you look at certain end markets in the economy.
Education would be one we're all looking to see how the education market is going to deal with coated.
Come the fall, we think our business models that are serving that end market should hold up really well, but there's just uncertainty around that we're not we need to any specific one, but we're all kind of watching and.
Managing that very actively.
Got it okay I appreciate the comments there and then yes.
And this might be a better one for Chris, but yes, I know, it's important decision and I appreciate the prepared remarks on on the dividend Im good to see it kind of.
We established but.
Could you just give us a little more context around the 40 cents level here and obviously based on adjusted NII. This quarter is very strong dividend coverage. At this point is it at a level that reflects certain credit scenarios, where you see earnings power kind of dropping and 40 cents can be.
Stained and most of the scenarios or is this just kind of almost an arbitrary number where you think you can maybe even growing barring a material degradation in kind of the economic outlook.
Okay, well look I think that's a very good question as you can imagine.
The team and with the Board you spent a lot of time deliberating.
That's exactly where two to set it.
You know sort of coming back from nor a conversation really think about just two months ago the amount of.
Changed that's occurred both in the environment.
Within our grasp of our portfolio I think as Mike touched on.
The team has been very close with all of our portfolio companies and really gone to budgets and current performance and all that type of thing and so while there was a tremendous amount of mystery just two months ago. I think now we have a lot more clarity.
As to how the companies are actually weathering and performing this and again as Mike touched on.
That PPP loans and.
Fed stimulus and all that type of thing has been enormously helpful.
Bridging what what could have been very calamitous decline.
There is also substantial unemployment payments out there and everything so so we're right now writing kind of a liquidity.
Hey.
That was brought about by the government to to help bridge our way through this and so.
As businesses are adjusting in this environment, you know things look pretty good.
I think the concern we have.
What we're trying to be conservative about going forward is.
How is you know.
The excess unemployment.
Compensation is going to run out July.
30, 31st.
Yes, the fed has no I don't know how.
Limited their balance sheet is to do the things they've been doing the PPP loan loan has been extended but but it has a finite amount of capital allocated to it at this point in time, so it's not clear when these initial liquidity.
Initiatives play out or are consumed.
What's next and does the real economy come back to pick up the slack. It may and we have great faith in the U.S. economy and.
We've got we are management, our management teams the teams out there in Chicago.
The ability to adjust is one of the great things about U.S. America and arc on our capital at our our system a company. So it's a great faith in that however, we just do not know what kind of.
Actual economic environment will will occur and so we didn't want to set the dividend right up at a 100% payout of our earnings this past quarter, because there may be declines coming forward. We also just issued a baby bond issue.
So we have more cash on our balance sheet. So as we said earlier about liquidity is critically important balance sheet strength is very important. So we have substantially more cash and substantially more liquid cash which is at the holding companies. We have lots of flexibility as to what to do with that cash.
However that that that cash is expensive we have to pay interest on the unused portion and so that creates a level of drag on the.
On our earnings until that capital is deployed I think again as as Mike alluded to we're having.
Good origination activity, hopefully that will continue and and absorb this capital in a productive way at it at a measured pace, but we could get significant redemptions and.
Or deals could dry up or something so we could be carrying that load. It. So we did we want to allow for.
That kind of drag on our earnings and then we have our COO and our COO has.
Performed quite a resilient way and.
For anyone who studied closer is very complex animal with all kinds of tests for what type of payouts you get.
No we for the last two quarters inside this last two payments inside post coated.
We have gotten our full management fee and our full equity distribution and so that is a meaningful consideration but.
Should there be up.
Decline or.
Some kind of adverse events, which caused the broadly syndicated market to retreat.
Somehow getting a position where are our distributions from the CLL are blocked.
Partially or completely we wanted to take that into account as well and so we kind of had a range.
Into the low Thirtys, all the way up to 50 or something and we felt that 40 was kinda solidly in the in sort of done the middle of the range of outcomes.
And we also felt that it was a number that we could sustain.
If things go status quo, and then if things decline.
Through new investments and the like we would be able to.
To to carry that dividend. So that's a lot of the thinking I think at the end of the day. This a little bit more art than science in the exact number just because we're still dealing with.
Such substantial.
Uncertainty I think as Henry mentioned that is you know, we we sort had two things one is how certain while we have three things one how certain we're about a portfolio how certain probably about the economy.
