Q4 2024 Saratoga Investment Corp Earnings Call
Operator: Good morning, ladies and gentlemen. Thank you for standing by.
Good morning, ladies and gentlemen, thank you for standing by welcome to Saratoga investment Corp's 2020 for fiscal year end and fourth quarter financial results Conference call.
Operator: Welcome to Saratoga Investment Corp.'s 2024 Fiscal Year End and Fourth Quarter Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in listen-only mode.
Operator: Please note that today's call is being recorded during today's.
Operator: Patients all parties will be in listen only mode.
Operator: Following management's prepared remarks, we will be open on the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp.'s Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.
Operator: Management's prepared remarks, we'll open the line for questions at this time I would like to turn the call over to George Hoagland Corp's, Chief Financial Chief Compliance Officer, Mr. Henri Steenkamp, Sir Please go ahead.
Henri J. Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp's 2024 Fiscal Year-End and Fourth 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 SEC 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.
Henri J. Steenkamp: Thank you I would like to welcome everyone to Saratoga investment Corp's 2020 for fiscal year end and fourth quarter earnings Conference call.
Henri J. Steenkamp: Today's conference call includes forward looking statements and projections, we ask you to refer to our most recent filings with the ACC for important factors that could cause actual results to differ materially from these forward looking statements and projections, we do not undertake to update our forward looking statements unless required to do so by law.
Henri J. Steenkamp: Today we will be referencing a presentation during our call. You can find our fiscal year-end and fourth 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 make a few introductory remarks.
Henri J. Steenkamp: Today, we will be referencing a presentation during our call you can find our fiscal yearend and fourth quarter 2020 full shareholder presentation in the events and presentations section of our Investor Relations website.
Henri J. Steenkamp: A link to our IR pages in the earnings press release distributed last night.
Speaker Change: A replay of this conference call will also be available. Please refer to our earnings press release for details.
Henri J. Steenkamp: I'd now like to turn the call over to our chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks. Thank.
Christian L. Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga's adjusted net investment income per share for the year increased 44% as compared to last year, and for Q4 decreased by 2.5% as compared to last year and 4% as compared to last quarter. The substantial year-over-year increase in NII reflects growth in AUM, strong overall portfolio performance, and margin improvement from year-over-year increased rates and spreads on Saratoga's investments, which are largely floating-rate assets, with costs of financing liabilities remaining largely fixed.
Speaker Change: Thank you Henri and welcome everyone.
Christian L. Oberbeck: Saratoga has adjusted net investment income per share for the year increased 44% as compared to last year and for Q4 decreased by two 5% as compared to last year and 4% as compared to last quarter. The.
Christian L. Oberbeck: The substantial year over year increase in NII reflects growth in AUM strong overall portfolio performance and margin improvement from year over year increased rates and spreads on Saratoga investment's, largely floating rate assets with cost of financing liabilities remaining largely fixed perspectives on year over year quarterly.
Christian L. Oberbeck: Perspectives on year-over-year quarterly performance include a four-cent decrease from last year's Q4 includes 13 cents of dilution from the increased share count resulting from the recent equity ATM issuances this year at NAV, which have not yet been deployed in new investments. Higher quality income this quarter versus a year ago, from a higher mix of recurring interest income, up 29%, and lower other income items, including structuring, advisory, and prepayment fees, which were down 44%, largely from a less robust M&A environment. And once-yearly excise taxes were up 4 cents per share, or 71% over last year's fourth quarter. This quarter's earnings of $0.94, inclusive of the once-annual $0.11 excise tax on undistributed taxable income, noted above, significantly exceeded our recently increased dividend by 29 percent.
Christian L. Oberbeck: Performance include a four cent decrease from last year's Q4 includes 13 cents of dilution from the increased share count, resulting from the recent equity ATM issuances. This year at AAP, which have not yet been deployed into new investments.
Christian L. Oberbeck: Higher quality income this quarter versus a year ago from a higher mix of recurring interest income up 29% and lower other income items, including structuring advisory and prepayment fees, which were down 44% largely from a class a robust M&A environment.
Christian L. Oberbeck: And once yearly excise taxes were up four cents per share or 71% over last year's fourth quarter.
Christian L. Oberbeck: This quarters earnings of 94 sets inclusive of the once annual 11% excise tax on undistributed taxable income noted above significantly exceeded our recently increased dividend by 29%.
Christian L. Oberbeck: The level of interest rates stabilized in the recent quarter, resulting in elevated margins on our growing portfolio relative to the past year. In addition, our ongoing development of sponsor relationships continues to create attractive investment opportunities from high-quality sponsors at attractive pricing terms and absolute rates, despite the constrained general volume of M&A over the past couple of years. We believe Saratoga continues to be well-positioned for potential future economic opportunities and challenges.
Christian L. Oberbeck: The level of interest rates stable and the recent stabilized in the recent quarter, resulting in elevated margins on our growing portfolio relative to the past year. In addition, our ongoing development of sponsor relationships continues to create attractive investment opportunities for high quality sponsors at attractive pricing terms and.
Christian L. Oberbeck: Loot rates, despite the constrained general volume of M&A over the past couple of years.
Christian L. Oberbeck: We believe Saratoga continues to be well positioned for potential future economic opportunities and challenges.
Christian L. Oberbeck: Saratoga's credit structure, with largely interest-only, covenant-free, long-duration debt incorporating maturities primarily two to ten years out, has positioned us well with the elevated level of interest rates, delivering substantially increased margins and industry-leading dividend coverage. Most importantly, at the foundation of our performance, is the high-quality nature, resilience, and balance of our approximately $1.139 billion portfolio. Our core BDC portfolio, excluding our CLO and JV, is down 1.7% versus cost, including $13.8 million of markdowns this quarter in two discrete credits, Pepper Palace and Zalage, which is partially offset by $4.2 million of net unrealized appreciation in the rest of the core BDC portfolio.
Christian L. Oberbeck: Saratoga has credit structure with largely interest only covenant free long duration debt incorporating maturities, primarily two to 10 years out has positioned us well with the elevated level of interest rates delivering substantially increased margins and industry leading dividend coverage.
Christian L. Oberbeck: The remaining fair value of these two written-down credits at year-end is $6.3 million, and we are actively implementing management changes and capital structure improvements which have the potential for future increases in recovery value. The overall financial performance and strong earnings power of our current portfolio reflects the strength of the underwriting in our solid, growing portfolio of companies in well-selected industry sectors. We continue to approach the market with prudence and discernment in terms of new commitments in the current environment.
Christian L. Oberbeck: Most importantly at the foundation of our performance is the high quality nature of resilience and balance of our approximately 113 9 billion dollar portfolio.
Christian L. Oberbeck: Our core BDC portfolio, excluding our CLO and JV is down one 7% versus cost, including $13 $8 million of markdowns this quarter and two discreet credits Pepper palace, and knowledge, which is partially offset by $4 $2 billion of net unrealized appreciation.
Christian L. Oberbeck: The Asian, and the rest of the core BDC portfolio.
Christian L. Oberbeck: The remaining fair value of these two written down credits at year end $6 $3 million and we are actively implementing management changes in capital structure improvements, which have the potential for future increases in recovery value.
Christian L. Oberbeck: Overall financial performance and strong earnings power of our current portfolio reflects the strength of the underwriting and our solid growing portfolio of companies and well selected industry segments.
Christian L. Oberbeck: We continue to approach the market with Prudence and discernment in terms of new commitments in the current environment our.
Christian L. Oberbeck: Originations this quarter demonstrate that. Despite an overall robust pipeline, there are periods, like the current one, where many of the investments we review do not meet our high-quality credit standards. During the full year, we originated 8 new portfolio company investments and had 65 smaller follow-on investments in existing portfolio companies which we know well, with strong business models and balance sheets. Originations this year totaled $246 million, with $30 million of repayments and amortization.
