Q2 2021 Saratoga Investment Corp Earnings Call
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He just stand by me. Thank you for your Beach.
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Please note that today's call is being recorded.
During todays presentation, all parties will be in listen only mode.
Following management's prepared remarks, we will open the line for questions.
This time I would like for technical Saratoga investment Corp., Chief financial and compliance Officer Mr. Hans Peter.
Sir Please go ahead.
Thank you I would like to welcome everyone to Saratoga investment Corp's fiscal second quarter 2021 earnings Conference call. Today's conference call includes forward looking statements and projections. We ask you to refer to our most recent filings with the ACVC for important factors that could cause actual results to date.
<unk> materially from these forward looking statements and projections, we do not undertake to update our forward looking statement that's required to do so by law today.
Today, we will be referencing a presentation during our call you can find out fiscal second 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 I read.
A replay of this conference call will also be available from one PM today through October 15th please refer to our earnings press release for details.
I would 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 Henri and welcome everyone.
Oh, and another volatile and challenging quarter across our businesses around the world.
Experienced improvement in market conditions and gain improved visibility on the immediate prospects of our portfolio companies.
We continue to believe Saratoga and our portfolio companies are positioned well at this point in time to weather This calamitous health and economic environment.
We look forward to presenting our most recent results and reviewing the solid structure of our capitalization and continued improvement in liquidity on today's call.
Well no business can anticipate with Clariti, how long the displacement in the market and the global economy. The last we have confidence in our historically conservative approach to investing.
On capital structure solid levels of liquidity organization and management experience will enable us to effectively navigate this challenging current and uncertain future environment.
Briefly recap the past quarter on slide two.
Sure first we continued to strengthen our financial foundation this quarter by maintaining a relatively high level of investment credit quality with over 92% of our loan investments retaining our highest credit rating after incorporating the impact of changes to market spreads.
EBITDA multiples into our revised portfolio company performance related to cope with 19.
This is up from 90% in Q1.
Importantly, this resulted in more than half of the Q1 unrealized fair value reduction recovery this quarter.
Generating a return on equity of 14.3% on a trailing 12 month basis in Q2 of the six month cold at 19 impact to the portfolio this year.
This significantly exceeds the BDC industry average of negative 8.5% by 22.8%.
And I just bring a gross unlevered IR of 16.6% on total realizations on 506 million.
Second our assets under management increased to $508 million this quarter, a 5% increase from 483 million as of last quarter, and 486 million and at the same time last year. Despite.
Despite the unprecedented uncertainty and turmoil in the markets, we originated a healthy $31.7 million of new investments offset by 23.3 million of repayments.
Importantly, our new originations included two new portfolio company investments.
Our capital structure portfolio performance and recently improved liquidity have enabled us to remain open for business an important differentiator in todays market.
Sure as we look ahead to the numerous challenges, but the COVID-19 pandemic presents to the economy, and particularly small businesses balance sheet strength liquidity and they'd be preservation are paramount and look for a portfolio of companies and ourselves for current capital structure at quarter end was strong with 200.
$98 million of Mark to market equity supporting $108 million of long term covenant free nonhospital see debt and $170 million of SP I see debt.
This includes our new $43 billion public baby bond that we raised in Q2 this way.
This was this substantially increased our BDC cash and available liquidity to support our existing portfolio companies. In addition to the 155 million a day of available just be I see two facilities, which can be used to finance new opportunities with an all in cost of less than 2%.
We also extended our Madison credit facility draw period to September 2021, with no change to the 2025 maturity date.
We had $11 million of committed undrawn lending commitments as of quarter end and $34 million at discretionary funding commitments, our quarter end regulatory leverage at 376% substantially exceeds our 150% requirement.
Finally, reflecting on our recent baby bond raise and improved liquidity in the overall portfolio resiliency worked.
Board of directors has decided to increase our quarterly dividend by one cents to 41 cents per share for the quarter ended August 30, Onest 2020 will come.
We will continue to reassess the amount of our dividends on at least a quarterly basis as we gain better visibility on the economy and fundamental business performance.
As discussed on previous calls we have historically conservatively managed or Rick compliance obligations, such that we had no ordinary income spillover obligations going into this fiscal year, and therefore substantial spillover flexibility and consequent liquidity anyway.
Payment of this increased dividend further preserves our spillover liquidity position.
This quarter saw continued solid performance with our key performance indicators as compared to the quarters ended August 30, Onest 2019, and May 30, Onest 2020, and considering the current economic environment.
Our adjusted NII is $5.5 million this quarter down 2.5% versus 5.6 million last year and down 5% versus 5.8 million last quarter.
