Q4 2022 Saratoga Investment Corp Earnings Call
[music].
Good morning, ladies and gentlemen, thank you for sending by welcome to the Saratoga indefinitely corpse fiscal fourth quarter and fiscal year 20, twenty-two financial results conference call.
Note that today's call is being recorded.
During today's presentation, all parties will be in a listen only mode falling management's prepared remarks, we will open the lines for questions. At this time call over to Saratoga investment Corp's, Chief Financial Officer, and complaints Officer Mister Henry Stink cap. Please go ahead.
Thank you I would like to welcome everyone to Saratoga investment corpse fiscal fourth quarter and fiscal year 20 twenty-two 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 a C. C for important factors that could cause.
Actual results to differ materially from these forward looking statements and projections, we do not undertake to update I'll forward looking statements unless required to do so by law.
Today, we will be referencing a presentation during a cold you can find out fiscal year end and fourth quoted 20 twenty-two shareholder presentation in the events and presentations section of our Investor Relations website.
Link to our I R page as 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 12th please refer to <unk> press release for details.
I would now like to turn the call over to our chairman and Chief Executive Officer, Christian Overbeck, who will be making a few introductory remarks.
Thank you Henry and welcome everyone.
Our fiscal year 2022, and fourth quarter performance continues to reflect the strength and resilience of our financial position and portfolio companies spy.
Despite the current global market volatility and continuation of COVID-19 impacts we feel very fortunate to navigate it to these challenges thus far and to be in a position to benefit from the upside of the ongoing recovery and substantial increase in market activity we.
We believe Saratoga continues to be well positioned for potential future economic opportunities as well as challenges.
Our existing portfolio companies are performing well current business development pipeline remains were bought robust with positive matrix in term sheets issued and deals executed are <unk> I'm grew significantly this quarter to 818 million and so we originated $164 million a new platforms will follow.
[noise] investments upset by $11 million of repayments.
Near to date saw significant achievement across all growth in credit matrix with record of <unk> Nations at 458 million net realized games with 13 million and net unrealized depreciation of 17 million all contributing to our fiscal 2020th two <unk> $263 million.
<unk> 12 months return on equity of 13.9%.
Yeah, that's been canes also demonstrate how our strategy of taking equity positions in our portfolio companies when available and when it makes sense to us has been rewarded.
We continue to bring new platform investments onto the portfolio with free added this fiscal quarter and all of our originations were made while maintaining the extremely high credit far we set for all investments.
The performance of our existing portfolio will also drove R. M. A V per share growth by 0.5% this quarter to $29.33 again, a historical record for the BBC, notably this quarter's increases the 17th increase in the past 19 corners.
To briefly recap the past quarter on slide to first we continue to strengthen our financial foundation in Q4 by maintaining a high level of investment credit quality over 98% of our loan investments retaining our highest credit rating at quarter end up from 95 per cent last quarter.
Generating a return on equity of 13.9% on a trailing 12 month basis and registering that gross unlevered IRR of 12.2 per cent on our total unrealized portfolio.
With our current fair value three per cent above the total cost of our portfolio and a gross unlevered IRR of 16.4% on total realizations of $764 million.
Second our assets under management increased substantially the 818 million this quarter, 24% increase from 662 million as it last quarter and a 47 per cent increase from 554 million at the same time last year.
Our new origination originations included three new portfolio companies and 19 follow on investments and our current pipeline remains robust with approximately $79 million of net originations since quarter at.
Third and volatile economic conditions, such as we are currently experiencing balance sheet strength liquidity and M. A V preservation remain paramount for us.
Capital structure quarter, and was strong $356 million Mark to market equity supported $313 million of longterm covenant free non S. B I see that Ah.
$185 million, a long-term puffing free S. B I C debentures, and $12.5 million longterm revolving borrowings are total uncommitted undrawn lending commitments outstanding to existing portfolio companies are $29 million.
A quarter and regulatory leverage up 209% substantially exceeded or 150 per cent requirement.
We had $166 million of liquidity, a quarter and available to support our portfolio companies with $76 million of the total dedicated to new and follow on opportunities and R. S V. I C to fund and $53 million of cash it would be fully accretive to earnings when deployed.
As of today all this cash has been deployed.
And we demonstrated our ability to be opportunistic with the issuance of our new 87, and a half million dollars, 6% 2027 baby bond last week, which more than replenished to $53 million of cash on hand invested since since corner at.
As far as we know this is the only baby bond issue this year.