And what's our liquidity position.
Since our last call our liquidity position has improved dramatically we worked very hard on that.
And we feel good about our liquidity position as of right now we still have a lot of uncertainty in the future. So.
Putting all that together.
How we arrived at 40 cents.
Got it I appreciate the color on that Chris It that's very helpful and that certainly can appreciate the at the uncertainty as well factoring into that decision. So thanks again for us for the comments guys appreciate it.
Thanks, Thank you thanks.
Thank you Sir our next question comes from Casey Alexander with Compass Point. Your line is now open.
Hi, good morning.
My first question is excuse me for Mike.
Mike can you tell us I think investors would really like to know the new investments that you made in this environment.
What was particular about those investments under such on certain conditions did gave you the confidence to put that money out to those quarters in and if you can kind of discuss the industries that they were in yeah sort of the multiples for new investments and what drove your your.
Thinking that that this was.
That the company could confidently put that money out.
Good morning, Casey good question.
The underwriting that we applied for those new portfolio companies is the same that we've applied historically as we've assembled this portfolio.
What's changed as everyone knows in this environment is that many companies are facing a lot of uncertainty in the revenue stream.
And as a result, many new deals are just.
Not happening.
The deals that are happening in the ones that we did in this case, we're in businesses that have proven themselves to be performing.
Continuing to perform very well in this environment and.
Their outlook for continued growth.
It's still very strong in.
In addition in all three cases the capital structure.
Is we think exceedingly strong.
So the the risk adjusted returns that I think our shareholders will benefit from here or really outsized in all three cases their businesses that have.
Our delivering their service through a software platform.
And I think we and our shareholders are benefiting from our expertise in that area one of the things that we've seen.
Not 100% of the time, but by and large.
Throughout our portfolio is that most of our SaaS businesses or software related businesses.
Aren't being affected.
As as greatly as other businesses as I referred to earlier that require a lot of human interaction and in fact in this environment.
Some of them are getting an additional boost because companies that were.
In a prior environment evaluating efficiency tools and ways to.
Introduced more productivity tools to their business models are now seeing the value that an even greater way.
So in all three cases without getting into lots of details about each one.
Common elements, our continued strong performance outlook for.
That as well and really strong capital structures and we're in a as a consequence in a position in the balance sheet that we think offers a terrific risk adjusted return.
Okay Secondly.
It would seem to me that in highly uncertain economic times.
With little visibility such as Chris discussed.
This would this would be a time, where you would be sticking with kind of your go to relationships as opposed to striking up new relationships, where these new relationships you theres some uncertainty as to how they may react if things start to go sideways can you explain what gives you the competence to develop new release.
Yes, and chips in the period of time like this.
Great question.
The the thing that.
Hopefully.
You can recognizes that the business development efforts in or.
Space or.
Very detailed and the diligence that we do on relationships is quite exhaustive. So most of the the deals and relationships that we develop have all fairly long gestation period. It would be great. If we could go to visit a company that has a terrific reputation we've seen the deals that they've done.
Performed exceedingly well you know how they've how they've.
Reacted in tough times, you view sharpened their office and then they start giving you deals it tends not to work that way most of those firms want to get to know you as a lender as well and that that period of time is fairly lengthy so the new relationships that were referring to are ones that we've had.
I've been spending a lot of time getting to know and have done quite exhaustive due diligence.
On those relationships I would add to that and this is an important point because we certainly compete with people that don't.
Look at the World the same way.
We turned deals down with our best relationships all the time.
And it goes back to what I've referenced about discipline, we do not just follow sponsors or private equity firms that we have good relationships with and and whatever they want us to do we do.
We're careful to develop that relationship in a way where if we see a business that is a really strong one we want to be the go to provider there and get the last look in support them, they're very actively but we also want to develop those relationships, where if we look at the fundamentals of the business and we're not.
Comfortable with the financing opportunity.
The relationship is strong enough that.
We can say no and and and continue to have a very healthy relationship. So.
I give you that because.
It is important for you to understand that we're certainly not underwriting deals with an expectation that.
You know a sponsor or the ownership group is going to come in and bail us out first and foremost.
We are looking at the fundamentals of the business and always asking ourselves look is our indoor almost all reasonable circumstances that we can diligence and thoroughly understand is our last dollar of capital. It safe is it in a safe space, where we feel like we can recover that capital not necessarily because the sponsor or.