Our adjusted NII per share was 49 cents this quarter down from 68 cents last year and down from 51 cents last quarter.
Latest 12 months return on equity was 14.3% currently the highest in the BDC industry.
And are any of the per share is 26 68 up 9% from 24 47 last year and up.
6% from 25 11 last quarter.
This is the highest year over year growth in the BDC industry and we are actually one of only three bdcs that have grown and 80 per share over the last 12 months.
And we will provide more detail on that later.
As in the past, we remain committed to future too.
Further advancing the overall long term size and quality of our asset base as you.
As you can see on slide three our assets under management has steadily risen since we took over the BDC and the quality of our credits remains high.
AUM increased to 508 million in Q2, 5% increase since last quarter, our cost basis increased to $524 million, which is an 8% increase from last year and a 2% increase from last quarter with the.
With that I would like to now turn the 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 our key performance metrics for the quarter ended August 31st 2020.
When adjusting for the incentive fee accrual related to net capital gains in the second incentive fee calculation adjusted Eni of $5.5 million was down 4.8% from $5.8 million last quarter and down 2.5% from $5.6 million as compared to last year's Q2.
Adjusted and I. Appreciate was 49 cents down 19 cents from 68 cents per share last year and down two cents from 51 cents per share last quarter.
The decrease in adjusted Eni from last year, primarily reflects the non recurrence of the income tax benefit recognized last year and the impact of lower LIBOR rates, partially offset by a higher level of investments with AIU and at cost up 9% from last year and also lower interest expense following the repayment.
Of the $74.5 million, it's a b baby bonds last year.
The decrease from Q1 was primarily due to the increased interest expense, resulting from the new Essakane and private baby bonds with all of that cash still on deployed once deployed the impact will be fully accretive to eni.
In addition to the above the decrease in adjusted and I. Appreciate from last year was due to the higher number of shares outstanding this year.
Weighted average common shares outstanding increased by 54.5% from 8.3 million shares last year Q2 to 11.2 million shares for the three months ended may 31st 2020, and August 31 2020, respectively.
Adjusted NII yield was 7.6% this yield is down 340 basis points from 11% last year and down 50 basis points from 7.9% last quarter, reflecting primarily the impact of outgrowing and Navy the reduced LIBOR over this period and the effect of a currently undeployed capital.
Yeah.
For the second quarter, we experienced a net gain on investments of $16.5 million or $1.48 per weighted average share, resulting in a total increasing net assets, resulting from operations of $21.8 million or $1.95 per share. This.
The $16.5 million net gain on investments were comprised of <unk> 0.0, 1 million in net realized gains and 16.6 million in net unrealized appreciation on investments.
Say 5.1 million of net deferred tax benefit on unrealized depreciation in our block us subsidiaries.
The $16.6 million unrealized appreciation.
Sorry appreciation reflects a 3.6% increase in the total value of the portfolio primarily related to the impact of COVID-19 that resulted in changes to market spreads EBITDA multiples and or revise portfolio company performance recovering more than half of the reduction in fair value.
In Q1.
Thinking about the total impact since COVID-19 began this year and as outlined in the Mdna and our form 10-Q that was filed last night. The cumulative six month impact is now as follows there are no investments with year to date unrealized depreciation of more than $3 million at only six investments with reductions of more than.
$1 million.
The two largest reductions of C to education services with $3.0 million and note and group with $2.3 million each but both improved from Q1.
Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains.
Return on equity was 14.3% 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 8.5%.
Total expenses, excluding interest and debt financing expenses and base and incentive management fees remained unchanged at $1.4 million as compared to both last quarter and last year's Q2.
It represents 1.1% of average total assets for all three quarters.
We have also again added the Capex I slide 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 12 quarters and the upward trends we have maintained.
Of particular note is slide 28, highlighting how our net interest margin run rate has almost quadrupled since Saratoga took over management of the BDC and has continued to increase in Q2.
Moving on to slide five and Ivy was $298.2 million as of this quarter end, a $16.6 million increase from last quarter and a $73.9 million increase from the same quarter last year.
And 80 per share was 26 68 as of quarter end up from 25 11 as of last quarter and up from 24 47 as of 12 months ago.
This quarter $5.3 million of net investment income and $16.6 million of net unrealized appreciation and offset by $5.1 million deferred tax benefit on net unrealized appreciation in our block a subsidiary and $4.5 million of dividends declared.
In addition point $8 million of stock dividend distributions were made through the company's drip plan and 90321 shares were purchased for $1.6 million pursuant to the share repurchase plan all in this quarter.
Our net asset value has steadily increased since 2011 and is up 33% in just the past year low and very importantly, this growth has been accretive as demonstrated by the increase in NPV per share.
