Q4 2021 Saratoga Investment Corp Earnings Call
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Today's conference is scheduled to begin shortly please continue the standby. Thank you for your patience.
[music].
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Good afternoon, ladies and gentlemen, thank you for standing by welcome the Saratoga investment Corp's fiscal fourth quarter and fiscal year 2021 financial results Conference call.
Please note the todays call is being recorded.
During todays presentation, all parties will be in a listen only mode.
Following managements prepared remarks, we will open the lines of questions.
At this time I would like to turn the call of the Saratoga investment Corp's, Chief financial and compliance officer, Mr. Henri Steenkamp, Sir. Please go ahead.
Thank you I would like to welcome everyone to Saratoga investment Corp's fiscal fourth quarter and fiscal year 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 ACC for 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 law.
We will be referencing a presentation during our call you can find out of fiscal fourth quarter and fiscal year 2020 was shareholder presentation in the events and presentations section of our Investor Relations website, a link to our IR page is in the earnings press release distributed last night.
A replay of this conference call will also be available from four P. M. Today through May 13th 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.
Hum.
Thank you Henri and welcome everyone.
Our fiscal 2021 results reflect a full 12 months of unprecedented times during which our company and our industry proved resilient as we in our portfolio of companies successfully managed through these challenges.
Looking ahead, we have confidence that our conservative approach to investing strong capital structure and levels of liquidity organization and management experience position and sensory experience positions us to effectively capitalize on potential future opportunities and navigate through the inevitable future challenges.
We look forward to presenting our most recent quarterly and full year results and reviewing our solid capitalization and continued improvement in liquidity on today's call on.
Annual performance metrics for fiscal 2021 include full year of return on equity of 5%, including the full year impact of COVID-19 and adjusted NII per share of $2, two and last 12 months NAV per share growth of 12 four 0.4%.
One of only a handful of bdcs to grow this metric over this period.
Our year end NAV per share of $27 25 represents our highest level yet.
Debris to briefly recap the highlights of the past quarter and year on slide two.
First we continued to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 93% of our loan investments continuing to have our highest rating.
At year end.
Generating a return on equity of 5% on a trailing 12 month basis significantly ahead of the BDC industry mean of 0.4%.
And as of year end registering of gross Unlevered IRR of 13% on our total unrealized portfolio with our current fair value of 1% above our total cost of our portfolio.
And a gross Unlevered IRR of 16, 5% on total realizations to date of $561 million.
Second our assets under management increased slightly this quarter to $554 million.
A 1% increase relative to Q3 included the impact of the refinancing of the CLO at quarter end, which included an upsizing of the CLO from 500 million to $650 million and extending the reinvestment period by a further three years.
For the year, our AUM is up 14% from $487 million as of last yearend.
With $130 million of repayments. This year, we again demonstrated the ability of our origination platform to keep pace with the ongoing redemptions was $202 million of new investments originated during fiscal 2021.
We've continued to originate both new investments and follow on throughout the year. Despite the many market challenges, which has been of great differentiator for US Mike will discuss this more in detail later.
Third despite improving economic conditions balance sheet strength liquidity and NAV preservation remain Paramount for us our capital structure remains strong with $304 million of Mark to market equity at yearend supporting $123 million of long term covenant free non Spi see debt.
This translates into regulatory leverage of 347% the substantial cushion over our 150% requirement.
On liquidity and credit facilities of $216 million at year end are available to support our portfolio of companies was $141 million of the total dedicated to new opportunities in our S. The IC to fund.
The on cost of this new S. P. I see two debt is currently approximately 2%.
Total committed undrawn lending commitments outstanding to existing portfolio of companies are just $13 million.
Subsequent to year end, we issued of $50 million 4.3, 75% five year unsecured bond debt strengthens both of our capital and liquidity position and also importantly reduces our current cost of non Spi C capital by almost 200 basis points.
Finally, reflecting on our improved liquidity and overall poor portfolio of resiliency the.
Board of directors decided to again increase our quarterly dividend by one cent. The 43 per share for the quarter ended February 28th 2021 eight on April 22021.
We will continue to evaluate our dividend payments on at least the quarterly basis as we gained better visibility on the intermediate term economy and fundamental portfolio performance.