The ownership groups going to rescue us, but that theres fundamental value there that we can recoup if necessary relative to where we are on the balance sheet. Now in addition, and certainly one of the things that we factor in his.
Who is that relationship in what's their reputation et cetera. So it does it does come into play and in this environment certainly.
The relationships that we have.
I have been very supportive of the portfolio companies and that's helpful, but that that doesn't.
Prevent us from actively trying to strengthen the relationships that weve been seeking to develop over time in fact, we think in this environment.
There is a great opportunities to really distinguish yourself by being there with capital and supporting businesses that are being underwritten as I mentioned before with a higher bar, but but but actually our evidencing really strong.
Characteristics I would tell you. This we have turned down.
In this environment, we have seen opportunities that.
People have presented to us and even that some of those cases, the fundamental metrics of the businesses have.
On the face of them looked pretty solid, but as we dug deeper we didn't get comfortable with the longer term.
Prospects for those businesses so we.
Turn down many deal opportunities in this environment as well.
Okay. Michael Thank you very much for those answers it it's really good color.
And I certainly appreciate my last question is for Chris and Chris I apologize. If this sounds contentious, but this is a question that I've been asked by several institutions and I simply do not have the answer for it which is at the last quarterly conference call you went to great links to it.
Xpress the lack of visibility in the environment and the uncertainty of the environment.
And then beginning one day after the call yourself and several other insiders began making insider purchases of the stock, which seems like contradictory behavior and I would appreciate if you could give us some color on your thoughts on the insider purchases so that we can.
With this within the context of your comment.
Sure.
Thank you for that.
Question, Casey and let's look at one thing to what Mike said just to.
The complete maybe some of the the firm's thinking on that I think Mike articulated very well.
We all.
Ross our management team.
This environment and performing as Mike said in this environment is one of the best opportunities to create new long lasting relationships and deepen our relationships with our deepened the quality of the relationship with our with our existing.
You know partners in this in this field and so we are very encouraged by the developments there and we're very encouraged by the quality the nature of how all these investments are being discussed were.
It's not so much a bidding exercise much more collaborative and the like and so we're setting a foundation here now today, which will be with us for many many years and pay many many long term dividends by being at a position to to play ball, if you well right now.
As to the insider purchases.
I'm not going to speak for Henry Higgins on the call you can ask Henry.
A couple of things.
As you can see from.
Form.
The form four filings.
I basically.
A chunk of my ownership was transferred to certain members of our management team.
35000 shares were trained or to another.
As a group of our managers to further in power there.
You know there their compensation and their incentives and alignment with shareholders and and so what I did I wanted to do sort of at a minimum was maintained by ownership levels.
This period of time, and so I went up buying I forget the exact number I think was around 20 20000 shares or something so so I'm still a little short of the whole 35 to stay sort of net even for me personally so that part of part of the decision was from for me to be able to issue shares to our management team and then maintain.
A similar level of investment in the company, which.
I think is important and we as management team thinks important.
Further despite going to the great lengths of the uncertainty.
There's also price in value and.
Never I don't think I hope printed gives the impression but never did we say we don't think we're going to.
Make it through this environment and come out strong okay. I mean, we have enormous space and in our company in our balance sheet I think at the moment that we said that right. We had we were early in the coded experience. We hadn't had time to harvest that that information from our portfolio company.
As you know analysts were predicting.
And to 40% declines and that ABS across the board and things like that and.
And so so yes, yes, there was a lot of that type of uncertainty, but but but the levels that we were trading at our where we're so far below what we felt was our intrinsic value and still substantially below our intrinsic value that we.
We thought this this was a very clear.
Clear opportunity to invest.
Chris. Thank you very much for addressing my question I really appreciate and thank you to the whole management team for taking my questions.
Sure pleasure. Thank you.
Thank you and next question comes from base rent with National Securities. Your line is now open.
Thanks, and good morning.
I wanted to ask about I guess slide number seven.
The references $7 million of.
Net repayments so far sense.
Since the end of May and just was curious if that net $7 million included the new platform company that you all spoke to that was added this week.
Yes, Thats right, Brian So what we've done last quarter and we concluded to do it again. This quarter was just to give some color on sort of where our portfolio as a whole, especially in the context of you know the increased liquidity that we have and so yes, you're right that number includes.