No other bdcs have grown in navy per share like we have the past year and only two others have grown it at all we continue to benefit from our history of consistent realized and unrealized gains.
On slide six you will see a simple a reconciliation of the major changes in Eni and Navy vishay on a sequential quarter basis.
Starting at the top and I appreciate decreased from 51 cents per share last quarter to 49 cents per share in Q2.
Five cent decrease in non feel though net interest income was partially offset by a three cents increase in other income.
Moving to the lower half of the slide this reconciles that dollar 57, and Navy vishay increase for the quarter the fee.
The 48 cents of Eni $1.47 of net unrealized depreciation on investments and two cents net accretion from the share repurchase plan and trip were offset by the 40 cents dividend paid in Q2.
Slide seven outlines the dry powder available to us as of August 31st 2020, which totaled $265.4 million. This was spread between available cash Undrawn SBA debentures, and Undrawn Madison facility.
This quarter end level of available liquidity allows us to grow assets by an additional 52% without the need for external financing with $65 million of it being cash and thats fully accretive to Eni when deployed and $155 million of it SB eight the benches with an all in cost of less than two.
Percent also very accretive.
During the quarter, we also increased our available BDC liquidity by raising $43.1 million in a 7.25% five year maturity two year non call baby bond trading under the ticker is a K, becoming the first BDC to raise a public baby bonds since COVID-19 began.
We also issued a $5 million private baby bond.
We remain pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all of our debt is long term in nature actually all three years plus.
Now I would like to move on to slides eight 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 $508 million of AUM at fair value or $524 million at cost invested in 40 portfolio companies and once yellow fund outflows.
Now first lien percentage has increased to 77% of our total investments of which 13% is in first lien last out physician.
On slide nine you can see how the yield on our core BDC assets, excluding LCL out as well as our total assets yield has dropped below 10%, yes remains healthy.
This quarter, our overall yield remained unchanged at 9.6% as compared to Q1.
Core asset yields decreased from 10.0% to 9.9%, but based on cost remain unchanged at 9.5%. This demonstrates that the additional LIBOR decrease this quarter was effectively absorbed by the existing flows as a reminder, 100 basis points is our lowest flow. So we do not expect to see further decreases in line.
Or impact interest income much.
Hello yield increased from 11.7% to 16.4% as CLL market conditions improved the CFO.
The C., although is currently performing and current.
Turning to slide 10 during the second fiscal quarter, we made investments of $51.7 million in two new portfolio companies and three follow ons and had $23.3 million in one exit plus amortization, resulting in a net increase in investments of $8.4 million for the quarter.
Our investments remain highly diversified by type as well as in terms of geography and industry. As you might note. We have updated our industry listing and schedule of investments to reflect the industry breadth and diversity that our portfolio represents our end.
Our investments are spread over 29 distinct industries with a large focus on education software IP services healthcare software and education and health care services. In addition to our investment in the CLL, which is included as structured finance securities.
About total investment portfolio, 6.0% consists of equity interests, which remain an important part of our overall investment strategy.
For the past eight fiscal years, including Q2, we had a combined $59.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments about two thirds of these gains were fully accretive to NSP due to the unused capital loss carry forwards that were carried over from wind Saratoga took over.
Management of the BDC this.
This consistent performance highlights our portfolio credit quality has helped grow our navy and is reflected in a healthy long term ROI in fact.
In fact, our six year return on equity average is now almost 11% that's not one year below 9%.
That concludes my financial and portfolio review I will now turn the call over to Michael Grisius, 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 the continued impact of coated 90.
Market conditions continued to be affected by totaled 19, but we're starting to see signs of renewed deal activity.
As well as renewed competition.
When we spoke when we last spoke in July loan inquiries were starting to pick up after nearly coming to a halt at the height of the pandemic.
Most M&A processes, we're still on hold while buyers and sellers weighted to better understand the impact of the pandemic.
The market has cautiously loosened up through throughout Q2.
As we've seen throughout the crisis the deals that are getting done in the current market are less frequently with new platforms and more often with existing portfolio companies that are either pursuing growth initiatives are seeking liquidity.
Now that said, we're beginning to see more new platform opportunities come to market.
Quality deals, we're also seeing leverage widening and pricing tightening.
Albeit not quite to pre coded levels.
Lenders in our market are staying disciplined on covenants and requiring deals to have healthy equity capitalization.
In these uncertain economic times, our underwriting bar is much higher than usual.
However, we are actively seeking opportunities to deploy capital.
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 five new platform investments since the onset of the pandemic include.
Including one since quarter end.