This quarter saw continued solid performance within our key performance indicators as compared to the quarter ended November 30 of 2020.
Our adjusted NII of <unk> $5.8 million this quarter up 5% versus $5 5 million last quarter.
Our adjusted NII per share of 52 cents this quarter up from 50% of 50 last quarter.
Latest 12 months return on equity is 5% this quarter down from 11% last quarter.
Our NAV per share is $27 of twenty-five up 2% from 26 84 of last quarter.
We will provide more detail later.
Yeah.
As you can see on slide three.
<unk> has steadily risen since we took over management of the BDC more than 10 years ago and the quality of our credits continue to remain high.
We are working diligently to continue this trend as we deploy our available capital while at the same time being appropriately cautious in this evolving credit environment.
With that I would like to now turn the call back over to Henri to review, our financial results as well as the composition and performance of our portfolio.
Thank you Chris.
Slide four highlights of key performance metrics for the quarter ended February 28, 2021.
When adjusting for the incentive fee accrual on net capital gains adjusted NII of $5.8 million was up 5% from $5 $5 million last quarter and down 15% from $6 $8 million as compared to last year's Q4.
Adjusted NII per share was <unk> 52 cents up two cents from 50 cent per share last quarter and down nine cents from 61 St per share last year.
Across the three quarters weighted average common shares outstanding remained largely unchanged for each quarter.
The sequential quarterly increase in adjusted NII per share is primarily due to the full period impact of last quarter's originations and a growing AUM base.
The year over year decrease is primarily due to last years fourth quarter, including $4 $4 million of nonrecurring advisory fee income and prepayment premiums related to the easy ice realization.
And the weighted average current coupon on non CLO BDC investments decreasing to nine 6% this quarter from nine 8% last year.
Both of these were partially offset by an investment base that has grown by 14.1% since last year.
Adjusted NII yield was 7.7% when adjusted for the incentive fee accrual. This yield is up from 7.4% last quarter, but down from nine 3% last year due to the reasons noted above.
For the fourth quarter, we experienced a net gain on investments of five point of $1 million or <unk> 46 cents per weighted average share and the realized loss on extinguishment of debt of point $1 million or one cent per weighted average share resulting in a total increase in net assets from operations of $9 $3 million or <unk> 83.
<unk> per share.
The $5 $1 million net gain on investments was primarily comprised of $14 $3 million in net unrealized appreciation on investments offset by $8 $7 million in net realized loss.
The $8 $7 million net realized loss, primarily relates to the sale of the company's Elyria equity investment the last remaining investment that dates back to before Saratoga took over management of the BDC in 2010.
The $14 $3 million net unrealized depreciation primarily reflect one the $8 7 million reversal of previously recognized depreciation following the realization of Elyria and two of <unk>.
1% increase in the total value of the remaining portfolio primarily related to improvements in market spreads EBITDA multiples and or revised portfolio company performance, therefore, all but $1 $4 million or of 95% of the nature of reduction in the value of the non CLO portfolio in the first quarter has been.
The reverse since May 31, 2020.
The point $1 million loss on extinguishment relates to the repayment of $26 million of SBA debentures, and our first Spic's license. This is reflected in its own line item in the statement of operations.
As this quarter is also a year and we also highlight the key performance metrics for the year ended February 28 on slide five.
When adjusting for the incentive fee accrual of net capital gains adjusted NII of $22 $6 million was down 3% from $23 $2 million last year.
Adjusted NII per share was $2 <unk> per share down 47 cents from $2 49 last year.
The decrease in adjusted NII per share is largely a result of of 20% year on year increase in weighted average shares outstanding and the nonrecurring easy ice impacts noted above partially offset by AUM up 14% year over year.
Adjusted NII yield was seven 6% when adjusted for the incentive fee accrual down from nine 9% last year.
For the full year, we experienced a net realized and unrealized loss on investments of $8 $2 million or <unk> 73 per weighted average share, resulting in a total increase of net assets from operations of $14 $8 million or of $1 32 per share.
The $8 $2 million net loss on investments was primarily comprised of the same $8 7 million elyria realized loss and $3 $9 million of income tax provision on our realized gains on investments paid in Q3.