A new portfolio company.
That.
We've been closing this week.
Okay.
And if maybe Henry or Mike could you kind of reconcile that with.
Some of the comments you made in your prepared remarks about no.
This environment.
Expecting lower levels of repayments just curious.
You know, what's what's driving that repayments and in an environment like like this to to get you to a net net repayments position at this point in the quarter.
I was just one deal that paid off and.
Consistent with what we've been expressing that one portfolio company is one that was performing very well in this environment and so there was a sale process that had stalled at one point, but because the company's performance continued to be very strong.
That sale process was re energized and there was just a change of control that.
Resulted in us getting paid off through that.
Change of control. So I think if there is a theme there it's it's.
As I've expressed for those companies that are distinguishing themselves in this environment.
There are still transactions being done the percentage of those businesses that are out there in this environment is much lower than what we all would have been looking at four months ago.
But that's the dynamics of that's at play.
Got it okay and my head.
Maybe maybe you could.
This one team.
The two new portfolio companies that you added in.
And the May quarter, one looks to be crisis at about a 6% type of type of coupon and that was done in.
In the first half.
Or in the middle of March, whereas the second portfolio company has a 10% 10% yield and that was done in April so kind of curious if that's where you're seeing pricing today in that 10% level or is there just something.
No at play with respect to each of those companies that.
But it would have allowed for a relatively low 6% rate versus what is now.
Going to be a higher rate versus to the weighted average portfolio yield.
That's a good question I mean, the first one with a 6% rate.
We think still offers a terrific risk adjusted returns with a sponsor group that we've been courting for some time.
One of the Premier software investment firms in the country.
I think if that deal were priced.
Today.
The pricing would be wider than that and our hope is that there will be an opportunity for.
A repricing event in the future.
That's a deal that we had kind of an unusual timing because we had you coated really starting to accelerate at the point that we were.
Closing and for a variety of reasons felt like.
Proceeding with the closing was the right thing for us to do in four.
The long term relationship and so forth, but we're excited to be in that investment.
Certainly the other deal that closed subsequent to that.
Is more reflective of the pricing that we're seeing in this environment I think as I mentioned, one thing that.
[music].
We've seen is that the attachment points the leverage level that.
People are requesting and we have an opportunity invest in in this environment is much improved relative to four months ago pre coated.
But we havent seen as much widening in pricing certainly theres some of that but there is capital on the sidelines.
Waiting for those opportunities and so I think the way we think about it is at the risk adjusted return opportunities for those very select circumstances, where we can put capital to work in a new portfolio company.
Is much greater but the spreads we have not seen widen.
To to really high degree of they certainly have widened, but but not as much as we would have hoped.
Okay. That's that's helpful.
And just one more for me I think that.
Portfolio, you had a comment in the press release like that that referred to portfolio management.
And so I was kind of maybe just broadly how how have you gone adult the process of.
Managing the portfolio as a as a team.
And then what what's kind of trends have you seen whether it'd be a week to week or month to month from your portfolio companies as Weve progressed through this this code that period I assume that you.
Gathered some pretty good intelligence along the way.
Well I would just to give you some context I would say in the ordinary course, and this obviously fluctuates depending on.
Particular portfolio companies et cetera, but in the ordinary course, we probably spend about two thirds of our time.
Combing through new deal opportunities trying to find new investments to grow our enterprise our shareholder value and about a third of our time actively managing or portfolio.
With the onset of coded that switch to.
95%, one could argue 110% of our time just.
Getting.
Really close to.
Ongoing events with our portfolio we.
We shifted to the point, where we had weekly.
Portfolio management meetings, where we literally as a team went through each and every portfolio company that we half I'm looking at things like what is their liquidity position, what's their updated outlook on their performance how are they being affected and we've we've been doing that.
Ever since the onset of cobot and continued to do that now how has that changed initially as you can imagine people were as I referenced availing themselves to PPP loans, we were helping a lot of the portfolio companies make sure that they were getting that done timely.
Except that we had to make modifications to our loan docket documents to accommodate that we were we're doing things of that nature.
As well I should point out to.
It's important to note.
Where we play in the marketplace. We're typically on a first name basis with our management team so managing.