Finally based on our overall performance and liquidity the board of directors declared our quarterly dividend 53 cents per share for the quarter ended February 28th 2022, which was paid on March 28th 2022.
This quartersaw strong performance within our key performance indicators as compared to the quarters ended February 20th 21 in November 30th 2021.
Are adjusted NII $6.4 million this quarter up 10% versus 5.8 million last year, and a 5% versus 6.1 million last quarter.
Alright, Justin I I <unk>, it's 53 cents this quarter up from 52 cents last year and unchanged from last court, notably there was a two cents dilutive impact from the $27 million a <unk> a T M equity shares issued the past two quarters and not yet fully deployed.
Latest 12 months return on equity is 13.9% up from five per cent last year down from 14.6% last quarter.
And R. N. A V per share is $29.33 up 8% from 27 25 last year not 1% from 29 17 last quarter.
This is the highest quarterly M. A b per share for Saratoga investment since the inception of our management in 2010.
Comparing the two fiscal years, adjusted and I I was up 14% from $22.6 million to $25.7 million.
The adjusted and I I for sure of this year is $2.24 up from $2.02 last year.
And we will put <unk> five more detail later.
As you can see on slide three are assets under management have steadily and consistently risen since we took over the B D. C. Almost 12 years ago and the quality of our credits remain high with no current nonaccruals.
Management team is working diligently to continue this positive trend as we deploy are available capital into our growing pipeline while at the same time being appropriately cautious in this evolving credit environment with that I would like to now turn to call back over to Henry to review, our financial results as well as the composition and performance of our portfolio.
Thank you Chris.
Slide full highlights how key performance matrix for the fourth quarter ended February 28th 2022.
When adjusting for the incentive fee accrual related to <unk> capital gains in the second and Saint defeat calculation adjusted N I I of $6.4 million, what's up 4.3% from $6.1 million last quarter and up 9.9% from $5.8 million as compared to last year's Q full.
Adjusted and I, either shake was 53 <unk> up one Saint from 52 cents per shade last year and unchanged from last quarter.
Across the three quarters weighted average common shares outstanding with $12.0 million for this quarter 11.45 million for last quarter and 11.2 million for last years <unk>.
The equity issuances above a navy we did in Q3 and two full under our a T. M program resulted in a two saint dilution to N. I I. Appreciate this quarter and reflects the impact earnings while this capital is still unemployed.
The increase in adjusted and I I from last year, primarily reflects the higher level of investments and result in higher interest and other income with a U M up 24% since last quarter or state by low absolute interest rates with a weighted average current coupon on non C. L O B D C in basements decreasing from 9.6.
<unk>, two 8.5% a year over yes.
Adjusted and I I yield was 7.3%. This yield is down 40 basis points from 7.7% last year and unchanged from 7.3% last quarter.
The full this both quota we experienced a net gain on investments of $2.7 million or 23 cents per weighted average shade and a point 1 million dollar realized loss on the repayment of S. P. I C. One debate inches or one cent per weighted average shape, resulting in a total increasing that acids from operations of $8.4 million.
Or 70 <unk>.
The $2.7 million Nip gain on investments was comprised of point $1 million in nature realized gains and $2.9 million, a <unk> unrealized depreciation Oh say $5.2 million of deferred tax expands on unrealized depreciation.
The point $1 million nature allies game comprises in escrow payment.
$2.9 million need unrealized depreciation primarily roughly first $1.9 million unrealized depreciation on the company's P. D D a perfect stuck investment.
A 1.0 million dollar unrealized depreciation on the company's Artemis wax preferred equity investment point $8 million unrealized depreciation on the company's <unk> investment and $1.0 million unrealized depreciation on the company's <unk> equity investment, partially offset by the 1.6 million and one point.
$1 million unrealized depreciation on the company's CLO and JV equity investments respectively.
This depreciation reflects the volatility in the broadly syndicated learn market as of year end.
In addition, they were numerous other Nate appreciations across the overall portfolio, resulting in the non cielo portfolio total value increasing by 0.7% in total during the quarter.
Return on equity remains an important performance indicated for US which includes both realized and unrealized gains I'll return on equity was 13.9% for the last 12 months.
Both are adjusted L. T M N I I have 7.8, the same and our R. O E as well above all blended average cost of capital a full 0.6% as of year end competition.
Competition remains fees, but we continue to find opportunities to and above a cost of capital.
Total expenses, excluding interest and date financing expanses base management fees and it seemed to fees and income taxes remained unchanged at $1.8 million for this quarter compared to last year. This.
