Q3 2024 Saratoga Investment Corp Earnings Call
Okay.
Good morning, ladies and gentlemen, thank you for standing by.
Welcome to Saratoga investment Corp's 2024.
Third quarter financial results Conference call. Please.
Please note that today's call is being recorded.
During todays presentation, all parties will be in a listen only mode.
Following management's prepared remarks, we will open.
On the line for questions.
At this time I would like to turn the call over Saratoga investment Corp's, Chief financial and Chief Compliance Officer, Mr. Henri Steenkamp, Sir Please go ahead.
Thank you I would like to welcome everyone to Saratoga investment Corp's 2020 for fiscal third quarter 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 S. E. 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 our forward looking statements unless required to do so by law.
Today, we will be referencing a presentation during our call you can find our fiscal third quarter 2024 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. Please refer to our earnings press release for details.
I would now like to turn the call over to our chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you Henry.
And welcome everyone.
Saratoga suggested that investment income per share increased 31% compared to last year.
Slightly yes compared to last quarter.
Sequential quarterly per share decrease decrease equates to the seven cents dilution from the increased weighted average shares outstanding from our recent ATM equity issuances.
So that cash yet to be deployed.
This quarterly performance significantly exceeded our recently increased dividend by 40%.
The level of interest rates stabilized in the recent quarter, resulting in elevated margins are growing portfolio relative to the past year.
There should be continued general contraction of available credit for small and middle market businesses.
Going back to all of our sponsor relationships, that's created an abundance of attractive investment opportunities from high quality sponsors.
Tractor pricing terms and absolute rates.
We believe Saratoga continues to be well positioned for potential future economic opportunities and challenges.
As credit structure with largely interest I'll make up next week long duration debt incorporating maturities, primarily two to 10 years out.
Positioned as well with the increase in interest rates delivering increased margins.
Most importantly at the foundation of our performance is the high quality nature of resilience a balance of approximately $1, one $1 billion portfolio, which has been marked down 3% overall versus cost.
<unk> bottomed out.
Our core BDC portfolio, excluding our CLO and J P is down less than 1% versus cost, including markdowns enforced specific credits, partially offset by $4 $3 billion of net realized depreciation and the rest of the core BDC portfolio.
This overall portfolio performance reflects the strength of our underwriting and our solid growing portfolio of companies and sponsors and well selected industry segments.
Our portfolio of strikers further manifested many key performance indicators this past quarter outlined on slide two including first quarterly adjusted NII increased by 44%.
Per share increased by 24 cents or 31% over the past year.
Current assets under management grew to approximately $1 $1 billion a record level.
Third our dividends increased to 72 per share up 6% from 68 cents per share in Q3 last year and over earned by 40% as compared to this quarter's dollar one per share adjusted NII.
We continue to approach the market with Prudence and decided that in terms of new commitments in the current environment. Our originations this quarter demonstrate that despite an overall robust pipeline. There are periods like the current one that made the investments we did not meet our high quality credit standards, we originate no new portfolio of investments in this fiscal quarter.
But I had 14 smaller follow on investments in existing portfolio companies, we know well with strong business models and balance sheets.
Originations this quarter totaled $36 million with $2 million of repayments and amortization.
Quality for this quarter remained high at 97, 1% of credits rated and our highest credit category.
By adding our solid investment this quarter as our third investment on non accrual with.
With 86% of our investments in quarter on.
Quarter random personally that overall portfolio generally supported by strong enterprise values of balance sheets and industries that have historically performed well in stress situations, we believe our portfolio and leverage as well structured for challenging economic conditions and uncertainty.
Saratoga has annualized third quarter dividends of 72 cents per share and adjusted net investment income of $1 one per share, implying an 11% dividend yield and a 15, 4% earnings yield based on its recent stock price of $26 16 per share on January eight 2024.
Sure.
Over earning the dividend by 29 cents this quarter or $1 16 annualized per share increases to NAV.
<unk> supports the increasing dividend level and growth and provides a cushion against adverse events.
And volatile economic conditions, such as we are currently experiencing.
She'd strength liquidity and NAV preservation remain Paramount for us.
First we raised $48 million of equity since the end of Q1 increase in our NAV.
$338 million as of May 31, 2023 to approximately $373 million on a pro forma basis.
The equity raise at the beginning of December usually on November 30 of 2023, and maybe as a basis. This equity provides additional balance sheet strength.
Our regulatory leverage.
Our strong originations.
And second at quarter end, we had a substantial $222 million of investment capacity available to support our portfolio companies with $145 million available through our newly approved Spic's refund $30 million of our expanded revolving credit facility and $47 million in cash.
Saratoga Investment's third quarter demonstrated solid performance within our key performance indicators as compared to the quarters ended November 32022, and August 31 2023.
Our adjusted NII is $13 $1 billion this quarter up 44% from last year and down 1% from last quarter.
Our adjusted NII per share is $1. One this quarter up 31% from 77 last year and down 6% from $1 eight last quarter.
12 months return on equity of six 6% up from 4% last year and down from nine 6% last quarter.
Our NAV per share is $27 42 down two 9% from $28 25 last year and down three 6% from $28 44 last quarter.
And our quarter end is up to $360 billion from $336 million last year, but down slightly from $362 million last quarter, and we will provide more detail later.
As you can see on slide three.
Assets under management have steadily and consistently risen since we took over the BDC 13 years ago and the quality of our credits remains high with only three credits on non accrual. Our management team is working diligently to continue this positive trend as we deploy our available capital into our growing pipeline, while at the same time being appropriately cautious.
While this past quarter and fiscal year I've seen some markdowns to a handful of credits on our core BDC portfolio as well as our CLO, our JV investments in the broadly syndicated loan market slide four demonstrates our long term average return on equity over the past 10 years is well above the BDC industry average as it remained.
Strong over the past decade.
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 five highlights our key performance metrics for the fiscal third quarter ended November 32023, most of which Chris already highlighted.
Of note the weighted average common shares outstanding of $13 1 million shares in Q3 increased from $11 9 million last year and $12 2 million last quarter.