This was offset by $5 million and net unrealized appreciation on investments.
Return on equity, which includes both realized and unrealized gains remains an important performance indicator for US a return on equity with 5.0% for the last 12 months well above the BDC industry average of 0.4%.
Quickly touching on expenses for the year total expenses, excluding interest and debt financing expenses base and incentive management fees and income tax of excise tax expense increased to $6 $3 million. This year from $5 $7 million in the same period last year, but remained unchanged at 1.1% of average.
Total assets.
And we have also added the historical Kpis in slides 28 through 31 in the appendix at the in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 14 quarters and the upward trends. We have maintained of particular note of slides 31, highlighting how our net interest margin.
Run rate has quadrupled since Saratoga took over management of the BDC and also increased by 14% just this past year.
Moving on to slide six Niv was $304 $2 million as of year end basically unchanged from last year.
Looking at just Q4, <unk> was up $4 $3 million or one 4% and NAV per share was $27 25 at year end up of one 5% from $26 84 as of last quarter and up <unk>, 4% from $27 13 as of 12 months ago.
NAV per share has increased in all but two of the last 14 quarters and we remain one of the few bdcs to have grown NAV per share in the past year.
In fiscal 2021, AAV also includes $2 $4 million of stock dividend distributions made through the company's dividend reinvestment plan offset by $3 $6 million in repurchases of common stock.
During Q4 50000 shares were repurchased at a cost of $1 $1 million at an average price of $22.88 per share.
On slide seven you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis.
Starting at the top the two cent increase to adjusted NII per share of 52 cents as compared to last quarter was primarily due to a 7% increase in non CLO net interest income offset by a 6% increase in base management fees and operating expenses.
Moving on to the lower half of the slide this slide reconciles the 41 cent NAV per share increase for the quarter.
The 38 cents generated by our NII in Q4, and the 50 <unk> net realized and unrealized gains on investments were partially offset by the five cent net change on deferred taxes on unrealized depreciation on investments one cent realized loss on extinguishment of date 42, St dividend declared for Q3 with the Q4 record day.
And one St accretive net impact of our ATM and drip programs in Q4.
Slide eight has the same reconciliation at this time for the full year.
Starting at the top NII per share decreased 47 from $2 49 per share last year to $2 on <unk> per share this year.
The significant changes were a 33% increase in non CLO net interest income offset by a 30 cent decrease in other income primarily due to the easy ice fees previously noted a 7% reduction from an increase in base management fees due to increased AUM and.
And of 41 same dilution due to the 20% increase in shares from the ATM and drip programs.
The lower half of the slide reconciles the 12, <unk> NAV per share increase for the year.
The $2.07 generated by our fiscal NII and T. St accretive impact of our ATM and drip programs for the year were partially offset by 33, <unk> net realized losses and unrealized depreciation the $1 23 dividend declared for FY 'twenty one.
<unk> 55 for income tax provision from realized gains and the one centralized loss on extinguishment of debt.
Slide nine outlines the dry powder available to us as of year end, which totaled $215 $9 million. This consists of our available cash undrawn SBA debentures and Undrawn Madison facility.
This year end level of available liquidity allows us to grow of assets by an additional 39% without the need for external financing with $30 million of it being cash and thats fully accretive to NII when deployed and $141 million in SBA debentures with an all in cost of under 2% also very accretive.
In addition on March 10th 2021, we closed a public offering of $50 million for 375% notes due 2026, resulting in net proceeds of approximately $48 $8 million. This.
Quiddity is accretive to the year in Saratoga investment available liquidity on the slide.
We remain pleased with our liquidity and leverage 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 with no non spic's debt maturing within the next four years and mostly fixed rate.
Now I would like to move on to slides 10 through 13 and quickly review of the composition in the yield of our investment portfolio.
Getting the slide 10 of $554 million of assets are invested in 40 portfolio companies and one CLO fund and 80% of our investments are in first lien of which 8% of that is in first lien last out positions.
On slide 11, you can see how the yield on our core BDC assets. Excluding the CLO remains just above 9% as short term LIBOR of continued to decline this year and as of year end. Our overall yield decreased 30 basis points to nine 1% from nine 4% last quarter like with LIBOR of rady below floors.