This represented 0.9% of average total assets on an annualized basis down from 1.1% last year.
We have also again added the K P. I slide starting from slides 28, 331, and the a P. I N next at the end of the presentation that shows our income statement and balance sheet matrix for the past nine Cortes and the upward trains we have maintained a particular <unk> city, one highlighting how a net interest margin run rate has continued to.
Increase in is almost quadruple since Saratoga took over the management of the BBC and also increased by 2%. The past 12 months, while still not th receiving the benefit of putting to work out a significant amount of Q full undeployed cash.
Slide full highlights the same key performance matrix for the full fiscal year when adjusting for the incentive fee accrual related to knit capital gains and the interest on the redeemed essay if baby bonds. During the cold period. This year adjusted and I I have $25.7 million was up 13.
9% from 22.6 million as compared to last year.
Adjusted and I I appreciate was $2.24 up 22 cents from $2.02 and adjusted and I I yield was 7.8% up 20 basis points from 7.6%.
For fiscal year 2022, we experienced a net gain on investments of $28.2 million or $2 and 46 per weighted average shape and a $2.4 million realized loss on the repayment of various pieces update or 21 cents per weighted average shape, resulting in a total increase in net assets from operations.
$45.7 million.
<unk> 99 per shape.
<unk> getting on investments included $13.4 million, a niche realized games and 17 million in nature unrealized appreciation for this year.
Moving on to slide six N. A V was $355.8 million as of this quarter and a 13.2 million dollar increase from last quarter and a 51.6 million dollar increase from the same quarter last year, primarily driven by <unk> realized an unrealized gains and Decretive ATM <unk>.
QWERTY issuances Deering.
<unk> approximately 390000 shades was sold for net proceeds of $11.5 million at an average price of $29 31, while 50000 shares were repurchased at an average price of $25 86.
<unk> was $29 53 as of year end up from $27.25 12 months ago.
This show up now also includes how historical N I V <unk>, which highlights how <unk> has increased 17 of the policy 19 <unk>.
No that's it value of steadily increase since 2011 and this growth has all been accretive as demonstrated by the consistent increase in in a V <unk>.
We continue to benefit from a history of consistent realized and unrealized gains.
On slide seven you'll see a simple a reconciliation of the major changes at N I I N N. A V. Appreciate on a sequential quarterly basis <unk>.
Starting at the top adjusted and I I appreciate remain the same at 53 <unk>.
Seven cent increase in non cielo net interest income from the partial impact of higher a U M and a seven cent increase in other income from high originations will offset by Tuesday decrease in cielo interest income, reflecting the volatile public market at two cent increase in base management fees and the 14th increase in operating expenses.
Two more normalised levels. In addition, about 2021 excise tax resulted in a force introduction and the Nathan you shares issued late to it to Saint <unk> dilution.
Moving onto the lower half of the slide this reconcile the 16 cents in a V P <unk> increase for the quarter <unk>.
48 cents of gap NII and 24 cents of Natrium is Gaines had unrealized depreciation on investments were primarily offset by the 53 cent dividend paid in queue for.
On Friday, if you will see the same reconciliation about the now on a sequential annual basis, starting at the top adjusted and I I appreciate increase from $2.02 per share last year to $2 24 per share. This year. The primary drivers were 44 cent increase in other income from higher originations offset by 20 <unk>.
Increasing base management fees from higher average <unk>. There was also a <unk> six cent deletion from increase shake count for the year.
On the lower half of the slide this reconcile the $2.08 and a V <unk> increase for the year.
The dollars 70 full of gap and I, I and $2 66 of <unk> realized gains an unrealized depreciation with partially offset by six eight <unk> related to deferred taxes on unrealized depreciation the.
The $1.92 dividend paid during the year at 25 cent income tax provision from realized gains in a text block has and at 21, St realized loss on extinguishment update.
Five nine outlines that dry powder available to us as of year end, which totaled $166.4 million. This was sprayed between now available cash Andrew and H B, a debate inches in Android secured credit facility.
This quarter and level of available liquidity allows us to grow assets by an additional 20% without the need for external financing with 53 million of it being cash and that's fully accretive to N I I wind deployed and $76 million of it S. P. A debentures with its low cost pricing also very accretive.
In January we close and institutional bond offering a $75 million $4 three 5% notes do 2027, and just last week, we close to $87.5 million $6 syrup is Saint baby born do 2027.
This baby bought liquidity is accretive two a year and liquidity outlined on this line.