Adjusted NII increase this quarter up 43, 8% from last year, but down 1% from last quarter, primarily from the impact of higher interest rates, both base rates and spreads with a weighted average current coupon on non CLO BDC investments increasing from 11, 7%.
The same to 12, 5% year over year and relatively unchanged from last year from last quarter.
Average non CLO BDC assets, increasing by 15, 7% year over year and by one 6% since last quarter and third other income, including a one 3 million dollar dividend received from the Saratoga investment joint venture.
Adjusted NII yield was 14, 6%. This yield is up from 10, 8% last year, but slightly down from 15.0% last quarter.
Total expenses for this quarter, excluding interest and debt financing expenses base management fees and incentive fees and income and excise taxes increased from $2 1 million.
Last quarter and last year to $2 $3 million this quarter.
Represented 8% of average total assets on an annualized basis unchanged from both Q3 last year and last quarter also.
We have again added the Kpis slides 28 through 31 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past nine quarters and the upward trends, we have maintained including a 57% increase in net interest margin over the past year.
Moving on to slide six.
<unk> was $359 6 million as of this quarter and a $2 $5 million decrease from last quarter, and a $23 $8 million increase from the same quarter last year.
This quarter. The main drivers of the decrease was the $10 million of equity issued under the ATM program and a 14.2 million of net investment income that was more than offset by $18 2 million of net realized and unrealized losses and $8 4 million of dividends declared net of stock dividend distribution.
Through the company's drip plan.
No shares were repurchased during this quarter.
This same chart also includes our historical NAV per share, which highlights how this important metric has increased 20 of the past 27 quarters with Keith sorry, with Q3 down $1 <unk> per share primarily reflecting the markdowns discussed over the long term on net asset value has steadily increased since two.
11, and this growth has generally been accretive as demonstrated by the consistent increase in NAV per share over the long term we continue.
To benefit from our history of consistent realized and unrealized gains.
On.
Seven you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis.
At the top adjusted NII per share was down seven.
Primarily due to the net dilution from the additional one 2 million shares issued in the recent ATM equity offerings with all the other changes offsetting each other.
In the lower half of the slide and NAV per share decreased by <unk> <unk>, primarily due to the $1.36 in unrealized depreciation and the 71 dividend recognized in the quarter exceeding the $1 nine and GAAP NII.
Slide eight outlines the dry powder available to us as of quarter end, which totaled $222 million. This.
This was spread between our available cash Undrawn, SBA debentures, and Undrawn secured credit facility.
This quarter end level of available liquidity allows us to grow our assets by an additional 20% without the need for external financing with $47 million of quarter end cash available and that's fully accretive to NII when deployed and $145 million.
<unk> SBA debentures with its low cost pricing also very accretive.
This quarter, we also added a column showing any call options of our debt. This shows that our $321 million of baby bonds effectively all out 6% plus debt is callable within the next year, creating a natural protection against potential future decreasing interest rates, which will protect our net interest margin and a <unk>.
Climbing rate environment if needed.
We remain pleased with our available liquidity and leverage position, including our access to diverse sources of public and private liquidity and especially taking into account the overall conservative nature of our balance sheet.
That almost all our debt is long term in nature and with almost no non spic's debt maturing within the next two years also update is structured in such a way that we have no BDC covenants that can be stressed during volatile times.
Now I would like to move on to slides nine through 13 and review the composition and yield of our investment portfolio.
<unk> nine highlights we now have $1 1 billion of AUM at fair value and this is invested in 55 portfolio companies, one CLO fund and one joint venture are first lien percentages, 86% of our total investments of which 62% is in first lien last out positions.
On slide 10, you can see how the yield on our core BDC assets, excluding our CLO has changed overtime, especially this past year.
This quarter, our core BDC yield was down slightly 10 bps to 12, 5%, primarily due to our knowledge investment going on non accrual with base rates relatively unchanged.
CLO yield increased to 8.0% from six <unk>.
Is there a percent last quarter, reflecting the decrease in value from weaker performance. The CLO is performing and current.
Slide 11 shows how rates have stabilized the past three months.
It's three months. So far is now basically the same as the average rates used in our portfolio and the closing quarter and rate. We will continue to benefit from these levels, while rates remain elevated and until rates reset.
Slide 12 shows how our investments are diversified through the U S.
And on Slide 13, you can see the industry breadth and diversity that our portfolio represents spread over 43 distinct industries. In addition to our investments in the CLO and joint venture, which are included our structured finance securities.
Of our total investment portfolio eight 3% currently consists of equity interest, which remain an important part of our overall investment strategy.
Slide 14 shows that for the past 11 fiscal years, we had a combined $81 6 million of net realized gains primarily from the sale of equity interests. This consistent realized gain performance highlights our portfolio credit quality has helped grow our NAV.
And as 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 Chief investment officer for an overview of the investment market.
Michael: Thank you Henry I'll take a few minutes to describe our perspective on the current state of the market and then comment on our current portfolio performance and investment strategy.
The overall deal market has remained relatively unchanged since our last update.
Michael: It seems to be in a bit of a holding pattern to see what happens in the broader macro environment.
While liquidity among private equity firms remains abundant and opaque economic outlook high financing cost and elevated levels of inflation continued to constrain the private equity deal market, which drives much of the demand for new credits.
Lenders, especially banks remain more risk sensitive backing off historically volatile sectors and taking a harder stance on the use of capital, which creates a lending vacuum for borrowers.
Overall lenders are requiring greater equity capitalizations, regardless of the enterprise multiples and in some cases have reduced their pace of deployment.
As well as their hold positions.
All of these factors are positive for us and support the confidence we have in our ability to carefully deploy capital in a manner that is accretive to our shareholders.
Leverage levels appear to be increasing and remained full for strong credits.
The growth in absolute yields appears to have abated and with fears of an economic slowdown dampening amongst some market participants we have seen some lenders offer tighter spreads to win mandates.