This was mainly because of the increase in our overall portfolio fair value back to above cost.
This is demonstrated by our core asset yield increasing slightly to nine 6% from nine 5% last quarter.
As of remind at 100 basis points is generally our lowest flow. So we do not expect to see further decreases in LIBOR greatly impact interest income.
CLO yield of 11, 6% similar to last quarter and a CLO is current and performing.
Turning to slide 12, our investments remain highly diversified by type as well as in terms of geography during the past quarter, we made investments of $80 million in two new portfolio companies and 11 follow ons and had $79 million and five exits plus amortization, resulting in a net increase in.
Investments of <unk> $9 million for the quarter.
On slide 13, you can see the industry breadth and diversity that our portfolio represents.
Our investments are spread of of 31 distinct industries with the large focus on education software.
Services, and education and health care services.
In addition, our total investment in the CLO is reflected of structured finance securities on the slide.
Of our total investment portfolio of six 7% consists of equity interest, which remain an important part of our overall investment strategy.
For the past nine fiscal years and as demonstrated on slide 14, we had a combined $59 6 million of net realized gains on investments originated by the Saratoga team from the sale of equity interest or sale of early redemption of other investments over two thirds of these gains were fully accretive to NAV due to the unused.
Capital loss carryforwards that were carried over from when Saratoga took over management of the BDC.
Following the realization of our legacy leery of position this creates new capital loss carryforwards that future capital gains will be offset by.
This overall consistent performance highlights of our portfolio credit quality has helped grow our NAV and is reflected in our healthy long term Roe.
That concludes my financial and portfolio review I will now turn the call over to Michael <unk>, 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 of performance and investment strategy.
Market conditions continued to be affected by COVID-19, but mainly in certain pockets and two of four of lesser extent than earlier in the crisis.
Liquidity conditions remain exceptionally robust we are seeing rebounding and even increasing transaction volumes tightening of credit yields and greater leverage multiples back to pre COVID-19 levels.
And the willingness to accept the greater risk.
Earlier in the crisis deals were mostly limited to existing portfolio of companies either pursuing growth initiatives, we're seeking liquidity.
This started the change in Q2 of last year and has accelerated since then.
Significant competition for quality deals is helping widen leverage and tightened pricing even back to pre COVID-19 levels.
The calendar Q1 was quite robust and there appears to be a positive outlook for calendar year 2021.
Lenders in our market are for the most parts of staying disciplined with covenants and requiring deals to have a healthy equity capitalization.
Our underwriting bar remains high as usual, yes, we are actively seeking and finding opportunities to deploy capital.
We believe the compelling risk adjusted returns can be achieved by deploying capital in support of businesses that have demonstrated the strength and durability throughout the COVID-19 environment.
Follow on investments with existing borrowers with strong business models and balance sheets continue to be an important avenue of capital deployment as.
As demonstrated with 11 follow on to this past quarter.
Most notably we have invested in 12, new platform investments since the onset of the pandemic, including two in this past calendar quarter.
Portfolio management continues to be critically important and we remain actively engaged with our portfolio of companies.
We have found that they are generally taking the right steps to help mitigate both the near and long term effect of COVID-19 on their businesses.
As we've mentioned before many of them were also able to avail themselves of the paycheck protection program or PPP loan relief.
All of our loans on our portfolio of paying according to their payment terms, including Roscoe that returned to accrual this quarter.
Taco Mac in myeloma are the two investments that remain on nonaccrual.
Ben no new non accruals prior to and through COVID-19.
We also recognized an additional $5 6 million of unrealized appreciation this quarter, which means that our overall portfolio has recovered over 95% of the unrealized depreciation in Q1.
And the fair value of Saratoga assets has recovered to 1% over its cost basis.
We believe the strong performance reflects certain attributes of our portfolio that bolster its overall durability.
80% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress situations.
We have no direct energy or commodities exposure.
In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention.
There remains potential future adverse effects of COVID-19 on on the 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 and could lead to unrealized and.
<unk> realized depreciation being recognized on our portfolio in the future.
Despite this lack of clarity we continue to believe that our well constructed capital structure and liquidity will help us to navigate beyond the challenges presented by COVID-19, and the broader macro environment.