We remind pleased with how available liquidity and leverage position, including access to diverse sources of both public and private liquidity and especially taking into account. The overall conservative nature about balance sheet. The fact that almost all out David longterm in nature with no. None spic's date maturing within the next three years and important.
Leave that almost all outdate is fixed rate and this rising rate environment.
Now I would like to move onto slides 10 through 13 and review the composition and yield of our investment portfolio flight.
Slight tan highlights that we now have $818 million of a U M at fair value or $796 million. It cost invested in forty-five portfolio companies once yellow fund and one joint venture officially percentage of 77% of our total investments of which 12% is in first lien lost out <unk>.
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On slide 11, you can see how the yield on our core BBC acids, excluding CLO as well as I've total S. A T yield has dropped below 9%. This year. This is primarily due to continued tightening of spreads in a market with another city basis points. This quarter. In addition equity positions. This fiscal you have increased significantly from $6 Sir.
<unk>, 10.7% in queue for much of that is due to the appreciation an existing equity valuations, resulting from strong performance. While some of the equity increase is also in the form of preferred equity veterans dividend income that is reflected in other income in the P&L rather than interest income.
As a reminder to 97.5% interest, earning portfolio is variable rate and 75% of our investments have a libel flew up 100 basis points or less so with a three month LIBOR breaking through 100 basis points recently, we expect to see the earnings impact uprising rates to our NII shortly.
10-K outlines the pro forma impact of rate increases to our portfolio, including a 17 Saint annual benefit to NII native incentive fee for the first 100 basis points.
The CLO, you'll decrease to 10.5% quarter on quarter, reflecting current market performance. The CLI was currently performing and <unk>.
Slide 12 shows how our investments are widely diversified through the U S.
And on slides 13, you can see the industry breadth and diversity that I've portfolio represents.
Investments are spread over 58 distinct industries with a large focus on healthcare software.
Services and education consumer and health care services. In addition to our investments in the CLO and JV, which I included here are structured finance securities.
Of a total investment portfolio, 10.7% consists of equity interests, which remain a very important part of our overall investment strategy for.
For the past 10 fiscal year is we have a combined $73 million of nature realized gains from the sale of equity interest or silo early redemption of other investments.
And a a two thirds of these historical total gains with fully accretive to N. A V. Due to the unused capital loss carryforward that were carried over from wind Saratoga took over management of the BDC and to a smaller degree the leery of realization last year and my <unk> to final write down. This year, we continue to have 1 million dollar cap it.
The last remaining at year end.
That's consistent realized gang performance highlights how portfolio credit quality is help grow R. N. A V and is reflected in a healthy longterm R O U.
That completes my financial and portfolio review I will now turn the call over to Michael <unk>, Chief investment officer for an overview of the investment market.
Thank you Henry.
I'll take a couple of minutes to describe our perspective on the current state of the market and.
And then comment on our current portfolio performance and investment strategy.
Since our last update in January we see market conditions, continuing to be very aggressive.
Exceeding where they were pre COVID-19, and very much a borrower's market.
Liquidity remains abundant.
And the first calendar quarter of 2022, we saw hot transaction volumes and M&A activity, albeit slow slightly lower than Q4, but continuing to be extremely robust.
We currently have an actionable deal pipeline.
Credit yields continue to be tight with high multiples and low absolute yields.
Broadly syndicated loan markets are experiencing much lower volumes year over year, and rising spreads, but we are not seeing a movement, yet and the lower middle market.
Hi demand for quality deals is keeping spreads tight <unk>.
Pricing and leveraged metrics are among the most competitive levels that we've ever seen.
Investors continue to differentiate themselves in other ways, such as accelerated timing to close and looser covenant restrictions.
Now that said lenders in our market are still wary of deadly capitalized deals and for the most part are staying disciplined in terms of minimum aggregate base level of equity and requiring reasonable covenants.
We're keeping a watchful eye on how continued inflationary pressures exacerbated by Russia, Ukraine conflict combined with expected interest rate hikes could affect the credit markets and the economy.
Despite this we have confidence in our strong position entering a possibly different credit and rate environment.
Our underwriting bar remains high as usual yeah, we continued to find opportunities to deploy capital as we will discuss shortly.
How old are your 2021 has been an incredibly strong deployment environment for us with a record origination pace.
Follow on investments in existing borrowers with a strong business model balance sheets continued to be an important avenue of capital deployment for us as demonstrated with 40 follow on to this past fiscal year <unk>.
19 in the last quarter alone, including delay draws.
Most notably we have invested in 13, new platform investments in this fiscal year.
Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams.