We continue to be very actively engaged with our portfolio companies.
We have found that our portfolio companies have generally taken the right steps to help mitigate both near and long term effective COVID-19 on their businesses.
Many of them were 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.
Separately ASCO.
Taco Mac my alarm investments and rasco have experienced challenges for some time now and remain on non accrual.
Our Q1 valuations reflected a 6.1% reduction in the total value of the portfolio primarily.
Primarily related to the impact of COVID-19, and.
And more than half of that reduction has been recovered this quarter.
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 and the overall durability of our portfolio.
77% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well and 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 if.
And have historically demonstrated strong revenue retention.
However, there are still plenty of uncertainties, and therefore potential future adverse effects are COVID-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 realized depreciation being recognized in our portfolio in the future.
Well no business can anticipate with clarity how long the displacement in the market and global economy will last week.
We continue to believe that our well constructed capital structure and liquidity will help us to navigate the challenges presented by the Corona virus.
We believe that 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 approach has resulted in our portfolio performance being at the top of the BDC space with respect to net realized gains as a percentage of portfolio at cost.
We're at the top of the list of only 10 Bdcs that had a positive number over the past three years.
Now 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 enjoy.
We endeavor to pure as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics.
We always have softer durable businesses and invested capital with the objective for producing the best risk adjusted accretive returns for our shareholders over the long term.
Our internal credit quality rating reflects the implant pact of Covis.
And shows 92% of our portfolio at our highest credit rating as of quarter end.
Up from 90% last quarter.
Now looking at leverage on Slide 13, you can see the industry debt multiples remained unchanged from calendar Q1 to Q2.
Total leverage for our overall portfolio was 4.12 times decreasing from last quarter, reflecting strength in portfolio company capitalization.
As we frequently highlight rather than just considering leverage our focus remains on investing in credits with attractive risk return profiles and exceptionally strong business models, where we are confident that the enterprise value the businesses will sustainably exceed the last dollar of investment.
In addition, this slide illustrates our consistent ability to generate new investments over the long term despite difficult market dynamics.
During the first three calendar quarters, we added six new portfolio companies and May 15 follow on investments.
And since the end of September we also invested in another new portfolio company.
There are a number of factors that give us measured confidence that despite the current the precipitous decline in deal activity. We can continue to grow our 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 the several investments we have recently made with newly formed relationships.
Second we have developed numerous deep long term relationships with active and established firms that look to us as their preferred source of financing.
Third we expect the pace of pay offs to wane until financing markets recover and the impact of Cove. It is more fully now.
Moving on to slide 14, our team's skill set 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 generally been impacted by COVID-19, although we are beginning to see a more active deal pipeline.
But what does especially pleasing is that one third of our term sheets issued over the past 12 months and four of our seven new portfolio company investments are from newly formed relationships, reflecting solid progress as we expand our business development efforts.
As you can see on slide 15, our overall portfolio credit quality remains solid.
On the chart on the right you can see the total gross unlevered IRR on our $489 million of combined weighted SP I see and BDC unrealized investments is 12.1% since Saratoga took over management.
As Henry mentioned earlier and reflected in our form 10-Q more than half of our of the Q1 markdowns have bounced back in Q2.
And what remains is across a wide variety of companies.
We do not believe the remaining unrealized depreciation changes our view with the fundamental long term performance.
The three largest depreciations are in our Nolan group C to education, and arbiter sports investments all of which are more dependent on in person human interaction.
Our investment approach has yielded exceptional realized returns.
The gross on leveraged ire on a realized investments made by the Saratoga investment management team the 16.6% on approximately $506 million of realizations.
The single repayment in Q2 had an IR of 11.4%.
Now moving on to Slide 16, you can see our first FDIC license is fully funded with $222.3 million invested as of quarter end.
Our second FDIC licenses already been funded with $65 million of equity of which $86.9 million of equity and Sps debentures have been deployed.
There are still point 7 million of cash and $110 million of debentures currently available against that equity.
In looking back at Q2, the way the portfolio has proven itself to be well constructed and resilient against the impact of COVID-19 really came to the four this quarter demonstrating 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 this year.
We remain intensely focused on preserving asset value.
And we 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 to our CEO Chris.
Thank you Mike.
That's helped lined on slide 17, following Saratoga Investment's recent baby bond raise in the current performance of its portfolio. The board of directors has decided to declare a 41 cents per share dividend for the quarter ended August 31 2020.
This reflects a one cents increase from last quarter.
Directors will continue to reassess this on at least a quarterly basis, considering both company and economic factors.
Moving to slide 18, our total return to last 12 months, which includes both capital appreciation and dividends has generated total returns of negative 30% slightly below the BDC index of negative 22%.