Our portfolio companies at that level is something that's.
Natural for us and natural for them. The management teams to expect so we have a open dialogue with the management team and the ownership groups as well.
That shifted clearly.
Things have settled down we've got much more visibility on the portfolio in the portfolio performance and we're continuing to monitor it extremely.
Carefully and actively just given all the uncertainty out there but.
I think you know at this point, we're probably still spending more than half our time, just making sure that were.
On top of things, we don't want to be surprised by by anything.
But but at the same time, we are starting to see new loan inquiries and we're spending some more time on that.
Does that address hopefully that address your question.
That does.
And I mean in those I guess that active management carried I was just curious what you've seen.
From that from an EBITDA cash flow perspective from your portfolio companies, but I get that the PPP funds has helped in a lot of ways.
But kind of was curious what what you've seen.
From from a fundamental revenue perspective.
That is portfolio companies, where it where it works it.
Right, I mean, and it's going to bury the impact of of.
Hope it will vary depending on the company and I think as I've referenced.
Companies that are more greatly affected are ones where there's.
Human interaction or.
Something of that nature, that's going to affect your revenue stream we are.
And our shareholders are benefiting from.
Our underwriting approach, which is theres a common theme in our portfolio is we really gravitate to businesses that have really strong recurring revenue dynamics. So.
We haven't seen as much impact.
I think the reference I made to two thirds of the devaluation.
Being driven.
The decrease in value in a portfolio being driven by just widening spreads and about a third of that 6% devalue devaluation being driven by either performance were expected reduction in performance is generally indicative of what we're seeing.
Okay Alright, thank you for the time I appreciate.
Thanks Frank.
Thank you.
Our next question comes on Mickey screen with Latin Baird. Your line is now open.
Good morning, everyone glad to hear everyone's doing well.
And it took to go this late into the call, but I still have a handful of questions I'd like to ask Mike Myers.
Hey.
Mike I think you alluded to this but.
I'll ask the question a little bit differently, where would you say spreads are today in your market the lower middle market today versus a.
31st in general.
I would if I had to pick up.
Give me a range of 50 to 100 basis points wider.
But it's not completely apples to apples because.
At the same time, we're finding opportunities to to put ourselves in a lower leverage point in the balance sheet.
So for deals yes.
Okay.
That conceivably that could continue to pressure net asset value than if you were to close the books today correct.
I think Mike is talking versus the really much the beginning of Kobe Dr., Mike right No no I. So that's it that's a good.
From a right right. So so we're not seeing further wide if yes, so the valuations are reflecting.
A mark to market relative to spread prevailing spreads in the marketplace, we havent seen any shift or significant shift in spreads from that valuation. Kevin. Since then I was referencing I'm what I meant to reference was for our entered the market. If we were to deploy new capital and.
A new deal we find ourselves generally in a.
More conservative spot in the balance sheet and that all else equal the pricing would likely be 50 to 100 basis points wider preclude us from pre cobot not not from the valuation point that's okay.
And going back to the logic monitor a question.
I understand it may have an attractive business profile, that's hard to find in this kind of market but.
At six at a 6% rate the mass doesn't work very well for Saratoga, if I'm not mistaken that's the lowest yielding investments in the in the portfolio. So could you just expand on your comments as to why do that deal at all given.
The yield a characteristic.
Well.
The the vast majority of the the capital that was deployed in that deal was through our new SP I see license.
And and the.
Position that were in the balance sheet the strength of the company.
To us.
Made us conclude that the risk adjusted return was quite nice and still accretive to our shareholders.
And as importantly.
You know the relationship opportunity we think is.
Very important for us one for us as a firm.
And so the combination of those things at the time that was priced.
Yep pre coated.
We felt like made a lot of sense I also indicated to you that if it's there's some likelihood not not certain but there's some likelihood that.
There's a chance that that pricing could be revisited.
Right Okay.
That makes sense and on scepter hospitality.
I think you've also referred to that but that adds to your hospitality allocation on top of Noland and I would probably.
Group village real team to that and everybody knows that that's a highly challenged industry right now what specifically about scepter Oh.
We've used the comfort to go ahead in and what is maybe besides airlines the industry that suffering the most.
Well I would say this and we have to hopefully you can appreciate as it relates to scepter.
We can't get into all the the the details because its private.
Business and.