Christian L. Oberbeck: Our originations this quarter demonstrate that.
Christian L. Oberbeck: Despite an over all robust pipeline there are periods like the current one where many of the investments. We review did not meet our high quality credit standards during.
Christian L. Oberbeck: During the full year, we originated eight new portfolio company investments and had 65 smaller follow on investments in existing portfolio companies, which we know well with strong business models and balance sheets.
Christian L. Oberbeck: Originations this year totaled $246 million with $30 million of repayments and amortization.
Christian L. Oberbeck: This includes $43 million originated in 14 follow-on investments in Q4, offset by $11 million in repayments. Our credit quality for this quarter remained high at 98.1% of credits rated in our highest category, with three investments currently still on non-accrual. With 86% of our investments at quarter end in first lien debt and our overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and leverage is well structured for challenging economic conditions and uncertain, Saratoga's annualized fourth quarter dividend of $0.73 per share and adjusted net investment income of $0.94 per share imply a 12.4% dividend yield and a 16% earnings yield based on its recent stock price of $23.57 per share on May 3, 2024.
Christian L. Oberbeck: This includes $43 million originated in 14 follow on investments in Q4 offset by $11 million in repayments.
Christian L. Oberbeck: Our credit quality for this quarter remained high at 98, 1% of credits rated in our highest category with three investments currently still on nonaccrual.
Christian L. Oberbeck: With 86% of our investments at quarter end, and first lien debt and our overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and leverage as well structured for challenging economic conditions and uncertainty.
Christian L. Oberbeck: Saratoga has annualized fourth quarter dividend of <unk> 73 per share and adjusted net investment income of 94 per share imply a 12, 4% dividend yield and a 16% earnings yield based on its recent stock price of $23 57 per share on May three 2024.
Christian L. Oberbeck: The over-earning of the dividend by $0.21 this quarter, or $0.84 annualized per share, increases NAV, supports the increasing dividend level and portfolio growth, as well as provides a cushion against adverse events. In volatile economic conditions such as those we are experiencing, balance sheet strength, liquidity, and NAV preservation remain paramount for us. First, we raised $48 million of equity at NAV since the end of Q1, helping increase our NAV from $338 million as of May 31, 2023 to $370 million as of February 29, 2024.
Christian L. Oberbeck: The over earning the dividend by 21 cents this quarter or <unk> 84, <unk> annualized per share increases NAV.
Christian L. Oberbeck: <unk> supports the increased increasing dividend level and portfolio growth as well as providing a cushion against adverse events.
Christian L. Oberbeck: Sure.
Christian L. Oberbeck: And volatile economic conditions, such as we are currently experiencing balance sheet strength liquidity and NAV preservation remain Paramount for us.
Christian L. Oberbeck: First we raised $48 million of equity at NAV since the end of Q1, helping increase our NAV from $338 million as of May 31, 2000, $23 million to $370 million as of February 29, 2024.
Christian L. Oberbeck: With shares trading below NAV during this period, the managers subsidized the issuance shortfall so that the BDC received the full NAV price for all shares sold. This equity provides additional balance sheet strength, reduces our overall regulatory leverage, and supports our strong origination. Second, at year-end, we maintained a substantial $207 million of investment capacity to support our portfolio companies, with $136 million available through our newly approved SBIC III fund, $30 million for our expanded revolving credit facility, and $41 million in cash. And third, on March 27, 2024, we entered into a special purpose vehicle and a new three-year financing credit facility which provides for incremental borrowings in an aggregate amount of up to $50 million.
Christian L. Oberbeck: With shares trading below NAV during this period the manager subsidize the issuance shortfall so that the BDC received a full NAV price for all shares sold.
Christian L. Oberbeck: This equity provides additional balance sheet strength reduces our overall regulatory leverage and supports our strong originations.
Christian L. Oberbeck: Second at year end, we maintained a substantial $207 million of investment capacity to support our portfolio companies with a $136 million available through our newly approved Spic's three fund $30 million for expanded revolving credit facility and $41 million in cash.
Christian L. Oberbeck: And third on March 27th 2024.
Christian L. Oberbeck: We entered into a special purpose vehicle and a new three year financing credit facility, which provides for incremental borrowings in an aggregate amount of up to $50 million.
Henri J. Steenkamp: Saratoga Invtmt's fourth quarter demonstrated a solid level of performance with our key performance indicators as compared to the quarters ended February 29th, 2023 and November 30th, 2020. Our adjusted NII is $12.8 million this quarter, up 10% from last year and down 3% from last quarter. Our adjusted NII per share is $0.94 this quarter, down $0.04 from $0.98 last year and down 7% from $1.01 last quarter, inclusive of the dilution and excise tax factors noted earlier.
Christian L. Oberbeck: Saratoga Investment's fourth quarter, demonstrating a solid level of performance with our key performance indicators as compared to the quarters ended February 29, 2023 and November 30th 2023.
Henri J. Steenkamp: Our adjusted NII is $12 $8 million this quarter up 10% from last year and down 3% from last quarter our.
Henri J. Steenkamp: Our adjusted NII per share is 94 cents this quarter down <unk> <unk> from <unk> 98 last year and down 7% from 101 last quarter inclusive of the dilution in <unk> test tax factors noted earlier.
Henri J. Steenkamp: The latest 12 months return on equity is 2.5%, down from 7.2% last year, down from 6.6% last quarter. Our NAV per share is $27.12, down 7% from $29.18 last year and down 1% from $27.42 last quarter. And our quarter-end NAV is up $370 million from $347 million last year and $360 million last quarter. Importantly, KPIs related to full-year earnings power are adjusted NII for fiscal 2024 is $52 million, up 52% from $34 million last year, and adjusted NII per share is $4.10 per share this year, up 44% from $2.85 per share last year.
Henri J. Steenkamp: Latest 12 months return on equity is two 5% down from seven 2% last year down from six 6% last quarter.
Henri J. Steenkamp: Our NAV per share is $27 12.
Henri J. Steenkamp: <unk> down 7% from 2009, 2018 last year and down 1% from 27 42 last quarter.
Henri J. Steenkamp: And our quarter end NAV is up $370 million for $347 million last year and $360 million last quarter.
Henri J. Steenkamp: Importantly, kpis related to full year earnings power or <unk>.
Henri J. Steenkamp: Adjusted NII for fiscal 2024 is $52 million up 52% from $34 million last year and adjusted NII per share is $4 10 per share this year up 44% from $2 85 per share last year.
Henri J. Steenkamp: While this past quarter and fiscal year have seen markdowns to a small number of credits in our core BDC portfolio, slide 3 illustrates how our long-term average return on equity over the past 10 years is well above the BDC industry average at 10.5 percent versus the industry's 6.5 percent and has remained consistently strong over the past decade, beating the industry eight out of the past ten years. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago, and the quality of our loans remains solid, with only three credits on non-accrual, unchanged from last quarter.
Henri J. Steenkamp: While this past quarter and fiscal year have seen markdowns to a small number of credits in our core BDC portfolio.
Henri J. Steenkamp: Slide three illustrates how our long term average return on equity over the past 10 years is well above the BDC industry average at 10, 5% versus the industry's six 5%.
Henri J. Steenkamp: And has remained consistently strong over the past decade, but any industry eight of the past 10 years.
Henri J. Steenkamp: As you can see on slide four our assets under management have steadily and consistently risen since we took over the BDC 14 years ago and the quality of our credits remains solid with only three credits on non accrual unchanged from last quarter.
Henri J. Steenkamp: Our management team is working diligently to continue this positive trend as we deploy our available capital into our pipeline, while at the same time being appropriately cautious in this volatile and evolving credit environment. With that, I would now turn the call back over to Henri to review our financial results, as well as the composition and performance of our portfolio.
Henri: Our management team is working diligently to continue this positive trend as we deploy our available capital into our pipeline while at the same time being appropriately cautious in this volatile and evolving credit environment.