Our approach has always been to stick to our strategy and focus on the quality of our underwriting and as you can see on slide 15. This approach has resulted in our portfolio of performance being at the top of of beat of the BDC list that has only seven bdcs with a positive net realized gain as a percentage of portfolio.
The cost over the past three years.
Our strong underwriting culture remains paramount of 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.
We endeavor to appear as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics.
We always of salt durable businesses and invested capital with the objective of producing the best risk adjusted accretive returns for our shareholders over the long term.
Our internal credit quality rating reflects the impact of COVID-19 and shows 93% of our portfolio at our highest rating as of year end.
I'm looking at slide 16, total leverage for the overall portfolio for investments underwritten using EBITDA was 363 times down from 4.03 times in the previous quarter, reflecting strength in portfolio of company capitalization and the lower leverage of certain new deals.
Our leverage is also below the average year to date market leverage multiples, which are.
Our above five times across our industry.
Through past volatility, we have been able to maintain a relatively modest risk profile throughout.
Although we never consider leverage in isolation.
Rather focusing on investing in credits with attractive risk return profiles and exceptionally strong business models, where we are confident that the enterprise value of the business will sustainably exceed the last dollar of our investment.
In addition, the slide illustrates our strengthening of ability to generate new investments over the long term.
Even in the midst of the difficult market dynamics.
During the calendar year 2020, we added 11, new portfolio of companies and made 26 follow on investments, including a follow on to that supported portfolio of companies liquidity during COVID-19.
We also out of two platforms and five follow on investments in the first calendar quarter of 2021.
That we were able to accomplish this in the face of COVID-19 challenges underscores the ongoing emphasis on broadening our origination capabilities.
Now subsequent to fiscal year end, including investments that are either closed today or will be closing in the next couple of days.
We have executed approximately $90 million of new originations in three new portfolio companies and six existing portfolio of companies and also had one repayment of approximately $14 million for net new investments originated of approximately $76 million.
Moving on to slide 17, 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 of new deals.
Our number of deals sourced has dropped reflect reflecting the difficult sourcing environment during much of last year.
Although we are beginning to see a more active deal pipeline and this year.
The 52 term sheets issued during the last 12 months.
Is also markedly up from last year's pace.
Does the especially pleasing to us is that almost one fifth of our term sheets issued over the past 12 months months and four of our 10, new portfolio company investments are from newly formed relationships, reflecting notable progress as we expand our business development efforts.
There are a number of factors that give us measured confidence that we can continue to grow our AUM 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've 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 continue to see plenty of investment opportunities in the industry segments that are experiencing long term secular growth trends and within which we are intentionally developed expertise.
As you can see on slide 18, our overall track record is very strong on almost $1 1 billion of originations.
On the chart on the right you can see the total gross unlevered IRR on our $514 million of combined weighted spic's on BDC unrealized investments is 13% since Saratoga took over management.
The two largest unrealized depreciations remaining due to COVID-19 or in our Nolan group in situ education of investments both of which are more dependent on in person human interaction.
We do not believe the remaining unrealized depreciation changes our view of their fundamental long term performance.
Even with those current markdowns, our overall portfolio of fair value is now 1% above its total cost.
Our investment approach is yield of exceptional realized returns are gross unlevered IRR unrealized investments is 16, 5% on approximately $561 million of realizations.
Subsequent to year end, we also had some developments on our my alarm center of investment.
Which had a remaining fair value of $181000.
The senior debt burden of the company plus the cost of acquiring and retaining new customers resulted in significant pressure on cash flow and liquidity.
As a result of new senior lender took a majority position in the credit and has accelerated its debt through a recent prepackaged chapter 11 filing.
With the equity sponsor choosing not to infuse additional capital into the business. At this time, there is very little prospect for recovery of the junior capital.
Now moving on to Slide 19, you can see our first spic's of licenses fully funded with $208 million invested as of year end.
And we have started paying down some of our Spic's won debentures using repayment proceeds with 26 million repaid in Q4.
Repayments of debentures occur on the semiannual basis.
Our second Spic's license has already been funded with $69 million of equity of which of $107 million of equity and SBA debentures have been deployed.
There are still $3 4 million of cash and $104 million of debentures currently available against that equity.