The Saratoga management team has successfully managed through a number of credit cycles and that experience has made us, particularly aware of the importance of first being disciplined when making investment decisions and second being proactive in managing our portfolio.
Michael: We're keeping a very watchful eye on how continued inflationary pressures in labor cost high rates in a potential economic slowdown could affect both prospective and existing portfolio companies.
A natural focus currently remains on supporting our existing portfolio companies through follow ons.
Our underwriting bar remains high as usual, yes, we continue to find opportunities to deploy capital.
Follow on investments in existing borrowers with strong business models of balance sheets continued to be a healthy avenue of capital deployment as.
As demonstrated with the 69 follow ons this calendar year, including delayed draws and.
In addition, we invested in nine new platform investments this calendar year.
The portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams, especially in this uncertain market environment.
There are a couple of credits specifically that are experiencing varying levels of stress that we have markdown this quarter that I'll touch on shortly.
But in general our portfolio companies are healthy and 83% of our portfolio is generating financial results at or above the prior quarter.
This quarter, we added ours knowledge investment to nonaccrual as they missed their October and November interest payments.
This means we have three investments on nonaccrual, including Noland and Pepper Palace.
After recognizing the net unrealized depreciation depreciation on our overall portfolio this quarter Saratoga core BDC portfolio is 9% below cost.
Despite the write down of a handful of specific assets. This quarter. The remaining portfolio generated a $4 $3 million of unrealized appreciation, reflecting certain attributes of our portfolio that bolster its overall durability.
86% 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.
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.
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 portfolio at cost.
We are only one of 13 bdcs that have had a positive number over the last three years currently fifth overall.
Even taking into account the challenges and corresponding write downs in a few of our portfolio companies.
Saratoga management.
Some total of realized gains and unrealized appreciation have far outstripped realized losses and unrealized depreciation in our core non CLO portfolio over time.
Our internal credit quality rating reflects the impact of current market volatility and shows 97, 1% of our portfolio at our highest credit rating as of quarter end.
A 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.
Equity co investment strategy has not only served as Youll protection for our portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated on the slide in a previous one.
Michael: And we intend to continue this strategy.
Michael: Now looking at leverage on Slide 16, you can see that industry that multiples multiples have come down this year from their historically high levels.
Total leverage for our overall portfolio was four three times, excluding norland pepper pallets and solids, while the industry is now again it at above five times leverage.
In addition, this slide illustrates the strength of our deal flow and our consistent ability to generate new investments over the long term despite ever changing and decreasing competitive market dynamics.
During the fourth calendar quarter, we added no new portfolio companies and made 15 follow on investments.
Despite the success, we're having investing in highly attractive businesses and growing our portfolio and the healthy deal flow. We are seeing it is important to emphasize that as always we're not aiming to grow simply for growth's sake.
Especially in the face of uncertain macroeconomic environment or capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment isn't a durable business and will be accretive to our shareholders.
Slide 17 provides more data on our deal flow previously discussed.
Demonstrating how our team's skill set experience and relationships continue to mature and our significant focus on business development has led to multiple new strategic relationships that have become sources for new deals.
Five of the nine new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts.
The significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.
As you can see on slide 18, our overall portfolio credit quality remained solid.
As you can see on the chart on the left the gross unleveraged IRR unrealized investments made by the Saratoga investment management team is 15, 7%.
$917 million of realizations.
On the chart on the right you can see the total gross unlevered IRR on our $1 2 billion of combined weighted Spic's BDC unrealized investments is 10, 9% <unk>.
Including the markdowns this quarter.
Notably the unleveraged IRR on the combined realized and unrealized $2 $1 billion.
Capital invested by the Saratoga management team is 13, 8%.
We now have three investments on nonaccrual with Pepper Palace classified this red and Nolan and solids as yellow.
No one has been yellow for awhile and no significant change to the to the Q2 Mark occurred.
Pepper Palace continued to suffer from poor performance and liquidity issues, reflecting the $4 $1 million markdown this quarter.
We are working with the sponsor and then a financial advisor to assess future options and evaluate the ongoing viability and profitability potential of the business and the current consumer retail environment.
The remaining fair value of this investment is $5 million.
Solid started facing liquidity issues this quarter, resulting in its and the ability to pay its October and November interest on time.
Which has led us to move this to nonaccrual.
Despite recent challenges, we believe that the core solid business model and value proposition remains solid evidenced by the company's reasonably stable student enrollment trends.
In addition to these nonaccrual investments we also want to highlight two other investments that we marked down this quarter.
We marked our <unk> investment down by $8 3 million of which $6 $1 million was the reversal of appreciation previously recognized and our common equity.
This marked down reflects a combination of factors, including recent weaker financial performance and a significantly lower market multiple due to changing market conditions.
We continue to believe that all of our debt is covered by the enterprise value of the business and that the ultimate equity realization will be determined by market factors and company performance.
We also marked down our <unk> investment by $1 $8 million, primarily related to our equity position.
This reflects weaker financial performance driven by lower revenue growth than expected amid.
Amid a weaker macro selling environment.
Corporate learning and development.
The company is a blue chip customer base and we continue to believe that the business offers market, leading technology and a unique value proposition within this space.
In addition, the CLO and JV have had a $6 $5 million of unrealized depreciation primarily driven by the performance of certain individual credits in the broadly syndicated loan portfolio.
Of note is that the rest of the core BDC portfolio has continued to perform well, resulting in $4 3 million of net unrealized appreciation across our remaining 50 portfolio companies.
82% of our portfolio is generating financial results at or above the prior quarter.
Sure.
Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long term performance remains strong as seen by our track record on this slide.
Moving on to Slide 19, you can see our first and second Spic's licenses are fully funded and deployed with our first license recently surrendered.
We are currently ramping up our new Spic's three license with $145 million of lower cost Undrawn debentures available, allowing us to continue to support U S small businesses.
This concludes my review of the market and I'd like to turn the call back over to our CEO Chris.
Alright, Thank you Mike.
As outlined on slide 20, our latest dividend of <unk> 72 per share for the quarter ended November 32023 was paid on December 28 2023.