Henri J. Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal fourth quarter ended February 29, 2024, most of which Chris already highlighted. Of note, the weighted average common shares outstanding of 13.7 million shares in Q4 increased from 11.9 million last year and 13.1 million last quarter. Adjusted NII increased this quarter by 10.3% from last year, but down 2.6% from last quarter, primarily due to, first, the impact of higher interest rates, both base rates and spreads, as compared to last year, with a weighted average current coupon on non-CLO BDC investments increasing from 12.1% to 12.6% year-over-year and relatively unchanged from last quarter.
Henri J. Steenkamp: 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.
Henri J. Steenkamp: Second, average non-CLO BDC assets increasing by 18.7% year-over-year and by 2.2% since last quarter. And third, other income, including a $5.9 million dividend received from the Saratoga Investment Joint Venture for the year and $1.2 million received for the quarter. The adjusted NII yield was 14.0%. This yield is up from 13.6% last year and slightly down from 14.6% last quarter. Total expenses for this fourth fiscal quarter, excluding interest and debt financing expenses, base management fees, and incentive fees, and income and excise tax, decreased from $2.3 million for both last quarter and last year to $1.9 million this quarter.
Speaker Change: Thank you Chris Slide five highlights our key performance metrics for the fiscal fourth quarter ended February 29, 2020, most of which Chris already highlighted.
Henri J. Steenkamp: Of note the weighted average common shares outstanding of $13 7 million shares in Q4 increased from $11 9 million last year and $13 1 million last quarter.
Henri J. Steenkamp: Adjusted NII increase this quarter up 10, 3% from last year, but down two 6% from last quarter, primarily from first the impact of higher interest rates, both base rates and spreads as compared to last year with a weighted average current coupon on non CLO BDC investments increase.
Henri J. Steenkamp: <unk> from 12, 1% to 12, 6%.
Henri J. Steenkamp: And relatively unchanged from last quarter second average non CLO BDC assets, increasing by 18, 7% year over year and by two 2% since last quarter and third other income, including a $5 9 million dividends received from the Saratoga investment.
Henri J. Steenkamp: Joint venture for the year and $1 $2 million received for the quarter.
Henri J. Steenkamp: Adjusted NII yield was 14.0%. This yield is up from 13, 6% last year and slightly down from 14, 6% last quarter.
Henri J. Steenkamp: Total expenses for this fourth fiscal quarter, excluding interest and debt financing expenses base management fees and incentive fees and income and excise tax decreased from $2 $3 million for both last quarter and last year to $1 $9 million.
Henri J. Steenkamp: This represented 0.7% of average total assets on an annualized basis, down from 0.8% for both Q4 last year and last quarter. Also, we have again added KPI slides 28 through 31 in the appendix at the end of the presentation that show our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained, including a 50 percent increase in net interest margin over the past year. Slide 6 highlights the same key performance metrics for the full fiscal year, with significant increases year-over-year in most operating metrics.
Henri J. Steenkamp: This quarter. This represented 0.7% of average total assets on an annualized basis down from 0.8% for both Q4 last year and last quarter.
Henri J. Steenkamp: 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 50% increase in net interest margin over the past year.
Henri J. Steenkamp: Slide six highlights the same key performance metrics for the full fiscal year with.
Henri J. Steenkamp: <unk> increases year over year in most operating metrics.
Henri J. Steenkamp: Moving on to slide 7, NAV was $370.2 million as of this quarter's end, a $10.6 million increase from last quarter, and a $23.2 million increase from the same quarter last year. During this year and quarter, $49 million and $14.4 million of new equity were raised at or above net asset value, respectively. The manager of the company contributed $4.5 million of that equity as part of the issuances, and the BDC received NAV or more for all purchases.
Henri J. Steenkamp: Moving on to slide seven.
Henri J. Steenkamp: With $372 million as of this quarter and a $10 $6 million increase from last quarter and a $23 2 million increase from the same quarter last year during.
Henri J. Steenkamp: During this year and quarter $49 million and $14 $4 million of new equity was raised at or above net asset value respectively.
Henri J. Steenkamp: The manager of the company contributed $4 5 million of that equity as part of the issuances and the BDC received AAV <unk> for oil.
Henri J. Steenkamp: Purchases.
Henri J. Steenkamp: This chart also includes our historical NAV per share, which highlights how this important metric has increased 20 of the past 28 quarters, with Q4 down $0.30 per share, primarily reflecting the specific markdowns discussed. Over the long term, our net acid value has steadily increased since 2011, and this growth has been accretive, as demonstrated by the long-term increase in NAV per share. Over the past five years, NAV per share is up $3.50, or 14.8%. We continue to benefit from our history of consistent realized and unrealized gains.
Henri J. Steenkamp: This chart also includes our historical NAV per share, which highlights how this important metric has increased 20 of the past 28 quarters with Q4 down <unk> <unk> per share primarily reflecting the specific markdown discussed over the long term our net asset value has steadily increased since between the <unk>.
Henri J. Steenkamp: And this growth has been accretive as demonstrated by the long term increase in NAV per share.
Henri J. Steenkamp: Over the past five years <unk> NAV per share is up $3 and 50 or 14, 8%. We continue to benefit from our history of consistent realized and unrealized gains.
Henri J. Steenkamp: On slide 8, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down $0.07, primarily due to the $0.05 net dilution from the additional $0.6 million shares issued in the recent ATM equity offerings and $0.11 in excise taxes on undistributed taxable income owed in December, partially offset by increased net interest and other income and decreased operating expenses.
Henri J. Steenkamp: On slide eight you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis.
Henri J. Steenkamp: Starting at the top adjusted NII per share was down <unk> <unk>, primarily due to the <unk> <unk> dilution from the additional 6 million shares.
Henri J. Steenkamp: Shares issued in the recent ATM equity offerings and 11th in excise taxes on undistributed taxable income in December.
Henri J. Steenkamp: Partially offset by increased net interest and other income and decreased operating expenses.
Henri J. Steenkamp: On the lower half of the slide and NAV per share decreased by <unk> <unk>.
Henri J. Steenkamp: Merrily due to the 53 net unrealized depreciation and a 72 St dividend recognized in the quarter exceeding the 94 and GAAP NII.
Henri J. Steenkamp: On slide nine you will see the same reconciliation, but now on a sequential annual basis, starting at the top adjusted NII per share increased from $2 85 per share last year to $4 <unk> per share mainly due to the increase in net interest income from higher interest rates and AUM.
Henri J. Steenkamp: On the lower half of the slide, NAV per share decreased by $0.50 primarily due to the $0.53 net unrealized depreciation and the $0.72 dividend recognized in the quarter exceeding the $0.94 in GAAP NII. On slide 9, you will see the same reconciliation but now on a sequential annual basis. Starting at the top, adjusted NII per share increased from $2.85 per share last year to $4.10 per share, mainly due to an increase in net interest income from higher interest rates and AUM.
Henri J. Steenkamp: On the lower half of the slide, this reconciles the $2.06 NAV per share decrease for the year. The $4.49 of GAAP-NII was more than offset by $3.70 of net unrealized depreciation and the $2.82 of dividends paid during the year. There was a $0.05 net accretion from the ATM share repurchases and drip plan during the year. Slide 10 outlines the dry powder available to us as of quarter end, which totaled $207 million.
Henri J. Steenkamp: On the lower half of the slide this reconciles that $2 <unk> per share decrease for the year the.
Henri J. Steenkamp: The $4 49 of GAAP NII was more than offset by $3 70 of net unrealized depreciation and $2.82 of dividends paid during the year.
Henri J. Steenkamp: Once a five cent net accretion from the ATM share repurchases and trip plan during the year.
Henri J. Steenkamp: Slide 10 outlines the dry powder available to us as of quarter end, which totaled $207 million. This was spread between our available cash undrawn SBA debentures, and Undrawn secured credit facility.