We still have $18 5 million of unfunded equity, which went dropdown into the Spi C would increase our debenture availability by $37 million.
And looking back over the whole year, the way of the portfolio has prudent proven itself to be well constructed and resilient against the impact of COVID-19 really came to the for.
The demonstrating the strength of our team.
Platform and portfolio.
And our overall underwriting and due diligence procedures.
Credit quality is always our primary focus.
And while the world has changed significantly this year.
We remain intensely focused on preserving asset value and remain confident on our team and the future for Saratoga investment.
This concludes my review of the market in our portfolio and I'd like to turn the call back over to our CEO Chris.
Thank you Mike.
As outlined on slide 20, following recent capital raises and the current performance of our portfolio. The board of directors declared of <unk> 43 per share dividend for the quarter ended February 28 2021.
This reflected a 1% <unk> increase from last quarter.
Third sequential quarterly dividend increase.
The board of directors will continue to reassess this on at least of quarterly basis, considering both the company specific and economic factors.
Moving on to Slide 21, our total return from the last 12 months, which includes both the capital appreciation and dividends has generated total returns of 153% outpacing the BDC index of 121% on.
Our longer term performance is outlined on slide 22 of our next slide.
Our five year return places us near the top of all Bdcs with both the five three and one year returns easily beating the BDC industry averages over the past three years, our 62% return outperformed the 34% return of the index and over the past five years of 148% return.
<unk> greatly exceeded the index in 59%.
On Slide 23, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics.
We continue to achieve high marks on outperform the industry across diverse categories, including interest yield on the portfolio.
Latest 12 months return on equity and latest 12 months net asset value per share growth.
Notably, notably our latest 12 months return on equity in the NAV per share outperformance reflects the growing value of our shareholders have been consistently receiving <unk>.
First not only are we one of the very few bdcs have grown NAV.
We've done it Accretively buy also growing NAV per share 12 of the last 14 quarters and only one of the seven bdcs growing it in the past 12 months and second our seven year average return on equity is now 11, 4% one of the highest in the industry.
Moving on to slide 24, all of our initiatives decisions on achievements discussed today on 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 the slide will help drive the size and quality of our investment.
Your base, including adding more institutions.
Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 15%.
Access to low cost and long term liquidity with which to support our portfolio and make accretive investments receipt of our second S. The IC license, providing sub 2% cost liquidity.
Triple B plus investment grade rating was recently upgraded and active public and private baby bond issuances.
Solid historic earnings per share and NII yield.
The strong in the industry, leading historic and long term return on equity accompanied by growing nev and NAV per share putting us at the top of the industry for both <unk>.
High quality expansion of the AUM.
And 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 our experienced management team historically strong underwriting standards and tested investment strategy will serve us well and battling through the substantial challenges in this current environment and that on our balance sheet and that our balance sheet capital structure and liquidity will benefit Saratoga has the best.
Shareholders in the near and long term.
In closing I would again like to thank all of our shareholders for their ongoing support and.
And I would like to now open the call for questions.
Thank you.
If you'd like to ask a question on at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
On the Star then one if you'd like to ask the question at this time.
Our first question comes from Bryce Rowe with have the group.
Thanks, Good afternoon.
Alright, Brian.
Hi wanted to maybe start on.
On pricing good.
To see stability from the from the yield on the on the debt portfolio.
And so wanted to wanted to get a feel for.
What you've seen here in the in the current quarter, Mike you talked about the $90 million of activity.
Subsequent to the February and then kind of what your expectations are from the from the CLO perspective, I know once once those get reset you kind of start with a lower lower yield into into the portfolio and then it could possibly build as the.
As we move through time.
Yes, let's let me take take that in two parts and I'll, let Henry addressed the CLO.
But as it relates to the market in general we're definitely seeing.
Reflections of a lot of capital available to invest in private credit and as a consequence yields have come in I would say to the point where yields are below even where we were seeing them pre COVID-19.
But having said that I'll remind you that where we operate at the lower end of the middle market. There are literally thousands of companies out there are good companies that we feel.
We'll continue to find very good opportunities to invest in those businesses.
The rates that are very accretive for our shareholders certainly the fact that debt our debt capital has come down as well as helpful to that end, but.