LTM total return was impacted by some of his 19, which has caused volatility severe market dislocations in liquidity constraints in many markets, particularly impacting the smaller bdcs with average latest 12 months returns for Bdcs with any of the low 300 million closer to negative 40%.
Our longer term performance is outlined in our next slide 19.
Our three and five year returns place us in the top 20, and 10, respectively of all Bdcs for both time horizons.
For the past three years, our negative 4% return actually exceeded the negative 11% return of the index over the past five years, our 55% return greatly exceeded the index is 10%.
On Slide 20, you can further see or outperformance placed in the context of the broader industry and specific to certain key performance metrics remain above the industry average across diverse in key categories, including interest yield on the portfolio latest 12 months return on equity and latest 12 months NPV per share.
Growth we can.
We continue to focus on our own his 12 months return on equity in any of the per share outperformance, which are both number one for the whole industry and reflects the growing value or shareholders shareholders are receiving.
Not only are we one of the few bdcs, who have grown in Navy. We have done it accretive flee I also growing entity per share one of only three bdcs to have done that the past year.
Moving on to slide 21.
All of our initiatives discussed in this call are designed to make Saratoga investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics outlined on this slide we helped drive the size and quality of our investor base, including adding more institutions.
Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 15%, which has decreased percentage wise as a result of recent equity issuances and not buy shares sold by management on that and transfers among managers for compensation related purposes access.
Access to low cost long term liquidity with which to support in our portfolio and make accretive investments.
Seat of our second SP, I see license, providing sub 2% cost liquidity.
A triple B investment grade rating and a new public and private baby bond issuance Salis historic earnings per share.
Strong historic return on equity accompanied by growing any the and maybe per share putting us at the top of the industry for both.
Hi quality expansion of a new web and attractive risk profile.
In addition, our historically high credit quality portfolio contains no exposure to conventionally cyclical industries, including oil and gas industry.
We remain confident that our experienced management team historically strong underwriting standards and tested investment strategy will serve us well in battling for the substantial challenges in the current and future environment and our balance sheet capital structure and liquidity will benefit Saratoga shareholders in the near and long term.
Closing I would like to again, thank all of our shareholders for their ongoing support I want to now open the call for questions.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question. Please press star one on your telephone if you wish to cancel your press your mute pesticides are hatched.
Please stand by while we compiled a cure any roster.
Your first question comes from the line of Mickey Schleien from Ladenburg. Your line is now open.
Yes, good morning, everyone.
I'd like to start with a few questions about the COO if I may.
Its reinvestment period is ending soon and I believe you've mentioned interest in raising new capital for seal those I just wanted to clarify would this be capital for an additional new COO.
Expansion of the existing skill.
Mickey This is Chris Hello.
Thank you for that question, yes, our our investment periods ending in early 2021 that we have we.
Pertain to a very high quality.
Investment banker, who helped us raise the last one.
Were actively in the marketplace.
It looks like spreads are coming in on liabilities and the market is firming up.
For refinancing you exactly when that will take place.
It's really subject to market developments, which are evolving in the right direction as of now pretty rapidly.
In terms of markets.
Requirements.
Depending on if we want to upsize, the CLL or not.
It may require additional capital certainly for an upsize and it may also there may also be a requirement for additional equity on a refinance.
Because leverage levels certainly as of today our.
Our ours are a little lower than they have been the last slide out.
The last slide out so there may be some capital required on a refinancing of our existing portfolio.
If I could follow up then Chris.
Do you think all else equal.
Given current terms and to see a little market.
The profitability of the C. A low in terms of distributions to the equity would be similar to where its been the last couple of years or or would it be a less profitable.
I guess, that's a difficult question to answer it this way.
At this point in time, obviously, if we need to put more equity and.
The return on that equity all else being the same might be lower.
But on the other had really depends on the pricing of the liabilities as well as the market valuation and spreads on the asset so.
I mean, if we've had this conversation a month ago.
Yes, it would have a definitely substantially less than the last.
Over the last four to.
Four to six weeks the market has improved dramatically, so where the market will be when we precisely refinance.
This is just not something that we're able to you know.
Oh, yes.
Effectively combat thought right now.
Stan and my last follow up question I think.
Henry mentioned.
The disclose still in compliance does that does that imply that the distribution. In September was was made and is equal to the distribution in July.
Okay. So two things on that one is the test date is early October and and were now passed that test data and we've we've exceeded all required.
We are on track for a late October equity distribution.
The precise amount of that distribution.
As being calculated.
But.
Our estimates at this time, it's it would be generally at that level or higher than it was in July okay.