All of our loans in our portfolio are paying according to their payment terms.
And so in addition to not having any new nonaccrual accruals through Covid, we have zero nonaccruals across our whole portfolio.
We also recognized $28.2 million net realized an unrealized gains this fiscal year and the fair value of Saratoga overall assets now exceeds its cost basis by 2.7%.
We believe the strong performance reflect certain attribute of our portfolio that bolster its overall durability.
77% of our portfolios and firstly that and generally supported by strong enterprise values and industries that have historically performed well and 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 historically demonstrated a strong revenue retention.
Our approach has always been to stay focused on the quality of our underwriting and as you can see on slide 15. 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 our portfolio. It cost. We're at the top of the list of only 12 Bdc's that had a positive.
Number over the past three years.
A strong underwriting culture remains paramount at Saratoga.
We approach each investment working directly with management and ownership to thoroughly assessed the longterm strength of the company and its business model, we endeavored appear as deeply as possible into a business in order to understand accurately it's underlying strengths and characteristics.
We have always sought durable businesses and invested capital with the objective or producing the best risk adjusted returns for.
For our shareholders over the long term.
Our internal credit quality rating reflects the impact of Covid and shows 98.5 per cent of our portfolio at our highest credit credit rating as a quarter and.
Part of our investment strategy is to selectively co invest in the equity of our portfolio companies when were given that opportunity and when we believe in the equity upside potential.
It has been our experience that there is significant overlap between those businesses that meet our strict.
Debt underwriting requirements and those that possess attributes that make them attractive equity investments.
This equity co investment strategy is not only served as yield protection for a portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated throughout this fiscal year with our Texas teachers, Gray Heller passageways and village Realty realizations.
We intend to continue this strategy.
Looking at leverage on Slide 16, you can see that industry that multiples were relatively unchanged from Q3 to queue for.
Yet remain at historically high levels.
Total leverage for our overall portfolio was 4.52 times and increase from last quarter, reflecting primarily the additional capital wheel provided our existing portfolio companies.
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 the enterprise value of the businesses will sustainably exceed the last dollar of our investment.
In addition, this slide illustrates are consistent ability to generate new investments over the longterm, despite ever changing and increasingly competitive market dynamics.
During the first calendar quarter, we added two new portfolio companies and me 12 follow on investments.
And moving on to slide 17, our team's skill set experience in relationships continue to mature and are significant focus on business development has led to new strategic relationships that have become sources for new deals.
Our top one number of deal source remains robust, but has dropped in the past two years initially due to COVID-19, but more recently, reflecting our efforts to focus on attracting a higher percentage of quality opportunities most notably the number of deals executed during the last 12 months is markedly up from last year's pace.
Demonstrating that this more focused sources sourcing strategy is yielding results.
What is especially pleasing to us is that eight of our 12, new portfolio companies over the past 12 months or from newly formed relationships, reflecting notable progress as we expand our business development efforts.
In addition to our growth this past year since quarter, and we have executed approximately $85 million of new originations.
And two new portfolio companies and seven follow ons and had repayments of approximately $5 million in one exit for.
For a net increase in investments of approximately $79 million.
Now as you can see on slide 18.
Overall portfolio credit quality remains solid.
The gross Unlevered IRR unrealized investments made by the Saratoga investment management team is 16.4% on 764 million realizations.
On the chart on the right you can see the total gross unlevered IRR on our $746 million a combined waited S. B I C and BDC unrealized investments is 12.2% since Saratoga took over management.
The largest unrealized depreciation remaining due to Covid is our Nolan group investment.
Which is more dependent on in person human interaction and remains our only yellow rated investment.
The remaining unrealized depreciation reflects the current performance of the company, but does not change our view of the fundamental long term prospects for the business.
R. C. Two investment we've previously discussed is performed well and is almost back at par.
Even with Noland current markdown are overall portfolio of fair value is now almost 3% above its cost.
Our investment approach has yielded exceptional realized returns.
I'm moving on to Slide 19, you can see our first Spi C license is fully funded are.
Our second Spi C licenses already been fully funded with $87.5 million of equity of which $236 million of equity in SBA debentures have been deployed.
There are still $2 million of cash and $76 million of debentures currently available against that equity.
To summarize the past year the way the portfolio has proven proven itself to be both durable and resilient against the impact of COVID-19, and the subsequent market adjustment and volatility really underscores the strength of our team platform and portfolio and her overall underwriting and due diligence procedures.
Credit quality remains our primary focus, especially at times with such high activity levels as we're seeing now.