Let's just put it at that but I would say that there is very significant credit support associated with that deal. So the combination of.
The businesses performance as well as the credit dynamics associated with it.
Made us very comfortable that the risk adjusted returns there were really strong.
In terms of credit a minute dynamics, you're you're talking about the deal structure and and the support by the sponsor.
Something else.
Both.
Okay.
Mike You mentioned that a third new investment I think that that's the one subsequent to the quarter.
Correct.
That's right correct.
Did you can tell us what industry that's in.
Yeah, I think I think our preference would be not to get into I mean, it's it's a it's a.
Business that is delivering its it services in.
In the SaaS model and it's a business it's holding up.
Very well in this environment, but given the recent see of it it's not something that we disclosed publicly yet I'd rather not get into too many of the details I don't think the ownership would be pleased with that only we think it's been announced in the in the marketplace yet.
That's fine as long assess business, which as you are.
Your sweet spot I understand.
And touching on the Education segment I think you said.
C was performing well, but you have others like misleading and go react.
[music].
Another industry, where frankly I don't.
I have a hard time, forming a thesis on what's going to happen with K through 12 or universities for that matter given the spike in the curve what is your thesis on.
Those businesses in how are you.
What are you assuming in terms of the valuations of those businesses for the potential for the schools to reopen in the fall.
Okay. So let me clarify one thing.
So see two is one that we wrote down in a fairly material way in and that is experiencing some challenges because of what we referenced that it's a tutoring model and so there is some human interaction that's involved.
We're optimistic that that will work out really well in the business models as demonstrated strength over the years and it has terrific ownership sponsorship as well.
As it relates to the other educated education related businesses. The vast majority of those not all of them, but the vast majority of those are also software related businesses.
And the products that are being offered there are ones that are still fundamental.
To the efficiency or they're they're typically bringing greater efficiency.
To the school system in a lot of ways. When you look at the use case at the software and.
In the long term prospects for those businesses, we continue to feel really really good near term their son, some uncertainty, but our interest in terms of how schools will reopen and how they're managing that none of us really knows you can see that changing weekly, but it has been our broader experience and we're seeing this right.
Now.
That.
Typically people don't decide if there if there is some uncertainty about reopening answered that they're going to shut off all of their software.
It just is it becomes fundamental to how they operate.
As institutions. So we havent, we haven't really seen how that experience we're seeing that.
In this environment, our expectation or or certainly our hope is that there won't be immaterial impact on that sector, but it's something that we're watching very carefully.
Okay I understand.
A couple of questions on the COO.
So my understanding is that the bulk of seal those make their distributions quarterly and its typically.
The first month of the quarter, which would have been April.
I'm not sure if that's the case for years Hello.
But obviously based on your comments to see a lowest passing all its tests.
If I am not mistaken how how how does it look in terms of its tests going into the next a distribution.
And do you expect to reduce the estimated yield given the level of loans at a rate of b minus and the market with more downgrades and higher defaults expected yeah, Yeah, that's right Mickey you're absolutely right. It's it's a the measurement date is once every three months and actually April was a measurement.
But also yesterday was a measurement date. So July 8th has a measurement date and and that determines whether you.
Where they Pos is all of its tests, which outside yellow did so.
As of yesterday.
It met all of the test and and so there is there's no issue for the next three months and specifically to Q2, obviously there'll be a new measurement date, and it's a single day test and three months' time.
With regards to the the effective interest rate you know that's an output from the actual valuation the weighted average effective interest rate and so.
Obviously, they were pretty conservative assumptions as you as you saw with regards to our valuation as of May 31st.
From a downgrade perspective, not too much has changed since we did the valuation through today, but obviously you know we need to keep monitoring it over the next couple of months until we get to that.
The diversity of the next valuation date at on August 31st which will drive the interest rate and then and then the measurement date in October that will drive the payment for Q3.
Okay. So hindered based on those.
Just said it seems that at least in the very near term.
Hello does not need another additional equity injected into it.
Yes, correct as of today, yes.
Okay and going back to the cash drag question.
I certainly appreciate.
Tapping into liquidity when it's when its available but you do have a very low level of.
Discretionary unfunded commitments I think I look I think I saw was eight or $9 million. So that that's not really an overwhelming amount for you.
You know declared dividends. So the drip, we'll we'll start again and I would imagine smart smarts shareholders are going to take advantage of the share price.