Okay, I appreciate that Chris and yeah in the prepared remarks, I think Mike mentioned that.
Most recently the market spreads have tightened a little bit and multiples have expanded a little bit and we saw some of that and clearly in your August results.
How would you say spreads and multiples have been behaving in September with.
Everyone looking to put capital to work in what is still difficult underwriting environment.
Yes, Mike would you like to address that.
Absolutely.
Good morning Mickey.
It's a good observation and certainly one that were facing.
In the in the midst of coded one thing hasn't changed in that is that there's still plenty of capital in the market place and so what we what we have observed is that for CA.
For companies that are performing well the businesses that were seeking to support.
There certainly is competition for capital and so thats starting to materialize.
I think I think a few months ago, if you'd asked me how much spreads had widened.
Its deal specific but I would probably say it was somewhere in the 50 to 100 basis points, maybe even a little bit greater depending on the specific deal in this.
In this market thats come in a bit so all else equal, it's probably 25 to 50 basis points wider than than pre coded some cases, a little bit more than that but but certainly pricing has come in a little.
One thing that's very nice that we benefit from is that the cost of our debt financing and certainly our SP I see debt financing has come in quite a bit as well I think as Henry mentioned in the prepared remarks. The most recent SP I see debentures got priced I think get an all time low such.
The.
The all in cost of that debt financing, even take into account fees and so forth is roughly 2%. So we still feel very confident that we can put capital to work in good opportunities and do it in a way that's very accretive to our shareholders.
Thanks for that Mike Thats helpful, and and you sort of hit the nail on the head and in terms.
In terms of my follow up question, which is FMG were you refinanced out of FMCG or if not.
Well you know what caused the exit and I ask because everyone's looking for software deals right now and and obviously that is a software company.
Yes, we're we're delighted that we were early entrants into that market. Many years ago. So we've got really strong relationships in that.
Space and I think our shareholders have benefited from it it's evident in the strength and durability of our portfolio as well, but that was a company that was actually on the market to be sold or the expectation was that it was going to be sold pre coded.
And then in the height of co bid it was.
Put on the shelf for a little bit because there's just a lot of uncertainty is not the best time to be selling the company continued to perform so well that they reengaged with the sale exercise and it just got sold and so we'll we'll we'll continue to face some of that.
We're watching repayments all else equal we think the repayment pace will be less than it usually is for natural reasons, but for those companies that are distinguishing themselves and performing very well.
You still can get you.
You still are subject to prepayment risk from just a change of control transaction. We think it's much less than in normal markets and we don't expect the pace of repayments to to match, what we usually face I understand and Mike I think you mentioned that.
Portfolio leverage declined part.
Partially due to it sounded like.
Equity capital be injected by sponsors is that correct.
Or am I mistaken.
Not so much from that it's really just reflective of improvement.
Improvement in EBITDA. So it's that part of the equation that improved the leverage profile and I.
And I guess CFM GE exit two right because those second lien and presumably at a higher multiple yes.
Right Okay.
Okay, and lastly, just in terms of helping.
Investors understand the risk in the portfolio can you give us a sense of where your average borrower EBITDA stands now.
I'm trying to get a sense of what we usually don't Diebolds. These.
These are all private companies, so we don't divulge that.
At that level, but are you asking for an absolute dollar amount or no no on average across the portfolio weighted average.
Is it.
5 million closer to 10 million were where we at in general.
Yes, I don't I don't have that number readily available.
I think what I would say to you Mickey is that we we do operate at the lower end of the middle market and the thing that we've done I think very very well is that we even though we are investing in businesses that are at the smaller end of the market.
What we seek out is opportunities to deploy capital in businesses that have larger company characteristics. They are leaders in their niche and and just about every one of our portfolio companies are.
Distinguished in that respect they've got really strong management teams they've got.
Good prospects for growth and they are delivering.
Excellent value proposition to their customers. So they have really strong durability of their revenues and repeat business from those customers they've got diverse customer sets the end markets that there.
Operating in have good Tailwinds all of those features are ones that.
Usually make people say oh, the upper end of the middle market is superior to the to the lower end of middle market and the trick to what we've done well is that we.
We think we found businesses that have all those characteristics, but we can get a better returns well structured deals that actually have covenants and lower leverage and so we think the risk adjusted returns in the way that weve constructed our portfolio are superior to what you'll see in the in the upper end of the middle market, where everybody is approved.
Competing on basis points right now.
Vicki if I could just add to that just one further point that.
I think your question, let's give some thought to that I don't think we have a good answer right now because as you can appreciate.
Got a lot of software as a service companies and so.
They have a very different.