And while the world isn't continuous blocks, we remain intensely focused on preserving asset value and remain confident in our team and.
In the future for Saratoga.
This concludes my review of the market and I would like to turn the call back over to our CEO Chris.
[noise]. Thank you Mike.
As outlined on slide 20, our latest dividend for the quarter ended February 20th 2022 was paid on March 28, 2022 Board of directors continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors.
Moving on to Slide 21, a total return for the last 12 months, which includes both capital appreciation of dividends is generated a total returns a 14% in line with the BBC index at 14% are longer term performance as outlined R X flag.
Are three and five year returns places in the top half of all Bdcs for both time horizons over the past three years or 40 per cent return exceeded the 36 per cent return of the index all over the past five years or 91% return greatly exceeded the index is 53 per cent return.
523, you can further C. R outperformance placed in the context of a broader industry and specific to certain key performance metrics. We continue to focus on our longterm metrics such as return on equity <unk> net asset value per share performance and I yield a dividend growth, which are both consistent.
And at the top of the industry and reflects the growing value our shareholders are receiving.
Not only are we wanted a few bdcs to have grown in a V. We have done it <unk>, but I also growing any of the per share 17 of the last 19 quarters.
Moving on to slide 20 for all of our initiatives discussed on this call are designed to make Saratoga investment a highly competitive BDC is attractive to the capital markets community.
Believe that are differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions.
Ah differentiating characteristics include maintaining one at the highest levels of management.
History at 14%.
Access to low cost and long term liquidity with which to support our portfolio and make accretive investments recently increase with our new baby bond issued last week <unk>.
A triple B, plus investment grade rating and active public and private bond issuances solid who's to work earnings per share in an ideal.
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At the top of the industry.
High quality <unk>.
Active risk profile.
In addition, our historic part of credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry.
We remain confident that our experienced management team his stroke, historically strong underwriting standards and time and market tested best strategy service well in battling through the challenges in the current and future environment.
On our balance sheet, Apple structure, and liquidity will benefit Saratoga shareholders of an ear at longterm.
In closing I would like to again, thank all of our shareholders for their ongoing support and I would like to know open to call for questions.
As a reminder to ask a question you would need to press star one on your telephone.
And to withdraw your question just must of tank.
Once again, that's star one for questions. Please.
Part of the Kunai roster.
Our first question comes from the line of Mikey Sheen Ladenburg your.
Your line is open.
Yes, good afternoon, everyone hope you're well a couple of questions the portfolio looks pretty defensive but there are some investments not particularly large but they are in restaurants, retail and hospitality, which depending on the companies could be more cyclical some.
Curious, whether you're seeing any signs of things slowing down at these companies and how do you feel about their ability to withstand a potential recession down the road.
That's a good question Mickey this is Mike.
The way, we underwrite our portfolio and and all of the investments that we make is with a mindset toward.
Thinking about and modelling scenarios, where you might go into an environment, where there's less demand or there's there's a correction in consumer demand for instance in the.
And the <unk>.
Industries that you just referenced and so we're <unk>.
<unk>, giving thought to that as we as we structure the balance sheet and restructure where we sit on the balance sheet and the cases that you reference we feel very strongly for instance, we've got a couple of restaurant deals that we feel very comfortable with their performance to date as well as where we sit in the bar.
Balance sheet.
Relative to the enterprise value, we do have a hospitality deal that is one that we've been focused on and following for some time or or one that participates in the hospitality space, but the experienced that they're having there is really a reflection of COVID-19.
And I think as I referenced prepared remarks that is by far and away the industry leader.
And so we have a lot of confidence in the prospects of that business over time and feel like when we get through the other end of Covid it'll it'll it's performance should look more like it was historically so.
Overall, I think I will say I say this though again I want to reiterate every deal that we do we're looking at the fundamentals of the business not thinking about where we are in the economy at the time, but but always thinking about the fact that it could be during our investment period that we go.
Through potentially a downturn and so we're very thoughtful in terms of how we construct construct our debt instruments and we're reposition ourselves on the balance sheet. As a result, we very much gravitate to <unk>.
Businesses that just have very strong fundamentals, they're ones, where they offer a very compelling value proposition to their customers that we think is sustainable in in a variety of markets they've got <unk>.
Proven track record with really good management team. Some strong ownership typically very strong margins and those margins lead to healthy cashflow, with which to service and pay down their debt and generally they're recession resistant business as well you're not going to see us go into businesses that have <unk>.