It would seem to me and maybe this question Chris the best too so the cash at least some of it has to buy back stock.
Not only to offset the dilution, but just to reinvest in the portfolio given the level of confidence that you have in it or am I.
Am I missing something.
Well Mickey I think that that's a very good question I think you know as were trading.
At a very substantial discount to.
And maybe I think you heard Mike mentioned earlier that lot of the markdowns in our portfolio, our mark to market more spread based year two thirds of the Mark down at roughly is you know is based on.
Spread marks as opposed to fundamental credit quality marks so so so we have a lot of confidence in our in our navy and and the new investments, we're making so so yes.
We do feel our stock has substantially.
Undervalued and we do have the ability to repurchase stock as.
As you've noted.
The.
The questions, obviously that one needs to consider is.
Is how much of this liquidity is needed for what purposes, I think as we've talked about in our last call we.
We have RSP IC, one which is largely fully invested and to the extent companies in that portfolio.
Have a.
Incremental needs for capital, we need to supply that from outside that.
Entity with.
Essentially whole holding company capital, so we need to keep our some powder dry to two to support those investments.
And.
We did have one repayment in there, which gave us a little extra room and helped our liquidity. So that we do have some incremental capital.
Helpful inside that.
SBC, one which is helpful and then.
SP I see two we still have another.
Weve invested 50 and this another 37.
Million 500000 of equity to go in which gets Levered two to one that sub 2% rates. So those are the return on equity.
Investment in the SP I see two is can be extremely high and.
So we have to.
Age when and how we we put more equity into that entity, we ought we still have borrowing capacity there.
And then we also have a lot of opportunities that we're looking at that are outside the.
Yes, I see criteria.
For types of investments.
And those are very important for our franchise in the near and long term and type of relationships we're building.
Sort of our you know our non SP I see.
Businesses that we finance.
And so.
And there are.
Less they don't have the same level of return at this point in time, but the cost of capital today necessarily but they might have higher spreads and so so developing those markets is also strategically very important for us and while strategically today will will translate into economics.
You know as as we put some of that money to work in some of those newer relationships outside the FDIC.
Criteria World. So we have a lots of balance we also I think as Weve said on the last call in this call.
So hope the whole system is riding on a huge wave of liquidity.
And.
Will that continue and how will it continue and at what rate just a real economy.
Pick up the slack if you will get back to normal and that's still an open question and so.
We just need to be careful because.
We were the first and I guess, Henry correct me, if I'm wrong the only.
Baby bond issuance in our industry we the.
We were ready we got to market as soon as we could get to market and we raised the capital and that was we think very fortuitous.
As you know when when when things decline all all capital markets.
Public markets tend to disappear.
And so we have to be very careful not to get an.
And in a position where we feel like we also need to raise capital in a period of time, where you can't raise capital. So we have a lot of.
Competing interests and a lot of.
Uncertainty.
Ahead, and so number one let's let's get our liquidity position, where we feel very comfortable we can support our portfolio and do new deals.
Buying in equity.
Does have value when it's absolutely something.
Incineration.
And so that'll be factored in on all of these.
But I can we just had a massive improvement in our liquidity from just two months ago, and we think thats very important for the near and long term.
No I agree with that.
Yes, I guess my my last question my follow up to that would be at a minimum wouldn't it make sense to at least tried to buy back shares in the open market to offset the likely dilution from the drip given you've got a lot of experience with your shareholders, you know more or less the ratio of shareholders that are going to.
Good luck for cash versus stock and at this price.
It could be.
Meaningfully dilutive to to NPV and it would seem to make sense for at least try to offset that.
That's clearly a consideration.
In terms of how much of a drip there is I mean that that has varied.
Fairly substantially over.
Over the different quarters for different reasons and.
But we do understand that that concern and I understand that you know.
That that dilution again, two and 82.
And maybe per share to earnings per share issues and all that does have have consequence, so thats absolutely something that were.
Where up and watching.
Okay. That's it for me I appreciate.
Your patience on what's probably one of the longest earnings call for you, but a very very helpful. Thank you.
Well, thank you and thank you thanks, maybe.
Thank you im not showing any further questions at this time I would now like to tend to call back over to Christian Oberbeck closing remarks.
Okay. So we want to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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