Henri J. Steenkamp: This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities. This quarter-end level of available liquidity allows us to grow our assets by an additional 18% without the need for external financing, with $41 million of quarter-end cash available and thus fully accretive to NII when deployed, and $136 million of available SBA debentures, with its low-cost pricing, also very acc We also include here a column showing any call options available to our debt.
Henri J. Steenkamp: This quarter end level of available liquidity allows us to grow our assets by an additional 18% without the need for external financing with $41 million a quarter end cash available and thats fully accretive to NII when deployed and $136 million of available SBA debentures with its low.
Henri J. Steenkamp: Cost pricing also very accretive.
Henri J. Steenkamp: We also include here a column showing any call options available to our deck that shows that $321 million of baby bonds effectively all out six plus percent debt is callable within the next year, creating a natural protection against potential future decreasing interest rates, which.
Henri J. Steenkamp: This shows that $321 million of baby bonds, effectively all of our 6 plus percent debt, is callable within the next year, creating a natural protection against potential future decreasing interest rates, which should allow us to protect our net interest margin if needed. Since quarter end, we also closed on a new three-year, $50 million secured revolving credit facility, fully available immediately. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity, and especially taking into account the overall conservative nature of our balance sheet, the fact that almost all our debt is long-term in nature, and with almost no non-SBIC debt maturing within the next two years. Furthermore, our debt is structured in such a way that we have no BBC covenants that can be stressed during such volatile times.
Henri J. Steenkamp: Should allow us to protect our net interest margin if needed.
Henri J. Steenkamp: Since quarter end, we also closed on a new three year $50 million secured revolving credit facility fully available immediately.
Henri J. Steenkamp: We remain pleased with our 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 of our balance sheet. The fact that almost all our debt is long term in nature and with almost no non spic's maturing.
Henri J. Steenkamp: Within the next two years also our data structured in such a way that we have no BDC covenants that can be stress during such volatile times.
Henri J. Steenkamp: Now I would like to move on to slides 11 through 14 and review the composition and yield of our investment portfolio. Slide 11 highlights that we now have $1.14 billion of AUM at fair value, and this is invested in 55 portfolio companies, one CLO fund, and one joint venture. Our first lien percentage is 86% of our total investments, of which 34% is in a first lien, last out position. On slide 12, you can see how the yield on our core BDC assets, excluding our CLO, has changed over time, especially the past two years. This quarter, our core BDC yield was up slightly by 10 basis points to 12.6%, with base rates relatively unchanged. The total CLO yield remained unchanged at 8.0% from last quarter.
Speaker Change: Now I would like to move on to slides 11 through 14 and review the composition and yield of our investment portfolio.
Henri J. Steenkamp: Slide 11 highlights that we now have 114 billion of AUM at fair value and this is invested in 55 portfolio companies, one CLO fund and one joint venture.
Henri J. Steenkamp: Lean percentage is 86% of our total investments of which 54% is in first lien last out positions.
Henri J. Steenkamp: On slide 12, you can see how the yield on our core BDC assets, excluding our CLO has changed overtime, especially the past two years this quarter, our core BDC yield was up slightly by 10 basis points to 12, 6% with base rates relatively unchanged.
Henri J. Steenkamp: The total CLO yield remained unchanged at 8.0% from last quarter. The CLO is performing and current.
Michael Joseph Grisius: The CLO is performing and current. Slide 13 shows how our investments are diversified throughout the U.S., and on slide 14, 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 JV, which are included as structured finance securities. Moving on to slide 15, 8.6% of our investment portfolio consists of equity interests, which remain an important part of our overall investment strategy.
Michael Joseph Grisius: Slide 13 shows how our investments are diversified throughout the U S and on slide 14, 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 JV, which I included a structured finance securities.
Michael Joseph Grisius: Moving onto slide 15, eight 6% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy.
Michael Joseph Grisius: This slide shows that for the past 12 fiscal years, we have had a combined $81.6 million of net realized gains from the sale of equity interests or the sale or early redemption of other investments. This consistent realized gain performance highlights our portfolio credit quality, has helped grow our NAV, and is reflected in our healthy, long-term ROE. That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our Chief Investment Officer, for an overview of the investment market. Thank you.
Michael Joseph Grisius: This slide shows that for the past 12 fiscal years, we had a combined $81 $6 million of natrium as gains from the sale of equity interest.
Michael Joseph Grisius: While early redemption of other investments this consistent realized gain performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long term Roe.
Michael Joseph Grisius: 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 Joseph Grisius: 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 continues to reflect slower deal volume and M&A activity than in historical periods and 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, an opaque economic outlook, high financing costs, and elevated levels of inflation continue to constrain the private equity deal market, which drives much of the demand for new credit. At the same time, some lenders have re-entered the market as fears of an economic slowdown have abated among some industry participants.
Michael Joseph Grisius: Thank you Henry.
Michael Joseph Grisius: I'll take a few minutes to describe our perspective on the current state of the market.
Michael Joseph Grisius: And then comment on our current portfolio performance and investment strategy.
Michael Joseph Grisius: The overall deal market continues to reflect slower deal volume and M&A activity than in historical periods.
Michael Joseph Grisius: And it seems to be in a bit of a holding pattern to see what happens in the broader macro environment.
Michael Joseph Grisius: While liquidity among private equity firms remains abundant and opaque economic outlook high financing cost and elevated levels of inflation continue to constrain the private equity deal market, which drives much of the demand for new credits.
Michael Joseph Grisius: At the same time, some lenders have reentered the market.
Michael Joseph Grisius: Fears of an economic slowdown have abated amongst some industry participants.
Michael Joseph Grisius: This is shifting the supply-demand equation at the margin, and we're starting to see leverage creep up and spreads narrow. However, that said, the risk-adjusted returns on first lien assets remain exceptional, and capital structures for new deals continue to be supported by strong equity capitalization. Overall, while new deal volume is modest, it continues to be a favorable market for capital deployment, especially at the lower end of the middle market where we compete. In addition, the flip side of a moderate M&A market is that our portfolio has experienced very little churn from redemption. The Saratoga management team has successfully managed through a number of credit cycles.
Michael Joseph Grisius: This is shifting the supply demand equation at the margin and we're starting to see leverage creep up and spreads narrow.
Michael Joseph Grisius: Now that said the risk adjusted returns on first lien assets remain exceptional and capital structures for new deals continue to be supported by strong equity capitalizations.
Michael Joseph Grisius: Overall, while new deal volume is modest it continues to be a favorable market for capital deployment, especially at the lower end of the middle market, where we compete.
Michael Joseph Grisius: In addition, the flip side of a moderate M&A market is that our portfolio has experienced very little churn from redemptions.
Michael Joseph Grisius: The Saratoga management team has successfully managed through a number of credit cycles and that experience has made us, particularly aware of the importance.
Michael Joseph Grisius: 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. In a year that has seen ever-shifting expectations for the economy due to inflation and rising interest rates, among other factors, we stayed largely focused on managing and supporting our portfolio; the combination of rising rates and wider spread. Steady follow-on deal activity and very few redemptions allowed us to achieve healthy growth in our portfolio size and robust growth in our portfolio earnings. Our underwriting bar remains high, as usual, yet we continue to find opportunities to deploy capital.
Michael Joseph Grisius: The importance of first being disciplined when making investment decisions and second being proactive in managing our portfolio.
Michael Joseph Grisius: In a year that has seen ever shifting expectations for the economy due to inflation and rising interest rates. Among other factors, we stayed largely focused on managing and supporting our portfolio.
Michael Joseph Grisius: The combination of rising rates wider spreads steady follow on deal activity and very few redemptions allowed us to achieve healthy growth in our portfolio size and robust growth in our portfolio earnings.
Michael Joseph Grisius: Our underwriting bar remains high as usual, yes, we continue to find opportunities to deploy capital.