This is the largest quarterly dividend in our history and reflects a 6% and 36% increase over the past one and two years respectively.
The board of directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors, including the current interest rate environments impact on our earnings.
Recognizing the divergence of opinions on when interest rate cuts will commence in at what pace and we expect that overall economic and economic performance Saratoga Q3 over earning up its dividend by 40% or $1 one per share versus <unk> 72 per share. This quarter provides a substantial cushion should economic conditions.
Right or base rates decline.
Moving to slide 21, our total return over the last 12 months, which includes both capital appreciation and dividends has generated total returns of 14%.
Uncharacteristically unprovoked underperforming the BDC index at 30% for the same period.
Our longer term performance is outlined on our next slide 22.
Our three and five year returns quite for us in the top quartile of all Bdcs for both time horizons over the past three years, our 66% return exceeded the average index return of 45% over the past five years, our 100% return exceeded the index's average of only 64%.
Since Saratoga took over management of the BDC in 2010, our total return has been 712% versus the industry is 241%.
On Slide 23, you can further see our performance placed in the context of the broader industry and specific to certain key performance metrics.
We continue to focus on our long term metrics such as return on equity and NAV per share NII yield and dividend growth and coverage all of which reflects the growing value our sure shareholders are receiving.
NAV per share is down two 9%. This past year, we continued to be one of the few bdcs to grow NAV over the long term and we have done it accretively.
These differentiating characteristics. Many previously discussed include maintaining one of the highest levels of management ownership in the industry at 13%, ensuring we are aligned with our shareholders.
Looking ahead on slide 25, we remain confident that our reputation experienced management team historically strong underwriting standards and time and market tested investment strategy will serve us well in navigating through the challenges and uncovering the opportunities in the current and future environment.
And that our balance sheet capital structure, and liquidity will benefit Saratoga shareholders in the near and long term in closing I would again like to thank all of our shareholders for their ongoing support and I would like to now open the call for questions.
To ask a question. Please press star one on your telephone and wait for your name to be announced.
All your question. Please press star one again, please standby, while we compile the Q&A roster.
Michael: Okay.
And our first question comes from Eric.
Eric Zwick with half the group your line is now.
Good morning, everyone.
I wanted to start first with that one question on the pipeline I Wonder if you could kind of break out how you characterize the opportunities that are likely to enter the portfolio in terms of new investments versus.
Existing it sounds like at this point based on what transpired in the last quarter. There are certainly more attractive opportunities to extend.
Two existing investments I'm curious if your kind of near term outlook for the next quarter or two with similar or if youre seeing some more attractive opportunities.
For new investments.
That's a good question.
We are continuing to see good opportunities to deploy capital we didn't find anything in this past quarter and that was mostly reflective of the fact that debt.
The deals that we saw in terms of the leverage that they were looking for relative to the strength of the business model.
We just couldnt get comfortable it didn't didn't pass our underwriting bar.
I think.
<unk>.
I wouldn't say that that is characteristic of our pipeline in general but that certainly was characteristic of what we ended where we ended up this past quarter.
The pace of investment that we're experiencing is certainly being influenced to some degree by.
Lower deal activity just in general in the middle market.
We're still seeing a disconnection between.
What value sellers thinks that they ought to fetch and what buyers are willing to pay in this market. So there's not we're not seeing as much deal volume as we've seen historically, but we still are seeing healthy activity and have confidence that we will find opportunities to deploy capital.
Yes.
That's helpful. Thank you and then you mentioned in the comments and one of the slides that you've got quite a bit of liquidity on hand, right now and the ability to potentially grow.
AUM is as much as 20% without harnessing kind of tapping the external financing just curious does that.
Our goal is to actually get that 420%.
And if so over what time horizon would you expect to put that to work.
Yes.
Go ahead go ahead Chris.
Sorry, Mike.
And it had a very high level.
We've tried to run our business with ample liquidity to take advantage of opportunities and.
Michael: So we have.
The dry powder available we have a.
Large.
Group of portfolio companies have continued to grow as you saw this past quarter. There's a lot of follow on opportunities, we're financing a number of buildups and so.
Want to make sure that we're there for and available to be there for our portfolio companies.
When they when they when they need the capital.
For whatever reason, mostly positive lesions.
So we want to have that available for that and then we also want to be available for new opportunities for our existing relationships and building new ones and so that's what that's the stance we've kind of maintained for for the whole time last 13 years.
And Thats why we continue to maintain as to the pace of deployment and our expectations for that I mean, that's that's sort of.
Not in our control I mean, I think as Mike said, just earlier than we had a lot of opportunity. He could've put out a whole lot more money this past quarter, but.
But doing so so we're going to pick our spots, we're going to support our portfolio companies.
When merited and we're going to be.
Selective.
Michael: Going forward so.
We can't give you a hard forecast for when and how we would deploy that and it's really going to be subject to the opportunity set both from our existing portfolio and for new opportunities.
The only thing I'd add to that too just to augment that as debt.
You had asked if you had a goal to deploy that additional capital we tend not to think about our business that way as Chris was.
Explaining we just really set ourselves up for the best opportunities we can to.
Deploy capital in a way that we feel very comfortable will be accretive to our shareholders.
And let the rest take care of itself, but definitely don't set goals around kind of where we want to move the balance sheet, it's really more a function of what opportunities, we see and if we see those we certainly want to avail ourselves of.
Those opportunities and let the shareholders benefit from it.
Got it and one last one and I'll step aside just in terms of the village.
<unk>.
Yes, I think I didn't get the exact quote, but I think you mentioned your the core business and operating trends remained solid but they did miss.
Michael: The two interest monthly interest payments so just curious.
Balancing that as to what led to their decision to skip those payments and.
Any timeframe expectations for for when they might return to accrual.
The company is.
<unk>, some execution and cost challenges that have constrained their liquidity.
And we're working with the sponsor and management on some initiatives to improve performance.
But the decision certainly was made as a result of those liquidity challenges too.
Suspend interest payments.
We are.