Pricing certainly has come in a bit.
Yes price and then on the CLO, you're absolutely right. So as the CLO gets closer to the end of its reinvestment period of the weighted average effective interest rate, which reflects the future cash flows that is now sort of shortening and you see more clarity on the performance of the portfolio. The weighted average effective interest rate growth. So you would've seen on the loss.
Couple of quarters, our weighted average effective effective interest rates being closer to.
The 20, 22% as you then reset it and we've seen this each time and obviously, we havent done evaluation yet for Q1, because the interest rate is an output of the valuation, but our expectation is that it will behave similarly to what it did last time.
And last time, what it did was it probably went to about half or maybe just slightly better than that of what the weighted average effective interest rate was just before the the repricing.
That's on the interest side and Thats, obviously, one component of the income that the CLO generate but in addition to that it also has the the the.
The management fee.
That the BDC ends and that management fee and the new CLO remains the same 50 basis points on the AUM, but now instead of it being on 500 million. It will obviously be on $650 million going forward.
Once we are fully ramped up and so that will be additional income to the BDC on the larger size.
Okay.
It's helpful of Henry I wanted to.
Maybe shift gears, a little bit and ask one more question of you.
You guys ended the ended the calendar year with.
Undistributed taxable income.
And so kind of and there was an excise tax in the.
In this in this quarter to account for that.
Can you talk about kind of how you how you plan to manage that I know in the past you've preferred to possibly not carry of UTI.
So just just kind of curious how you're how you're thinking about that now.
Well I think on the on the actual where we are at the moment to your high price as you probably saw in the 10-K.
So we start this year now which is March one for us with <unk>.
Spillover effectively taxable income related to last year of just under $8 million.
As you know our dividend on a quarterly basis. The last couple of have been around between four and a half of $5 million. So.
This dividend that we just declared and then the next one we'll take care of the spillover.
But in addition to that obviously.
We also I think historically actually have been more conservative.
And the way we've managed capital.
So that we hadn't had spillover.
In the past. This is now obviously of reflection of our earnings power that we've had as well as the effect from.
Of the dividends, we paid last year that means we have some spillover this year, but it should be taken care of certified by the by the next dividend.
And then just.
Just to further in terms of how we look at it I think we spent a lot of time last year in the in the height of the of the COVID-19 crisis.
Pointing out how how much flexibility the spill over the absence of spillover gave us.
In terms of.
The potential liquidity should it have been needed.
And Sam you mentioned.
Thankfully this past year has turned out to be quite a good year.
Opposed to what it looked like it could've been in the past.
We did.
The move into the the spillover realm to the tune of $8 million as Henry mentioned in terms of you asked specifically on managing it it's not something that needs to be managed if you will theres no theres nothing of the ordinary course will just take care of the spillover of the cost of the spillover of the excise taxes on I believe kind of is 4% on whenever the.
Net outstanding amount is so the absolute cost of it.
Viewed in the context of the totality of our liability cost structure on our balance sheet is not high so we're obviously.
Looking at it aware of it.
We are a little less spillover of flexibility than we had before but we still have substantial spillover of flexibility on top of it should that prove needed.
In the future and and as we.
Depending on where our earnings and dividends and the interplay between those two elements that spillover we would anticipate.
We wouldn't anticipate of growing much from here.
And then possibly shrinking.
Okay. Thanks, Chris I appreciate the.
The answers.
Back in queue, let others ask.
Our next question comes from Mickey Schlein with Ladenburg.
Good morning, just one question from Mike.
You mentioned, the new relationships created last year.
Wanted to ask given that these are private funds could you describe to us the deep diligence that you do on new sponsors.
The you conduct before you decided to work with them.
Happy to.
And thankfully most of the the groups that are sponsored.
Private equity firms have.
On a lot of diligence to attract the capital from from investors that are pretty sophisticated as well, but having said that we're pretty deep in the marketplace and kind of.
No who most of the players are and continuing to develop our network but.
When we get to.
Meet our new affirm that we haven't done deals within the past the starting point is looking at the team looking at their backgrounds as long as we've been in the marketplace. We typically know people, who know them or we know people that were at their prior firms and we may even know some of them at least maybe one step.