Michael Joseph Grisius: As seen on slide 16, our more recent performance has been characterized by continued asset deployment to existing portfolio companies, as demonstrated by 69 follow-ons this calendar year, including delayed draws, which we expect to continue. While we invested in nine new platform investments this calendar year, we focused much of our time and resources towards supporting our portfolio and managing a discreet few challenge credits. Overall, our deal flow remains strong, and our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics, is a strength of ours. More recently, during the first calendar quarter, we added new portfolio companies but still had 11 follow-on investors.
Michael Joseph Grisius: As seen on slide 16, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 69 follow ons this calendar year, including delayed draws which we expect to continue.
Michael Joseph Grisius: While we invested in nine new platform investments. This calendar year, we focused much of our time and resources towards supporting our portfolio and managing a discrete few challenged credits.
Michael Joseph Grisius: Overall, our deal flow remains strong and our consistent ability to generate new investments over the long term despite ever changing and increasingly competitive market dynamics is a strength of ours.
Michael Joseph Grisius: More recently during the first calendar quarter, we added no new portfolio companies, we still had 11 follow on investments.
Michael Joseph Grisius: Portfolio management continues to be critically important, and we remain actively engaged with our portfolio companies and in close contact with our management. There are a couple of credits specifically that are experiencing varying levels of stress that we have marked down this quarter that I will touch on shortly. But in general, our portfolio companies are healthy, and 80% of our portfolio is generating financial results at or above the prior quarter. 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 have no direct energy or commodities exposure.
Michael Joseph Grisius: Portfolio.
Michael Joseph Grisius: Management continues to be critically important and.
Michael Joseph Grisius: And we remain actively engaged with our portfolio companies and in close contact with our management teams.
Michael Joseph Grisius: There are a couple of credits specifically that are experiencing varying levels of stress that we have marked down this quarter that I will touch on shortly.
Michael Joseph Grisius: But in general our portfolio companies are healthy and 80% of our portfolio is generating financial results at or above the prior quarter.
Michael Joseph Grisius: 86% of our portfolio is in first lien debt and generally supported by strong enterprise values and industries that have historically performed well in stress situations.
Michael Joseph Grisius: We have no direct energy or commodities exposure.
Michael Joseph Grisius: 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. Consistent with last quarter, we still have three investments on nonaccrual, namely Noland, Pepper Palace, and Solid. Looking at leverage on the same slide, you can see that industry debt multiples have come down slightly this year from their historical high level.
Michael Joseph Grisius: In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue.
Michael Joseph Grisius: We have historically demonstrated strong revenue retention.
Michael Joseph Grisius: Consistent with last quarter, we still have three investments on non accrual, namely Noland Pepper Palisson solids.
Michael Joseph Grisius: Looking at leverage on the same slide you can see that industry that multiples have come down slightly this year from their historical high levels.
Michael Joseph Grisius: The total leverage for our overall portfolio was 3.9 times, excluding Noel and Pepper Powell and solids, while the industry is now again at above 5 times leverage. Despite the success we've had 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. Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment is in a durable business and will be accretive to our shareholders.
Michael Joseph Grisius: Total leverage for our overall portfolio was three nine times, excluding norland pepper pallets and solids, while the industry is now again at above five times leverage.
Michael Joseph Grisius: Despite the success, we've had investing in highly attractive businesses and growing our portfolio and the healthy deal flow. We are seeing is important to emphasize that as always we're not aiming to grow simply for growth's sake.
Michael Joseph Grisius: Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment is in a durable business and will be accretive to our shareholders.
Michael Joseph Grisius: 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 how our significant focus on business development has led to multiple new strategic relationships that have become sources of new deals. Two of the five new portfolio companies over the past 12 months are from newly formed relationships, reflecting our ongoing investments in business development. 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.
Michael Joseph Grisius: 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 of new deals.
Michael Joseph Grisius: Two of the five new portfolio companies over the past 12 months are from newly formed relationships.
Michael Joseph Grisius: <unk>, our ongoing investments in business development.
Michael Joseph Grisius: 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.
Michael Joseph Grisius: And reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.
Michael Joseph Grisius: As you can see on slide 18, our overall portfolio credit quality remains solid. While we are presently facing challenges in a few credits, I thought I'd take a moment to highlight that our team remains focused on deploying capital and strong business models where we are confident that, under all reasonable scenarios, the enterprise value of the businesses will sustainably exceed the last dollar of our investment. We can't be perfect, but we strive to be as perfect as possible, and we have not veered from our thorough and cautious underwriting approach. In the dozen-plus years that we've been working together, we've invested $2.1 billion in 116 portfolio projects. We've had just one realized loss on investment.
Michael Joseph Grisius: As you can see on slide 18, our overall portfolio credit quality remains solid.
Michael Joseph Grisius: While we are presently facing challenges in a few credits I thought I'd take a moment to highlight that our team remains focused on deploying capital and strong business models, where we are confident that under all reasonable scenarios to enterprise value of the businesses will sustainably exceed the last dollar of our investment.
Michael Joseph Grisius: We can't be perfect, but we strive to be as perfect as possible and we have not beard from our thorough and cautious underwriting approach.
Michael Joseph Grisius: Over that same time frame, we've successfully exited 67 of those investments, achieving gross unleveraged realized returns of 15.7% on 917 million in realizations. Even taking into account the current write-downs of a few discrete credits, our combined realized and unrealized return on all capital invested equals 13.7%. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. We have three investments on non-accrual, with Pepper Pallis and Zalich classified as red, and Nolan as yellow.
Michael Joseph Grisius: Over the dozen plus years that we've been working together, we've invested $2 1 billion in.
Michael Joseph Grisius: In 116 portfolio companies.
Michael Joseph Grisius: We've had just one realized loss on investments.
Michael Joseph Grisius: Over that same timeframe, we have successfully exited 67 of those investments achieving gross unlevered realized returns of 15, 7% on $917 million of realizations.
Michael Joseph Grisius: Even taking into account the current write downs of a few discrete credits are combined realized and unrealized return on all capital invested equals 13, 7%.
Michael Joseph Grisius: We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt.
Michael Joseph Grisius: And we have three investments on nonaccrual with Pepper Palisson solids classified as Red and Nolan is yellow.
Michael Joseph Grisius: No one has been on yellow for a while, and this quarter saw an improvement to the Q3 mark, reflecting recent moderate improvement in the business and liquidity. Pepper Palace continued to suffer from poor performance and liquidity issues, reflecting the further $2.5 million markdown this quarter.
Michael Joseph Grisius: No one has been on yellow for awhile and this quarter saw an improvement to the Q3, Mark reflecting recent moderate improvement in the business and liquidity.
Michael Joseph Grisius: Yes.
Michael Joseph Grisius: Pepper Palace continued to suffer from poor performance and liquidity issues, reflecting the further $2 $5 million markdown this quarter.
Michael Joseph Grisius: The remaining fair value of this investment is $2.5 million. We are actively working with a sponsor on restructuring the balance sheet, including installing a turnaround specialist to manage the business. While not finalized, we are progressing toward an agreement that would have Saratoga take control of the business. As part of this plan, the turnaround specialist, who has substantial successful experience in similar situations, would invest significant equity in the business and become the CEO and a board member.
Michael Joseph Grisius: The remaining fair value of this investment is $2 $5 million.
Michael Joseph Grisius: We are actively working with our sponsor on restructuring the balance sheet, including installing a turnaround specialists to manage the business.
Michael Joseph Grisius: While not finalized we are progressing toward an agreement that would have Saratoga take control of the business as part of this plan the turnaround specialist who has substantial successful experience in similar situations with invest significant equity in the business and become the CEO and a board member.