As we look at the core business, though a lot of the fundamentals that we originally liked in the business remain intact.
And so we're seeing.
A lot of stability in terms of student starts and enrollment and things.
0.2 fundamentally to feel comfortable that the business model has a.
Compelling value proposition for its customers.
Work to do on the execution side can't can't really put a date or time around.
Kind of a timeframe for improved performance, but thats what were focused on for sure.
Thanks for taking my questions.
Thank you.
Enrollment for our next question.
Our next question comes from Mickey Schlein with Ladenburg Thalmann.
Line is now open.
Yes, good morning, everyone.
Wanted to follow up on your comments on Rio.
It sounded like you are.
<unk> did most of the decline in the valuation to comparable valuation, but I saw in the Q that you also mentioned higher leverage.
Is that due to declining EBITDA or a bank coming in ahead of you or could you just.
And on that please.
There is higher leverage because we've been supporting the growth of the business with our own debt. So theres nothing thats come in in front of us, but there is a higher debt load.
Most of the change just to reiterate in value was due to a.
Change in multiple as we looked at macro factors and just where valuation is.
Bind with.
Lesser performance of the underlying business.
And then the thing I'd point out two Mickey is that the vast majority of that write down was reversal of a appreciation that we had unrealized depreciation that we had.
Before that.
I understand thanks, thanks for that Mike.
Your last fiscal quarter also includes December which is historically.
Months of the year for Bdcs.
Could you give us any sense of how active you were in December in terms of fulfilling your pipeline.
I mean, we tend not to get into that that detail post quarter end, but I think.
We've continued to support our portfolio companies kind of consistent with what we've done in the past haven't seen a whole lot of change in sort of.
What you saw through the last reported quarter.
Okay. My last question is when.
Regards to the.
Notes coming due in March.
I understand that they are extendable at your discretion.
For a year.
Those are at $8 75, I'm just.
Trying to understand whether you are more predisposed to try to refinance those or just.
Just extend them for a year and see how rates go.
I don't think we've made a decision on that yet we still got two and a half months to go Mickey.
So I think we're still sort of considering our options, but it's obviously nice to have the flexibility.
With an instrument like that especially a short term instruments like that.
All right.
If I could just add also to that.
Michael: Sure.
I think inside of that that Optionality to do that I think that's something that.
Yes.
We tried to preserve I think Henry did a very good job in negotiating that to allow us that option I mean, it could have been straight up to your facility, but we gave ourselves the option.
To be able to repay it so I think it's reflective of how we think about our capital structure relative to potential changes in interest rates. The other thing I would say this is sort of a broader.
Onset.
Running through the broader marketplace in the BDC marketplace.
What is the course of interest rates next year.
What people expect what what's going to happen and.
And I think the core answer is that nobody really knows I think if you were to put up the charts of all the forecast.
Short term interest rate cuts.
That had been forecast over the last several years I think they've been universally wrong.
So we just don't know enough right now about.
The market rate for four for debt instruments to make that call just like what's happened in the last two and a half months what people would've said, where did say two months ago and what they've been saying last couple of weeks is pretty radically different ad.
There's a lot of more information, we're going to get before we have to make a call on that.
As Henry said, so we're going to wait until the <unk>.
Right up to it and obviously evaluate.
All our financing alternatives relative to that expansion.
Yes, I completely agree with you I know I know that we don't know where interest rates are going to go in.
I understand your rationale and and I suppose it's similar with the undistributed taxable income you seem to be carrying right. That's something you'll evaluate sort of I guess in the middle of this year is that absolutely I mean, we actually we talk about it the whole time and.
Again, it's being able to have optionality and flexibility, especially at a time like this we went sort of at a moment in the market way.
A lot could be changing not Mike, but it's just nice to have that flexibility right now.
I understand that's it for me this morning I appreciate your time. Thank you.
Thank you. Thank you.
Thank you.
One moment for our next question.
Our next question comes from Robert Dodd with Raymond James Your line is now open.
Hi, guys first question, if I can on leverage obviously.
Regulatory leverage down.
Versus where it was a couple of quarters.
With raising equity and the manager.
Supporting that financially.
So are you is this today, we are way you're kind of we should expect you to remain comfortable in the 100 sixty's or is it contingent or market. If the market gets more active you're willing to go.
And again on the makeup between leverage side can you give us any any thought I know you don't give us an explicit target.
Some framework surround.
Would expect leverage to.
To play out.
Sure.
Again that is.
To answer the last question, that's something we think about talk about.
Continuously.
I think also just going back to.
Consistent theme on this call and all of our prior calls.
We tend not to forecast and project, what our deployment is going to be.
Against any kind of.
Goal per se.
We we try it.
We try and address each opportunity as it as it comes in.
And as you can see in the last quarter, we declined to.
Okay.
Further new platform investments.
That wasn't driven by.
Any.
<unk>.
Sort of metrics that we're operating to it but it really was sort of on a case by case basis not.
Seeing the risk reward.
Situation fitting within what we felt it should.
And we will continue that going forward. So we really.
It's possible we may see some true.
Tremendously opportunistic deals coming our way in which case, we will be favorably inclined.
But.
But we're going to be judicious and prudent as we said about how we deploy relative to sort of everything obviously leverages a factor.
Opportunity as a factor in credit quality as a factor. So I guess, it's difficult for us to ask answer that question for you prospectively, because it's got to be a function of the opportunities that are presented.
Generate for ourselves.
Got it. Thank you I think that actually is pretty clear and I appreciate that.
I did want to ask a couple of questions and so on.
Michael: <unk> was there any.
Negotiation was shown with the sponsor as to whether to.
So don't pay or.
Potentially pick the interest if this is a transitory cost issues you believe it's fixable.
<unk>.
With Taco.
Sure.
But the straight to not paying interest.
When pick has been increasing across the industry. There is more and more of it would have stood out that much. If you've done can you just give us any any thoughts on why is that.
I didn't come up in your view or was rejected.
Well.
It's a good question, we're continuing to work with the sponsor and the management team in terms of one focusing on improved performance this year.