Lots of volatility associated with them all businesses can get some impact as a result of a recession, but but generally as we look at our portfolio. We feel very good about how it's constructed as you as you referenced at the beginning.
Thanks, Thanks for that Mike That's really helpful. My next question is maybe a little more high level.
I'm curious about the new senior loan funds those are obviously quite popular amongst bdcs to potentially operate these vehicles.
In a different segment of the credit markets with with some more leverage in the BDC itself can usually take on but but you are unique in the sense that you own and manage a cielo, which is effectively a larger form of a senior low fun. So why why why add the senior loan fund instead of just expanding the seal Oh Bill.
<unk>.
Uhm, Mickey maybe I'll answer that.
I think there's an element of diversification that occurs there you know.
And and so that that's something that you know it is important that we also have <unk> call investors. It's another source of diversification in in capital and and is also another source of diversification in time.
[noise] cycle for our existing CLO, it's driven by certain dynamics and call periods and and that type of thing and so this allows us to to.
More diversification over time.
That's <unk> that's helpful. Chris I I I understand and just following up on the CLO I see that the estimated yield goes down to 9.3 on the equity from the 11.3 in the previous quarter and you know other vehicles in that space are seeing estimated deals and the.
Teens and cash flows north of 20, I I know that Henry said in the prepared remarks that the seal those performing but it you know are there some credit problems percolating <unk>, what's what's depressing the estimated yield there.
Yeah, Hi, Mick Henry So as you know that yield is sort of a output of the valuation and it's a it's a weighted average interest rate that gets calculated as in output of sort of how the evaluation is doing and if you look at this past quarter as a failure and a reminder out measurement period is as of the end of February what.
You saw when we did our valuation was that especially we made no changes actually to the valuation assumptions that they were unchanged for last quarter and when he came to <unk>.
One of the things you are safe.
As part of the valuation assumptions is any you know assets trading under you know a D O 785, or a certain level the number of assets that we defaulted in the valuation because they were trading under that level actually remain the same so definitely wasn't a reflection of credit really the main driver of the unrealized depreciate.
Action that you saw in the valuation and when the when there's unrealized depreciation the the interest rate, which is the output decreases as well was really old driven by a little bit of a temporary impact of the rising rate environment, because if you if you recall.
What happens is in a cielo the liabilities reprice a lot quicker than the acids. Firstly, so often assets are you know either one month, a three month repricing Where's the liabilities reprice immediately and then secondly also some of the assets have.
Flaws in place and that initial rising rates through February if you. If you recall three month LIBOR at the end of February was was only 50 basis points. So that rise that you stole a sort of through the end of February was not yet through the asset flows and so the net impact of sort of the timing and the flows resulted in a.
Reduction in the projected cash flows as of 228 and once those projected cash flows go down in the valuation that drives the the the the interest rate down as well. So you know it's it's.
It's based.
Based on based on what existed at end of February it's more of a temporary phenomenon than anything else.
Yeah, I was just gonna ask it sounds like that could reverse itself as you know.
Interest rates it'll go up.
Henry can you just remind us where where are you in the reinvestment period and the CLO.
We refined it just over a year ago and it's a three years. So the next refi period is and I think at the beginning of 2024.
Oh or at the end of the replacement period, where you would consider refining it again.
I understand that's it for me. This this afternoon. Thank you for your time.
Thanks, Vicki thanks to make it.
No. Thank you.
Our next question.
Price row from Pulse group you may begin.
[noise] [noise]. Thanks, good afternoon.
Let's say you wanted to just maybe maybe ask about the activity here Uhm post quarter, and and how you're thinking about.
The balance sheet.
And leverage on the balance sheet as well as usage of of the SDA.
Available SBA I see that you're you you haven't drawn down.
New SBA debentures, [noise] with with somebody to see a recent activity and just curious if some of the deals you.
You've done this quarter and would that would fit the spic's.
Yes, I'll I'll go first Bryce hi, there. So so yes, we've had quite healthy activity post quarter, and and and yeah. Some of that activity related to HB icy qualified investment so.
They want some drawdowns of our Spi debentures Uhm to partially fund that in addition, we have cash on hand, and then as you probably saw last week and as you know last week. We did it we did a baby bond as well, which afforded us the opportunity to lock in a rightful for longterm an instruction maybe one structure.
That from a structuring perspective unsecured longterm, we've always liked so we're we're sort of if you think of post quarter and we're using a combination of some of the remaining spic's debentures.
As well as cash and obviously the the new issuance, though we did is partially also a reflection of the healthy pipeline that you saw since quarter and and we still see in their eyes right. So opposed though this is Mike.