Michael Joseph Grisius: And Solace suffered from continued performance this past quarter and required liquidity to continue operating, resulting in us marking down this investment significantly by $11.3 million to a fair value of $3.8 million. We immediately started working with the founder and prior owner on a restructuring of the balance sheet, resulting in us taking over the company last week and actively managing this investment. We have in place a framework for an agreement that would have the previous owner invest meaningful dollars in the business and work in partnership with us with the immediate goal of returning the business to its former profitability levels and the ultimate objective of exceeding those levels.
Michael Joseph Grisius: Yeah.
Michael Joseph Grisius: And solid suffered from continued performance this past quarter and required liquidity to continue operating.
Michael Joseph Grisius: Resulting in us marking down this investment significantly by $11 $3 million to a fair value of $3 $8 million.
Michael Joseph Grisius: We immediately started working with the founder and prior owner on a restructuring of the balance sheet, resulting in us taking over the company last week and actively managing this investment.
Michael Joseph Grisius: We have in place a framework for an agreement that would have the previous owner invest meaningful dollars in the business and work in partnership with US with the immediate goal of returning the business to its former profitability levels and the ultimate objective of exceeding those levels.
Michael Joseph Grisius: In addition to these non-accrual investments, we also want to highlight an update on NETREO, an investment that faced challenges this year. Subsequent to year end, Netraeo was acquired by BMC, a global leader in software solutions for autonomous digital enterprises.
Michael Joseph Grisius: In addition to these nonaccrual investments we also want to highlight an update on natural investment that face challenges this year.
Michael Joseph Grisius: Subsequent to year end <unk> was acquired by BMC, a global leader in software solutions for autonomous digital enterprises.
Michael Joseph Grisius: On May 1st, we received a full repayment of our first lien term loan, including accrued interest, and received partial equity proceeds at closing, with additional amounts held in escrow for future distributions subject to certain conditions. It is important to note that this investment, taken as a whole, including both our debt and equity, produced a positive IRR of approximately 5% without taking into account any potential yield enhancement that could be achieved through our residual escrow and earn-out.
Michael Joseph Grisius: On May <unk>, we received the full repayment of our first lien term loan, including accrued interest and received partial equity proceeds at closing with additional amounts held in escrow for future distributions subject to certain conditions.
Michael Joseph Grisius: Now it is important to note that this investment taken as a whole, including both our debt and equity produced a positive IRR of approximately 5% without taking into account any potential yield enhancement that could be achieved through our residual escrow an earn out.
Michael Joseph Grisius: In addition, the CLO and JV have $2.5 million of unrealized appreciation reflecting positive market appreciation this quarter, partially offset by markdowns due to individual credit. Of note is that the rest of the core BDC portfolio has continued to perform well, resulting in $4.2 million of net unrealized appreciation across our remaining 53 portfolio companies in Q4. 80% of our portfolio is generating financial results at or above the prior quarter. 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.
Michael Joseph Grisius: In addition, the CLO and JV have $2 5 million of unrealized.
Michael Joseph Grisius: Appreciation, reflecting positive market appreciation this quarter, partially offset by markdowns due to individual credits.
Michael Joseph Grisius: Of note is that the rest of the core BDC portfolio has continued to performed well, resulting in $4 2 million of net unrealized appreciation across our remaining 53 portfolio companies in Q4.
Michael Joseph Grisius: 80% of our portfolio is generating financial results at or above the prior quarter.
Michael Joseph Grisius: 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.
Michael Joseph Grisius: Moving on to slide 19, you can see our first license has been merged into the BDC following its wind down. Our second SBIC license is fully funded and deployed. And we are currently ramping up our new SBIC 3 license with 136 million of lower-cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back over to our CEO, Chris.
Michael Joseph Grisius: Now moving on to Slide 19, you can see our first license has been merged into the BDC. Following its wind down our second spic's licenses fully funded and deployed.
Chris: And we are currently ramping up our new Spic's three license with $136 million of lower cost Undrawn debentures available.
Chris: Allowing us to continue to support U S small businesses, both new and existing.
Michael Joseph Grisius: This concludes my review of the market and I would like to turn the call back over to our CEO Chris.
Christian L. Oberbeck: Thank you, Mike. As outlined on slide 20, our latest dividend of 73 cents per share for the quarter ended February 29th, 2024, was paid on March 28th, 2024. This is the largest quarterly dividend in our history and reflects a 6% and 38% 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 environment's impact on our earnings.
Speaker Change: Thank you Mike.
Christian L. Oberbeck: As outlined on slide 20, our latest dividend of <unk> 73 per share for the quarter ended February 29, 2024 was paid on March 28, 2024. This is the largest quarterly dividend in our history.
Christian L. Oberbeck: Flex of 6% and 38% increase over the past one and two years respectively.
Christian L. Oberbeck: The board of directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate environments impact on our earnings.
Christian L. Oberbeck: Recognizing the divergence of opinions on when interest rate cuts will commence and at what pace, as well as expectations for the economy, Saratoga's fourth-quarter over-earning of its dividend by 29 percent, 94 cents versus 73 cents per share in this quarter, provides substantial cushion should economic conditions deteriorate or base rates decline.
Christian L. Oberbeck: Recognizing the divergence of opinions on when interest rate cuts will commence and at what pace as well as expectations for the economy, Saratoga fourth quarter over earning of its dividend by 29% 94 versus <unk> 73 per share and this quarter provides substantial cushion should economic conditions.
Christian L. Oberbeck: <unk> or base rates decline.
Christian L. Oberbeck: Moving to slide 21, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 8%, uncharacteristically underperforming the BDC index of 30% for the same period. Our longer-term performance is outlined on our next slide, 22. Our five-year return places us in line with the BDC Index, while our three-year performance is slightly ahead. Since Saratoga took over management of the BDC in 2010, our total return has been 665.7% versus the industry's 269.2%.
Christian L. Oberbeck: Moving to slide 21, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of 8% uncharacteristically on performing the BDC index of 30% for the same period.
Christian L. Oberbeck: Our longer term performance is outlined on our next slide 22.
Christian L. Oberbeck: Five year return places us in line with the BDC index, while our three year performance is slightly ahead.
Christian L. Oberbeck: Saratoga took over management of the BDC in 2010, our total return has been 665, 7% versus the industry is 269, 2%.
Christian L. Oberbeck: 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, NAV per share, NII yield, and dividend growth and coverage, all of which reflect the growing value our shareholders are receiving. While ROE and NAV per share are lagging the industry this past year, that is primarily due to the two discrete non-accruals we have previously discussed.
Christian L. Oberbeck: On Slide 23, you can further see our performance placed in the context of the broader industry and specific to certain key performance metrics.
Christian L. Oberbeck: We continue to focus on our long term metrics such as return on equity.
Christian L. Oberbeck: For share NII yield and dividend growth and coverage all of which reflects the growing value our shareholders are receiving.
Christian L. Oberbeck: On ROE and NAV per share are lagging the industry. This past year that is primarily due to the two discrete non accruals. We have previously discussed we continue to be one of the few bdcs to have grown our NAV over the long term and we have done it accretively and our long term return on equity remains one six times the long term industry average.
Christian L. Oberbeck: We continue to be one of the few BDCs to have grown NAV over the long term, and we have done it creatively. And our long-term return on equity remains 1.6 times the long-term industry average. Moving on to slide 24, all our initiatives discussed in this call are designed to make Saratoga Invtmtmt a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics, outlined on this slide, will help drive the size and quality of our investor base, including adding more institutions.
Christian L. Oberbeck: Moving on to slide 20 for all our initiatives discussed on this call are designed to make Saratoga investment a leading BDC is attractive to the capital markets community.
Christian L. Oberbeck: We believe that our differentiated performance characteristics outlined on this slide.
Christian L. Oberbeck: We will help drive the size and quality of our investor base, including adding more institutions.
Christian L. Oberbeck: The differentiating characteristics many previously discussed include maintaining one of the highest levels of management ownership in the industry at 12 percent, 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 challenges and uncovering opportunities in the current and future environment, and that our balance sheet, capital structure, and liquidity will benefit Saratoga's shareholders in the near and long term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions. Thank you. At this time...