NAMIC than just an EBITDA metric right, because they're growing companies and there's a lot of reinvestment going on them. So.
You have to give a meaningful answer to that because it sounds like what you're trying to do is sort of get a sense of the size of the companies were involved with right.
And so we would have to we'd have to do some work to make sure that that was a meaningful.
Statistics put out.
Let let us do some work on that we can address future.
Thats fine Chris it's just that in.
Investors.
I have had this quandary is upper middle market or lower middle market is or is there a meaningful disparity in risk and and prior to Cove. It we would have expected the upper middle market companies to outperform but your portfolio, which is a lower middle market portfolio has done very well and that's why I'm asking the question.
And you know for example, yes, yes, new build out.
Is a $15 million investment I don't know if you are the sole lender there, but if I were to apply the average portfolio leverage of four times that would imply that's a four.
Or $5 million EBITDA company, that's what I'm, just trying to understand it.
I think as Mike.
Articulated earlier, I I think that part of <unk>.
Part of the way to assess risk.
Retrospectively is just look at how we performed with our portfolio, but I think what Mike was saying and to repeat a little bit is that.
In essence, we have a unique portfolio now every every company. That's our portfolio has been uniquely underwritten white house and selected by us and so to put them in sort of an average grouping based on.
Metric like $10 million.
10 million EBITDA.
Isn't necessarily capture the.
The you have that the level of credit underwriting that goes into each of these companies and the equity dynamic because quite frankly, a number of these will grow a lot we have equity investments in them and so it's not so easily broken out by a single slice that metric.
No I understand Chris and I appreciate that.
Clarification those are all my questions. This morning, congratulations on.
Very good quarter in a very difficult environment.
Thanks, Thank you.
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Your next question comes from the line of Casey Alexander.
Yes.
Hi, good morning.
Okay, what's the number.
Good morning, I think that shareholders should.
As shareholders should truly appreciate the fact that you guys chose to exercise some portion of your share repurchase program during the current quarter.
I have a couple of questions in relation to that even with the change in the price of the stock today the discount in the stock is similar to that which you were repurchasing shares during the last quarter are you continuing to repurchase some shares during the current quarter and secondly, strategically how do you think about it.
And you know.
Should we read this as as at least some expression of of your confidence in capital deployment, given that two quarters ago, you deferred the dividends to harvest capital now you have reinstated the dividend and you're using some capital to repurchase shares.
Okay. So that's a that's a good question and that's something that we think about.
Think about discuss analyze that.
On a very.
Very profound basis sort of all at all times clearly.
Clearly.
You just look at newspaper headlines or whatever you want to look at.
You know in the last several months not a week goes by there is not a dramatic change in the outlook, one way or the other for all sorts of things economic.
Corporate related et cetera, So we've come through a very volatile time in terms of you know.
Forward looking like what's the future going to be.
I think as you can see from our portfolio performance.
We had enormous amount of questions in that early period of time and in April and May add.
A tremendous amount of stimulus came in from the government I think the government did a fantastic job between the fat and the government fiscal stimulus BPP et cetera, and I think a lot of what would have been sort of organic risks to the system based on what it happened were were somehow take we're definitely muted.
Oh very substantially by by these interventions. We those are one of the hardest things to predict how much is the government going to do and how long it's going to do it for so those kind of uncertainties became more and more clear as time went by and as our portfolio.
Continued to perform and some of our portfolios that had a bit of seasonality you know some of the summer and the fall.
Hi.
Were important for what revenue projections would be.
And so we basically gained tremendous amount of visibility and our portfolio has performed very well through this environment all things considered and so our.
Our view on portfolio risk based on what we know and see as of right now.
Has as improved we think our risk profile relative to what we thought it was is much improved.
In addition, we've taken some very substantial steps.
Relative to you.
Yeah.
Our balance sheet to create a lot of liquidity and we raised the baby bond in June.
And we did a private.
Smaller private baby on following that to open new avenues that we have a more diversified source of capital kind of preparing for what could be either difficult times or a very opportunistic times, where you know a lot of very interesting deal flow might come our way if we are.
And for business as we are and differentiated from some of our competitors. So so all of that has evolved very substantially and as recognized by not only.
Not only rinsed, putting our dividend back in place, but then be.
Raising the dividend rate.
In terms of the specifics relative to the share repurchase I think if you look at that amount of repurchase on the one hand.
It's not that large.
Yes. They had it is a share repurchase and your point is very well taken that.
Some of the best investments can be just buying more of our portfolio a substantial discount.
The the intention around that particular set of purchases was more about kind of.
Countering.
Any dilution to our stock through our dividend repurchase.