Post quarter and is is really a continuation of what you.
The trend that you saw in queue for where we had a healthy mix of new portfolio companies and since quarter and we've we've invested in two new portfolio of companies and then we've done a number of follow ons and that's sort of.
Indicative of what we didn't Q for as well.
Okay. That's that's helpful and.
Uhm.
Yeah.
In terms of what you're seeing from kind of repayment perspective.
We saw relatively light repayment activity here in the February quarter, and it looks like so far you know quarter to date you <unk> relatively lie is that is that something you.
You kind of expect to continue here as we as we look out for the balance of the year.
Well, well I'll I'll say Oh go ahead.
Before he got like I'd, just say, we certainly hope that would continue but but that is one of the things that's placed in Arkansas [laughter].
Go ahead actually that's that's that's the one the one thing that is the.
We we have no way of really determining precisely I'd say this though bryce the way we think about it in general is that <unk>.
25% to 30% of our portfolio on a normalized basis is what's likely to turn over.
In a given year, but having said that especially someone that's been through so many cycles I would say that often gets tempered and a rising rate environment because in a in a rate environment, where spreads are compressing and rates are declining you you have more repayments that may not.
B as a result of the change of control, but somebody just recapitalizing their balance sheet to take advantage of more aggressive capital markets.
I would expect that in this environment, we would see less of that all else equal and so it's possible that the repayment speeds could be less than that but very under terminable I think that that kind of general way. We think about it is 25 to 30 per cent of our portfolio that's likely to turnover.
Is kind of a base case that seems reasonable to us.
Okay. Okay. Thanks, a lot I'll I'll jump back into key to appreciate it.
Once again, that's a question star one.
First our next question was constantly item that Jayden Mmm Raymond James.
Hey, guys afternoon, and I. Appreciate you taking my questions wanted to follow up on the senior loan Fund J V was wondering if you could give us a sense of targeted size and Roy for the vehicle as well as kind of timing on as to when we could see a dividend from the membership interest peace.
Sure Hi, Matt Hope you guys are doing well, yes. So we.
We haven't disclosed all of the sort of the components. He ate because it's still early days. This past quarter was the first time that we did investments and it's it's around.
Just from the disclosure that we included in our K. It's I believe we've made an investment as of about 20, and it was like $25 million or so in total it's a form of data and equity and and.
Busy ramping up that joint venture so at the moment, it's still very much sort of in a in a putting too many putting the money to work phase from you know from from an <unk> perspective, I mean, obviously for us to do something like a joint venture and it's our first one that we did you know we're thinking that.
It's more similar to our to sort of if you think of the diversity of the different business lines. We have it's most similar to our existing cielo or our existing spic's basements from an <unk> perspective, and that's the reason that we sort of went into this first joint venture for Saratoga.
Got it that's helpful. Maybe maybe the pivot a bit to the origination front was wondering given the the uncertainty and the economic outlook, what's the appetite for kind of more junior capitals say second lien an unsecured debt.
That's a good question I mean, I think the approach that we've always taken is that.
We we underwrite the strength of a business model and then decide where is it that we can get the best risks risk adjusted returns for our shareholders and with that approach in mind. We've we've been careful to stay more often at the top of the capital stack then.
Then.
Middle spot in the capital stack, just because we found better risk adjusted return opportunities in this market with potentially.
A lot of reasons that you could look at the market and be concerned about where the economy may be down the road the bars, probably even a bit higher for for junior capital position. Then then it would be in normal times, let's say so I think we're gonna we're gonna continue to stick with our playbook, which is to lean heavily.
On first lien senior debt positions and that's what served us very well, we like being dollar one and a capital structure and we can do that in a way. That's that's very accretive for our shareholders stretching for yields, especially in uncertain times are uncertain capital markets, we've seen over the.
<unk> <unk> often doesn't pay now having said that you know we're always open minded to opportunities that may present themselves. So if we found something that was.
A super great opportunity to deploy capital in a very accretive fashion and we felt like it was.
Safe investment for our <unk>, our shareholders that that'd be something we'd consider but by and large were looking to do what we've done historically focused primarily on first lien debt securities.
Got it that's it for me I appreciate the time.
Thanks Smith.
Thank you and I'm not showing any further questions.
I'm gonna call back over to Chris Overbeck for any closing remarks.
Okay, well again, we appreciate all of your support interest in time and listening to our our your and report and we look forward to speaking with you next quarter. Thank you very much.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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