Christian L. Oberbeck: The differentiating characteristics. Many previously discussed include maintaining one of the highest levels of management ownership in the industry at 12%, ensuring we are aligned with our shareholders.
Christian L. Oberbeck: 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 service well in navigating through challenges and uncovering opportunities in the current and future environment and that our balance sheet capital structure and liquidity.
Christian L. Oberbeck: <unk> will benefit Saratoga shareholders in the near and long term.
Christian L. Oberbeck: In closing I would again like to thank all of our shareholders for their ongoing support I would like to now open the call for questions.
Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A list. Our first question comes from the line of Erik Zwick of Hufty Group. Your line is now open.
Christian L. Oberbeck: Yes.
Operator: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to retire a question. Please press star one again, please stand by while we compile the Q&A roster.
Operator: Yeah.
Operator: Okay.
Erik Edward Zwick: Our first question comes from the line of Eric Smith of Hub Group. Your line is now open.
Erik Edward Zwick: Thanks. Good afternoon, everyone.
Erik Edward Zwick: Thanks, Good afternoon, everyone.
Erik Edward Zwick: Hi, Eric.
Erik Edward Zwick: I wanted to start maybe just on your thoughts as you look at the portfolio today, and you mentioned spreads are getting a little bit tighter, leverage may be going up a little bit, and certainly, the activity you had in the last fiscal year was weighted much more heavily towards add-on investments. Given that backdrop, would you expect the next couple quarters to be similar with more weighting towards add-on investments? Are you seeing any improvement in the market for new opportunities today?
Erik Edward Zwick: Wanted to start maybe just on your thoughts as you look at the portfolio today, and then you mentioned.
Erik Edward Zwick: Spreads are getting a little bit tighter leverage maybe going up a little bit.
Erik Edward Zwick: And then certainly the activity you had in the last fiscal year was weighted much more heavily towards add on investments.
Erik Edward Zwick: Given that backdrop would you expect that the next couple of quarters to be similar with more weighting towards Adam investments are you seeing any improvement in the market for offer new opportunities today.
Michael Joseph Grisius: That's a good question. This is Mike.
Erik Edward Zwick: That's a good question this is Mike.
Michael Joseph Grisius: You know, it's interesting; we can never have a crystal ball in terms of what the future holds. I would say this, right now where we look, even with spreads tightening at the margin and leverage creeping up a little bit at the margin because we're seeing some participants that were on the sidelines before kind of starting to enter the market, so there's just a little bit more competition, we think the risk-adjusted returns in the market are just fabulous in terms of the gross return that you can get on first lien securities.
Mike: It's interesting we can never have a crystal ball in terms of what the future holds I would say this.
Michael Joseph Grisius: Right now, where we look at even even with spreads tightening at the margin and leverage creeping up a little bit at the margin because we are seeing some participants that were on the sidelines before kind of starting to enter the market. So there is a little bit more competition, we think the risk adjusted returns.
Michael Joseph Grisius: In the market are just fabulous in terms of.
Michael Joseph Grisius: Gross return that you can get on first lien securities. So we're certainly open for business and looking for opportunities to deploy capital.
Michael Joseph Grisius: So we're certainly open for business and looking for opportunities to deploy capital. What certainly has happened, though, is that where rates are and given the uncertainty in the economy, we've seen that the overall M&A deal flow just in general is down, so that's certainly affected our investment, and new investment velocity. It's also affected us in that we haven't had many redemptions at all, so the flip side of that is that we're not seeing as many new opportunities that we like, but we do have a portfolio that's holding up really well and is hungry for capital.
Michael Joseph Grisius: What certainly has happened, though is that where rates are and given the uncertainty in the economy. We have seen that the overall M&A deal flow just in general is down so that certainly affected our investment new investment velocity. It's also affected us in.
Michael Joseph Grisius: That we haven't had many redemptions at all so the flip side of that is that yes, we're not seeing as many new.
Michael Joseph Grisius: New opportunities that we like but we do have a portfolio, that's holding up really well.
Michael Joseph Grisius: <unk> is hungry for capital I think a lot of the owners of those businesses, probably would've foreseen that they would have sold some of those businesses a little bit earlier, but they are probably waiting for a better more favorable market and so instead, they're continuing to do acquisitions and continue to grow their business. So theres sort of two sides of the equation.
Michael Joseph Grisius: I think a lot of the owners of those businesses probably would have foreseen that they would have sold some of those businesses a little bit earlier, but they're probably waiting for a better, more favorable market, so instead, they're continuing to do acquisitions and continue to grow their businesses, so there's sort of two sides to the equation. But to answer your question more directly, we do think that there'll be plenty of opportunities for us to deploy capital and that as the market picks up, as it does so, probably our investment volume will move in accordance with that.
Michael Joseph Grisius: But to answer your question hopefully more directly.
Michael Joseph Grisius: We do think that.
Michael Joseph Grisius: That there'll be plenty of opportunities for us to deploy capital.
Michael Joseph Grisius: And that as the market picks up that will.
Michael Joseph Grisius: Is it is it does so we will will probably our investment volume will move.
Michael Joseph Grisius: Move in accordance with that.
Michael Joseph Grisius: And I think the other thing I would add is that we've been in this market very focused on supporting our portfolio companies, and you've seen that in the add-on activity that we've done. We also have a few discrete credits that we've been focused on very carefully as well, and that's taken some of our time and attention.
Speaker Change: And I think the other thing I would add is that we've been in this market very focused on supporting our portfolio companies and you've seen that in.
Michael Joseph Grisius: The add on activity that we've done we've also had a few discreet credits that we've been focused on very carefully as well and that's taken some of our time and attention.
Christian L. Oberbeck: I appreciate the detailed answer there. Next question, just looking at you, was fairly active in the last fiscal year in terms of utilizing the equity distribution agreement. You know, it looks like you've got fairly good liquidity levels now with additional capacity on the SBIC-2, the third one now approved, and also the new $50 million revolving credit facility. So, just curious about your thoughts around continuing to use the equity distribution agreement at this point to raise additional capital as well.
Speaker Change: I appreciate the detailed answer there.
Christian L. Oberbeck: Next question just looking at you were fairly active.
Christian L. Oberbeck: Fiscal year in terms of utilizing the equity distribution agreement it looks like you've got a fairly good liquidity levels now with additional capacity on the FDIC two.
Christian L. Oberbeck: Third one now approved and also the new $50 million revolving credit facility. So just curious about your.
Christian L. Oberbeck: Any thoughts around continuing to use the equity distribution agreement at this point to raise additional capital as well.
Christian L. Oberbeck: Well, I think that's also a very good question. I think one of the important things that we've learned over time is that having a highly diversified source of capital is very important. And I think utilizing the equity ATM is important for many reasons, and equity is kind of the cornerstone of so much of what's done in the BDC space. In terms of these other facilities, I think we're always looking to try and have a highly diversified source of capital because markets change.
Speaker Change: Well I think that's also a very good question.
Christian L. Oberbeck: One of the important things that we have.
Christian L. Oberbeck: And over time as having a highly diversified source of capital is very important and I think <unk> utilizing the equity ATM is important for many reasons and equity.
Christian L. Oberbeck: As kind of the cornerstone of so much of what's done in the BDC space.
Christian L. Oberbeck: In terms of these other facilities I think we're always looking to try to have highly diversified source of capital because markets change. There was a period of time, where we did baby bonds in those other periods of time, where we were able to raise institutional capital and then.
Christian L. Oberbeck: There was a period of time when we did baby bonds, and there was another period of time where we were able to raise institutional capital, and then those markets can come and go at different levels, and then we went back to baby bonds. And then these credit facilities are important for flexibility. There's some residual level of outstanding at all times, but they also serve as swing lines, if you will, and allow us to move very quickly on investments, and then we can decide over time what the right overall financing is and basically adjust to that in the marketplace.