Sales and so that amount and it was more than what we did last quarter, but depending on what the drip as this quarter, we were kind of countering what that what that dilution might be into.
In terms of our outlook going forward.
We don't have a set decisions at this moment we do.
We do recognize that we think the stock is quite quite a bargain at this time, but we also recognize that we have substantial.
Undeployed leverage capability that is dependent on our equity level. Our trading value also float is another consideration and our outlook in terms of our potential portfolio growth.
And growth with a proper.
Crop balance in this environment equity that all those things go into the equation as to how much.
As to whether and how much we might look to repurchase going forward.
All right. Thank you for that Chris.
And I would.
Communicate that they think that shareholders will be pleased especially at this level of discount. If you continued to at least offset the dilution from the dividend reinvestment program.
That would certainly make lot of sense Ive got a question couple of questions for you Mike first of all the two new originations in the quarter can you share at first of all thank you for the granular information and breaking up business services into their constituent components, because it was a little bit too to blanketed for most people's comfort level.
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In the two new originations that you did in this quarter what industries are they specifically in and what made them attractive.
And then I'll just give you the follow on to that.
M.S. link has a new CEO and has done an acquisition.
In this current quarter.
It did that create an add on opportunity for that particular education company and also we have heard that that things have improved substantially at rasco medical if you could give us some color on rasco medical that would also be helpful. So I know that's throwing a lot actually but I gave it to you at once so that you can go into it.
Okay. Let me see let me see if I've got all of those so the two new portfolio companies are both businesses that are delivering their product in a SaaS.
Model, one is serving the commercial real estate industry, but is a fundamental product that we don't think.
Really is greatly affected by of volumes in the commercial real estate industry. So much.
In the way that the business is constructed the other is a business that is in the field service management.
Businesses think of electrical contractors, and H.B.A.C. and things of that nature. So.
Two two SaaS related businesses that we think have terrific fundamentals in all of the characteristics that I've mentioned before that we look for in businesses.
Businesses, and very well capitalized businesses with good ownership.
As well.
In terms of specific companies we.
We typically don't do this but if you're going to highlight the one business CMS link. It is a business that has been paid off and so we've exited that that transaction post quarter end.
It was was holding up well, but we we did get recapitalized out of that that business.
You are correct in noting that.
The performance of.
Many of the companies in our portfolio. We are pleased to see is held up well and some companies rasco would be one.
That would fall into that category their performance is actually improve markedly during the downturn and so we're encouraged by that.
We'll wait to see how that shakes out over the next 668 coming months.
But but there are a lot of reasons for us to be optimistic about how that.
How that company's value will grow as their performance continues to improve.
Okay great.
That's it for me, maybe you've got a lot of mine so.
I'll stop there go back in the queue and let somebody else ask some questions. Thank you for taking my questions. This morning.
Thanks, guys. Thanks.
Thank you.
Your next question comes from the line of Tim Hayes from B. Riley.
Yes.
Hey, this is actually Mike on for Tim.
Just a quick one on the dividend. So you increased it by any can you just talk a little bit about what exactly went into this decision just given the in place coverage and idle cash do you anticipate recommending to the board to go back to a penny a quarter increased like before or is this something you can just sit and wait and see mode given all the macro economic.
Uncertainty.
Yes.
Well, thank you for that question.
So I'd say.
I think as we have been consistent all along we pretty much make our dividend decisions at the time, we declare them and we don't make long term projections on on on our dividends.
And I think that practices, particularly important and in.
In the World, we're in right now where such dramatic changes and purchasing both perception and reality can occur such short time frames and so.
No our view.
When we set the 40 cents dividend was to be.
Serve a different set of number that we didnt feel like we would have to cut back on in the future based on what we do at that time.
And.
And as the quarter rolled out and as we got the performance from our existing companies.
Got increased confidence in our underlying earnings power for the BDC at.
We decided to increase our our power dividends based on based on that.
You know at the moment now.
In five weeks into our current quarter.
We don't want to make any projection based on all that.
But as you can see from the macro environment right Theres there hasn't been.
Do substantial business setback, so we don't want to again make.
And you kind of projection as to our dividend in the future but.
Certainly looking backwards that are reported earnings are or coverage is high and it was we're earning well in excess of our existing dividend in this past quarter and that was why we raised it and again some of the similar thinking will be applied at our at.
At our at our next quarter and.
Depending on the circumstances, we will make that decision.
Got you Thats very helpful. Thank you for taking my questions.
[noise] there I know for a good question at this time, Sir you may continue.
Okay, well thank you.
Thank you everyone for joining us today, and we look forward to speaking with you next quarter.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating you may now disconnect.
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