And then and then the general direction that the business is going to go.
Michael: <unk>.
It's interesting if we were to convert to a pik toggle, let's say.
In that case, typically that kind of discussion becomes one where you are.
You are agreeing to not get paid your interests.
And youre, hoping to get something in exchange for it I think our view is that debt.
At this point that interest is due so it's.
From a legal perspective, the interest is accruing legally not from an accounting perspective, because they are not paying on a current basis, but that that interest is still due to us.
If we were to convert to any of these negotiations if you convert to a pik toggle youre sort of saying to the sponsor it's okay not to pay us and we're fine with that.
Given all the circumstances here and the fact that we're not being paid we prefer to be in a position where.
Kind of we own to default if you will.
And it allows us to.
Negotiate.
Kind of a course of action from a better position of strength at this juncture.
Got it appreciate that and then.
If we look back two years ago.
The asset was mark.
Well above cost across all of your security tranches and you put in additional capital a couple of times.
Since then.
It seems like it's been on a gradual valuation.
Michael: Deterioration.
Two years ago.
It looks like today, it's not performing.
But what it would.
Okay.
Prolonged period, and it's been gradual deterioration.
Okay.
One thing that works to fix.
Fixed I mean I understand your comments do you think the equity markets primarily.
Sure.
Comps and performance but.
Yes, it's been I think 25% of your unrealized depreciation in the last two years that one asset.
Performance It would have been noticeably better with this asset had been performing better.
What is the problem that.
Still doesn't seem to have been resolved.
A couple of years.
Yeah.
Ill try to try to be careful in terms of.
Michael: This fund through investment and you don't want to say too much but anything you can would be appreciated.
Sure. So if you think about valuation of this business and we are a material component of the equity here.
A lot of the driver of a value of a business like this is the rate of growth.
And then there's also just macro multiples.
That affect the value in general in this case.
Michael: It's not that the businesses performance has deteriorated.
In a really meaningful way, but they have faced growth challenges so for a business where a lot of that value driver is dependent upon continued growth when that growth.
It gets dialed back the valuation multiple has to come in unfortunately, and that's what we've experienced here when you coupled that with an overall.
Decline in valuation multiples in the macro environment. The combination of those things is has caused the value to come down. So we're obviously very disappointed because we were quite excited about the appreciation that we're experiencing in this this asset we think that the primary volatility around it is in the <unk>.
Equity.
Of course, but.
And the vast majority of our capital is in the debt.
Got it appreciate it thank you.
Thanks Robert.
Okay.
One moment for our next question.
Our next question comes from Casey Alexander with Compass Point Research and trading your line is now open.
Hi, good morning.
First question.
With little series of questions here.
There was a quarter over quarter reduction in pick income.
Speaker Change: Can you tell us what that is attributable to.
Okay, just trying to look at it I think it was actually <unk>.
Part of it was all age I think because there was.
Component two solids as well Casey and so obviously going on to nonaccrual. We also has stopped the pik on <unk> I mean <unk> is very good.
In general for US. So it has an outsized impact just because not that it was a huge pick amount, but it has an outsized impact because the overall amounts.
Okay.
That's fine thank you.
<unk>.
As part of your Optionality is a deemed dividend considered part of that Optionality for some of the.
Speaker Change: <unk> income.
Yeah.
What do you mean by deemed dividend Casey.
I think you know what I mean.
You mean cash or noncash.
Speaker Change: Yes, so noncash dividend.
Well I think.
You, obviously know that that is an option yeah, absolutely that.
The statutory.
Tori requirements for BDC has to pay.
Pay out anything.
Is it has an option for a stock issuance.
That is.
Statutory option that is out there we have not made a decision one way or the other on how to address that.
Speaker Change: Okay.
Does the JV owned any pepper palace or knowledge.
No.
Okay.
Is is the CLO.
Experiencing when you talk about.
Individual credits as it experienced actual defaults in the CLO.
No, it's mainly been it's not necessarily defaulting assets, but the market price of a handful of assets has deteriorated significantly from a mark to market, which then makes it classified as a default for purposes of the valuation, which obviously lowers the principal cash flows that you're using.
Your evaluation.
So in essence it.
It's the bid price that puts it in violation of the CLO measuring stick is that what you mean.
Well just for valuation purposes Sofa, Mark moved from let's say 80 to 50 it means.
Not necessarily in default from our payment terms perspective, but for purposes of our valuation we treat it as a default. So we take it as cash flows out of the valuation.
Okay, Great Alright, and then Chris.
I'd like to invite you to.
Take this opportunity to have kind of an open discussion with your shareholders about the manner in which you guys are raising equity.
And why you think shareholders should be comfortable with the manner in which you are raising equity in the market.
Sure and I think Thats fair.
Good question.
I guess.
When we started 13 years ago I think that the.
BDC had 50.
<unk> million dollars.
<unk>.
Of equity.
And today, we're at $373 million of equity.
<unk>.
The bulk of that is country share issuances overtime and.
And Unfortunately, we've also had some very good success in terms of capital gains and so our retention of capital gains is also contributed to that and over that period of time.
We've taken.
The BDC from kind.
Kind of.
Inconsequential BDC to certainly consequential relative to our.
Our niche in the marketplace. If you will but we're substantially larger than we were or we like 80 something million now were $1 billion, one and so we built our franchise very substantially and as you know.
And as you point out.
There's there's leverage capabilities and a BDC that have limits and.
And in order to grow what has to what has to raise equity.
Two to grow.
And we have done that over time.
Pretty much we bought it when we when we can and when we could have and the results I think if you look at our.
Performance total return performance I think all the equity.
Relative to almost every period I mean, if you've got the Super short periods.
Trading and things like that.
Less than a year less than six months, maybe thats a problem, but I think if you look at annual periods, our multiyear periods for all the <unk>.
Parties that have invested in our equity and stayed with it for.
A year or more.
Sure that every single person has had a very very sizable returns.
Speaking has outperformed.
The industry average of the BDC. So we think all our equity issuances have been.