Removed what have you and so the starting point is always with the team and invariably the we're able to get a lot of very strong and.
The very strong references on on.
The experience set that people have had investing with those teams. The second place that we go it's just looking at their portfolio.
What what kind of deals are they doing how are they capitalizing their deals what's the reputation and dealing with lenders. It is a pretty robust process and then the best way you get to know somebody we don't when we issue a term sheet. The deal is by no means done the best way you really get to know somebody is is to work.
With them directly and what what drives our decision making more so than anything is is it a good business opportunity do we feel very good that our capital is in a good position in that the businesses has all of the durable characteristics that we always talk about.
And the combination of that factor plus the work that we do to get comfortable with the sponsor is how we get there.
Mike You just mentioned.
Behavior with lenders.
I'd, probably put the top three right in terms of gauging.
Your interest in working with the sponsor.
Do you look at that just anecdotally or do they provide you information on.
The trouble deals and how they were worked out in the past.
It tends to be more anecdotally candidly and it's also the kind of thing where if the sponsor develops the bad reputation that word spreads pretty quickly. So when I say, it's anecdotally, it's not without good background knowledge the thing I would remind.
Mind, you, though that it is important certainly the relationships on the sponsors that we work with are very important I wish our business were such that you could just find the sponsor and the minute the a.
Got into a little bit of trouble they'd come to the rescue with the big equity checks and so forth. We don't do underwriting that way so even if the sponsor is the <unk>.
The very best private equity sponsor at the lower end of the middle market and they liked the deal a lot we turned plenty of those down so we tend to if not to diminish the importance of the sponsor of it's a very important part of the of our underwriting, but we're not underwriting the sponsor and hoping that they're going to save the day if.
Things go wrong, we're always when we're looking at an investment saying.
Make the assumption that the sponsor is not there and that.
If we're in a position where this this business underperforms what are ways out where are we in the capital structure, how good do we feel about.
The the durability of the business model is it going to face cyclical pressures do they produce a lot of free cash flow so that even if they underperform a little bit they can continue to pay our loan and even pay it down over time all of those elements come into play, but certainly the sponsor and the relationship is one of them.
Okay. Thank you for taking my questions.
Our next question comes from Sarkis, <unk> with B Riley.
On the securities.
Hi, Thanks for taking my question here.
Just wanted to touch a little bit on the Pik income side. It was up meaningfully this quarter and just wondering if that jump was attributable to the Roscoe medical investment returning to accrual.
Yeah, Hi, <unk>. This is Henry Yeah, absolutely that was because we released the the Rasco reserve that was Pik, we released back into income as its gone back on accrual actually last quarter on radio Q3, and so we released debt reserve that's really the job. So if you if you take that out and you sort of look at pick it up.
Run rate as of Q4.
It's under 2% from of total interest income perspective. This the rasco just skews it.
Got you and just just just to be clear how much of that was onetime in nature on how much of that kind of continues.
Sure. The one time so the release of the reserve was 941000.
And I think the I think Roscoe on a quarterly basis.
I would have to double check, but I believe it's around 45000.
Hillary's.
Thank you for that.
Wanted to verify the <unk> 9 million there and then you talked about the sale on the Lyra position you mentioned that there was a new capital loss of that kind of comes with that.
Any other.
What's the level of the capital loss and obviously that helps you for for the future. So just kind of understand.
What that level is.
Yes, so when we had the easy ice gain last year. So that's February 2020.
That cleaned out our capital loss Carryforwards, we had and then ended up in us having a realized gain on which we paid the the federal income tax debt you. So now in this year in Q3.
So we sort of cleaned out our our loss position gain position back to zero and then with hilly area now now being sold in Q4 that realizes the full loss on the area. That's been written out of written down of it. Many many years and so that the total position. We're in from from the leery of loss of $8 $7 million, which is obviously of.
New capital loss carryforward.
Can be put against future realized gains.
Great and then just one.
And just one further point on on the areas of that that investment predates our ownership and management of the BDC.
That was of that that was one of our legacy positions.
Yes, yes understood. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Chris Oberbeck for closing remark.
Well, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
This concludes today's conference call.
Thank you for participating you may now disconnect.
Okay.
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Yeah.
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Net income.