Speaker Change: Accretive if you will for people that bought that stock that it's gone up and our total return basis.
I think if you look at our stock right now.
We have close to 16% earnings yield.
Thats very substantial earnings yield, which I think has helped.
Helping too.
Build or.
Build our equity.
Cover our dividend by 40% So I think the stock is.
Certainly from our standpoint, our internal ownership.
<unk> attractive stock to own now we have traded below NAV.
And as you know.
One doesn't issue stock and issue stock below NAV at the BDC level and so as a manager and this past year we've issued.
Speaker Change: About $50 million of stock and the manager itself is invested.
Speaker Change: $5 million.
So basically support our subsidize that so that the BDC when it sells that stock yes.
3% of NAV.
And I think that that.
<unk> by the manager is reflective of our.
Belief in the business and that in essence, its an investment by the manager and our equity and our business and the growth and opportunities.
Speaker Change: That we see in the business and I think if you look across the shareholders were not selling stock I think <unk>.
Buyers many of us reinvest in our stocks. So we are believers in our own stock. The manager is a very firm believer, having invested more in that stock and there's obviously there's two.
There's more things like this but theres two two things obviously that we have to watch more one is growth.
And without equity as the cornerstone given leverage limitations on Bdcs, we can't grow unless we have equity and so we've been issuing equity to support our growth our growth has been a profitable growth I think.
Obviously this quarter.
A lot of things converged.
And so you would have.
The best news this quarter relative to some others, but if you look over the long long haul we've had very very positive performance, which we expect to continue and we're very we're very sanguine about the opportunities in our field, but in order to grow.
Need to issue equity and so we took advantage of some opportunities, including our willingness to invest to support the BDC.
In the past period of time, the other element, which you and others have commented on is the leverage ratios that Saratoga has and we kind of have a statutory leverage and we also have a.
Yes.
But we have to comply with it.
Certain technicalities with Spi see counting.
We can borrow more than the statutory.
Limits for regular way BDC are and so we have.
Historically taken advantage of that opportunity.
Over the long run and it's worked out very very well for US we've had lots of discussions on these calls about.
The character of our leverage.
A lot of people point to absolute leverage and say, okay. Your Leverages X.
And thats quote too high or higher than everybody else and things like that and we have said well.
Speaker Change: At a point in time that's right.
The dynamic of our leverage and the term structure of our leverage and the absence of covenants in the absence of mark to markets and the absence of.
The advance rates and all those types of things are.
Our leverage is very well structured and very well structured for harsh ups like we had in COVID-19.
Everything sort of fell apart I mean, we were able to go forward and put money to work and support our portfolio companies and support our sponsors because our leverage structure was.
Speaker Change: Very solid and was not being perturbed by the external environment, we're very prominent BDC as an hour.
Our universe.
Speaker Change: Yes.
To cover.
Out of out of Formula.
Speaker Change: Asset based loan requirements to basically stay in business and so so so I think our leverage structure has been time tested and.
And so.
But.
So we're very comfortable with it as we've said many times.
There is there are absolute metrics associated with leverage and the issuance of equity basically allow us to have more either cushion in a down environment or support opportunity and an app environment or upset or opportunities apart. So.
I think we've been very.
I think our equity performance I think.
I think it's been very good all along for anyone who has ever gotten into the stock and we would anticipate anyone who's bought the stock.
<unk> will share in that performance and we think our stock is.
We don't think people are looking at the right way and.
Where else are you going to get 16% earnings yield.
At this point in time.
With the type of historical performance and portfolio that we have this up so we think we think <unk> was a very good value at this point in time.
Speaker Change: Well I appreciate that answer.
Looking at slide 21, and.
The period of underperformance of Saratoga relative to the BDC index kind of clearly corresponds with the time period, where you have been in the market and selling stock at around 90% of book.
So can.
Can you explain until a shareholder is confident that you are no longer in the market and 90% of the book and look I. Appreciate the fact that you are making up the difference at the manager I understand that fully but you still supply in the market at 90% of the books.
Can you tell me as a shareholder I should be willing to pay more than 90% of book If I know that you are willing to sell stock at 90% of book.
Well when you say you.
The BDC is not selling at 90% of book.
Yes.
Okay BDC is selling okay.
That's fine.
By the way.
That's your answer that's your answer.
But just by the way.
Im not sure Youre your headline that.
The supply is coming into the market at 90% book, Okay, Youre, making up the difference, but the supply is coming into the market at 90% of book, that's where we know that supply is coming.
Alright so.
TB.
Speaker Change: Why because I want you to be willing to pay more than that.
While the BD until Theyre confident that you are no longer in the market at that level.
Well first of all I'll just say this.
But it's going into the BDC at 100 cents. So the BDC is getting a I'm aware of that alrighty acknowledged that.
Okay, and then whether we're in the market.
Not I mean.
Bob.
We can't say just as we've answered these other questions about.
About.
The.
What are how.
What are going to deploy over the next period of time and our targets versus leverage.
It's a consistent answer relative to this which is it's going to be.
It's going to be a set of opportunities I mean these.
<unk> sales were done in blocks these were not.
These were not like open market sales superblock sales to specific investors with long term investment outlook. So.
<unk>.
<unk> slowed in the all those types of things.
Again.
Not.
Driving what those investors are thinking and how they are doing it but but.
Those investors arent buying.
In blocks at this scale.
To them kind of trade out.
Speaker Change: And the volume situation of our stock Okay. So so we believe there they are long term investors. So so on the one hand, you're saying Oh, yes, it's adding to the supply, but it's adding to the supply of people that are long term holders or not.
It's not such a great idea to buy a big block and then try and get out of it right away I mean, as you know alright.
Well, let me ask you one more question.
Alright.
Shares that you have already sold in the fourth quarter.
Hey.
Speaker Change: Will.
Will you be.
Making up the difference to NAV of $28 44, a $27 42.
Hey, Matt.
The higher number right Okay alright.
Alright. Thank you that's all my questions. Thanks for taking my questions. Okay. Thank you.
Thank you.
One moment for our next question.
Our next question comes from price ROE with B Riley. Your line is now open.
Hi, Thanks, Good morning, Tom.
I don't necessarily want to extend the call here, but did want to ask a couple of questions.
Wanted to follow up on that last discussion with Casey.
Chris certainly understand the quality of the leverage profile.
And do acknowledge that.
That balance sheet leverage is absolutely on an absolute basis is elevated relative to the space.
Speaker Change: And appreciate that you all are subsidizing the.
The equity issuance here to allow the BDC to take it at 100% of NAV to what extent are you.
Is the manager willing to subsidize subsidize, especially with the stock now down in the let's call it 80%, 85% of NAV range now.
Well again.
That's our perspective.
Jen and I hope you appreciate that we have to be very careful on what we say we do prospectively.
I think much like our investment.
<unk>.
Discussions.
Selling stock is also similar I mean in other words, it's not our decision to sell stock we need a buyer on the other side.
To acquire and as we've said before the stock sales have been in blocks.
We haven't been selling stock.
They haven't been having a cell.
In the open market everyday okay, but that's not what we've been doing to achieve these sales and we are very cognizant.
Trading volumes and things like that these are these are specific sales by appointment as opposed to us.
I'm, saying, okay, we're going to sell all of the stock.
To anybody all day, and just having an open cell order no.
So these arguably have been so off market right now the stock has been trading blocks and it hasnt really affected the market, it's a separate kind of trade so.
We obviously are very sensitive to.
Where our stock trades, how our stockholders are true.
Effectively.
Are affected by these events, we've been very thoughtful and careful about that and we think that it's very very positive for the company, but we're really excited.
Also we're sort of slightly puzzled by.
Getting so much pushback on selling equity win.
No.
Like yourselves are asking us about our leverage ratio, we would think we would get maybe more plaudits for for raising equity.
As improve.
Speaker Change: Improving that metric on that.
On that side.
Recognizing that.
The next question everyone has is like why are you going to deploy it and increase your leverage again and our answer has always been.
We will or we won't depending on the opportunity set.
What's missing from in our mind for a lot of this discussion we have.
Speaker Change: It's sort of like risk adjusted returns right. So you can have an absolute return backs, but a question how risky is X and so on a risk adjusted basis.
Speaker Change: Ex risk might be X plus.
50% risk or it might be X and so and so on are in are on our leverage structure, it's sort of somewhere like what is our risk adjusted leverage and.
If you compare our leverage.
At fixed rates and what the term structure the absence of covenants all of those types of things.
You say, okay, well, let's compare that to another BDC that has.
Tremendous about our bank leverage with asset based formulas.
And let's say <unk>.
So substantially less than our leverage but if they've got a bunch of markdowns theyre going to have a defaulted that credit facility.
And we had the exact same portfolio in the exact same markdowns, we wouldn't have enough. So so so on a risk adjusted leverage basis, we think our leverages.
Should it be discount what you should take the absolute number of <unk>.
Leverage and say Thats, what Theyre Leverages, you should put a discount on that because of the structure relative to the BDC industry because the BDC industry has a tremendous amount of essentially bank leverage and you look at when people got into trouble most of that trouble has come from bank leverage.
Wind assets have to be marked down and things come out of formula. So.
Anyway, so we feel our leverage is.
He is on a risk adjusted basis should be.
Substantially discounted from the absolute number.
I understood that I appreciate that.
Maybe I'll just move on to another topic here Henry.
The quarterly dividend income you called out $1 3 million from the from the senior loan fund.
Yes, there is.
<unk>, let's call it $500000 that came in there is that is that.
Would it be characterize that as kind of recurring in nature or is that more one time.
Yes, there's one portfolio company that regularly pays us.
And every quarter, but it's more of a 100 150 I would say the additional piece Youre right price was sort of a.
Speaker Change: It's definitely won't be recurring every quarter. It wasn't it was another one of our portfolio companies who distributed.
Some of their excess cash flow from operations.
Okay. That's helpful and one more for me.
Certainly I understand youre, not going to give specific guidance around kind of repayments.
But or exits, but we've seen relatively muted activity on the repayment exit side for the last few quarters understandably. So.
Can you speak to maybe this is a question for Mike, but can you speak to kind of that.
The market activity right now within the portfolio is there interest in potential exits.
And if there is can you kind of speak to maybe the velocity or the probability of stuff kind of come in come in come into market over the over the next little bit. Thanks.
Hey, Brian This is Mike.
As it relates to that it's it's a bit of a question Mark right I think thats going to coincide with.
The overall deal market picking up.
So really hard to tell.
I would say some of the things that we look at is for some of our assets they've been in sponsor ownership for a period of time.
So at some point.
Even if they feel like theyre not going to optimize the valuation relative to what they would have gotten 18 months ago or a couple of years ago, Let's say.
They're going to be inclined to exit so we think that at some point.
That will turn and probably we will start to see some some redemptions within our portfolio.
At the same time that that starts to occur we would expect and this is just naturally how it tends to work the deal volume in general will pick up and so it will be a little bit back on that.
Typical cadence that we have where we're getting redemptions and then our origination activity has to out outstrip that which it has comfortably for a long time now but.
But right now we're in a position where deal volume and originations are skewing more toward <unk>.
Supporting our portfolio companies, which were delighted by and we're not getting much redemption. So our portfolio growth, even though our new platforms are not increasing our portfolio growth is still solid.
But hard to say on the on the redemptions.
I can't tell you that hey, we see that on the horizon and theres going to be a big wave this year, although that could occur.
Just hard to say.
Okay I appreciate that thanks for taking the questions.
Thanks, Brad.
Thank you. This concludes the question and answer session.
I would now like to turn it back to Chris Oberbeck for closing remarks.
Well, we want to thank all.
All of you.
While our shareholders and everyone on this call for listening for considering Saratoga and.
Look forward to speaking to you next quarter. Thank you.
This.
Today's conference call.
Thank you for participating you may now disconnect.
Okay.
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Okay.
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