Christian L. Oberbeck: Those markets can come and go at different levels and then we went back to baby bonds and then these.
Christian L. Oberbeck: Credit facilities are important for flex.
Christian L. Oberbeck: Flexibility.
Christian L. Oberbeck: There is some residual level of outstanding is sort of at all times, but they also serve as swing lines. If you will and allow us to move very quickly on investments and then we can.
Christian L. Oberbeck: Decide over time, what's the right.
Christian L. Oberbeck: Overall financing is and basically adjusted that in the marketplace. So we don't have any specific plan for any of our particular.
Christian L. Oberbeck: So we don't have any specific plan for any of our particular capital sources at this moment in time, but also, just realistically, those are kind of opportunistic as well. It depends how the markets evolve, but at this point in time, I think we're pretty well financed.
Christian L. Oberbeck: Capital sources at this moment in time.
Christian L. Oberbeck: But also just the realistically those those are kind of opportunistic as well.
Christian L. Oberbeck: It depends how the markets evolve and but at this point in time, I think we're pretty well financed.
Michael Joseph Grisius: Thanks. And last one for me, and then I'll step aside. You know, the second bullet on your objectives for the future is to, you know, potentially add to your management team and process. I'm just curious what the market is like out there now for, you know, finding new investment professionals to join Saratoga. Where are you finding the best opportunities, if it's from other asset managers or investment banks or other sources as well, and how competitive is that market today?
Speaker Change: Thanks, and last one for me and then I'll step aside the second bullet on your objectives for the future is too.
Michael Joseph Grisius: Potentially add to your management team and process. So I'm just curious what the marketed like out there now for finding new investment professionals to join Saratoga.
Michael Joseph Grisius: Where are you finding the best opportunity that fits from other asset managers or investment banks or other sources as well and how competitive is that market today.
Michael Joseph Grisius: This is Mike. Let me jump in on that.
Michael Joseph Grisius: Yes. This is Mike let me, let me jump on the on that one of the things Thats interesting. If you look at our management team and just our team in general.
Michael Joseph Grisius: One of the things that's interesting, if you look at our management team and just our team in general, the senior management team has worked together for 12 plus years, and there's just been incredible continuity. So that track record that I referenced in the prepared remarks has been built by that senior management team and a credit culture that we've developed together, a certain way of assessing risk that's been, you know, successful.
Michael Joseph Grisius: Senior management team.
Michael Joseph Grisius: <unk> has worked together for 12 plus years.
Michael Joseph Grisius: And there's just been incredible continuity, so that track record that I referenced in the prepared remarks has been built by that senior management team and a credit culture that we have developed together a certain way of assessing risk that's been.
Michael Joseph Grisius: Successful and so we're really careful have been very careful cautious about bringing in your senior people into the management team its a little bit of that.
Michael Joseph Grisius: And so we're really careful, have been very careful, cautious about bringing in your senior people into the management team. It's a little bit of that. It's hard to take somebody in, teach old dogs new tricks or what have you.
Michael Joseph Grisius: It's hard to hard to take somebody in treated teach.
Michael Joseph Grisius: Teach old dogs, new tricks or what have you like we really like.
Michael Joseph Grisius: We really like training people up when they're younger in their careers. We view our business as one where you generally make money by not losing money, and the way you get trained well in credit is really an apprenticeship-type way to do it right so that as people are growing in their careers, they have a continuity of looking at credit and risk in the right way, we think. And so what I'm getting to is that, therefore, we're focused more on building from the bottom up.
Michael Joseph Grisius: Training people up.
Michael Joseph Grisius: When they are younger in their careers, we view our business is one where you generally make money by not losing money and the way you get trained well in credit is is really almost an apprenticeship type.
Michael Joseph Grisius: The way to do it right. So that as people are growing in their careers. They have a continuity of of looking at credit and risk in the right way, we think and so what I'm getting to is that therefore, we're focused more on building from the bottom up.
Michael Joseph Grisius: And we've done that successfully over the years, bringing in people that are two, three years out of school, largely out of investment banking programs. We've got two new talented associates that are starting this summer. We've also got an analyst starting to augment our business development efforts. So the market is ripe right now for hiring young, talented professionals. More favorable than it was a couple years ago, when everybody was trying to, you know, kind of hold on to their professionals. We're seeing less activity and less competition from some others. And so we're jumping into that void and trying to build our talent from the bottom up.
Michael Joseph Grisius: And we've done that successfully over the years, where we're bringing in people that are two or three years out of school largely out of investment banking programs. We've got.
Michael Joseph Grisius: Two new talented associates that are starting this summer we've also got a.
Michael Joseph Grisius: Analysts starting.
Michael Joseph Grisius: To augment our business development efforts so.
Michael Joseph Grisius: The market is ripe right now for hiring young talented professionals.
Michael Joseph Grisius: More favorable than it was a couple of years ago, where everybody was trying to.
Michael Joseph Grisius: Kind of hold onto their professionals, we're seeing less activity and less competition from some others and so we're we're jumping into that void and trying to build our talent from the bottom up.
Christian L. Oberbeck: And one general comment as well is that we're seeing, you know, there was a very, you know, market increase in the rate of compensation starting in 21, 22, and that's starting to moderate, you know, very substantially. And so that's maybe the beginning of, you know, sort of, a greater availability of professionals in general. But I think Mike explained pretty well what our philosophy is at Saratoga.
Christian L. Oberbeck: One general comment.
Christian L. Oberbeck: As well is that we're seeing.
Christian L. Oberbeck: There was a very market.
Christian L. Oberbeck: The increase in the rate of compensation, starting in 'twenty, one 'twenty, two and thats starting to moderate very substantially and so that's maybe at the beginning of <unk>.
Christian L. Oberbeck: Sort of.
Christian L. Oberbeck: Yes.
Christian L. Oberbeck: A greater availability of professionals in general, but I think I think Mike explained pretty well, what our philosophy is that Saratoga.
Erik Edward Zwick: Yeah, thanks. It's interesting to hear those anecdotes.
Speaker Change: Okay. Thanks.
Speaker Change: Those are those anecdotes that's all for me thanks for taking my questions today.
Operator: That's all for me. Thanks for taking my questions today. Thank you. Thank you. One moment for our next question.
Speaker Change: Thank you.
Operator: Thank you one moment for our next question.
Operator: Our next question comes from the line of Robert Dodd of Raven James. Your line is now open.
Operator: Our next question comes from the line of Robert Dodd of Raymond James Your line is now open.
Robert James Dodd: Hi guys, on the, um... The Origination activity in Pipeline. I mean, you didn't do any new platform companies in the quarter, and you talked about maybe some things didn't hit your quality metrics, but a lot of follow-on activity. So you deployed the platform, nonetheless, on things not meeting your requirements. And can you give us any more color on that? Are those some of the businesses coming into the market now? Are they asking for too much leverage? Are they in the wrong industries?
Robert James Dodd: Hi, guys one on the.
Robert James Dodd: Image Nation Act.
Robert James Dodd: Activity in pipeline.
Robert James Dodd: You didn't do any new platform companies in the quarter and you talked about maybe some things didn't.
Robert James Dodd: Quality metrics, but a lot of follow on activity.
Robert James Dodd: Capital Nonetheless.
Robert James Dodd: Is all on things.
Robert James Dodd: Things not meeting your requirement.
Robert James Dodd: Can you give us any more color on is that.
Robert James Dodd: Some of the business is coming to market now the asking for too much leverage the wrong industry.
Robert James Dodd: What is it.
Robert James Dodd: I mean, what is it? That's kind of not ticking the boxes for you to be willing to deploy new capital into new platforms. Obviously, you've got the existing book, which is always great to have.
Robert James Dodd: That's kind of not taking checking the boxes for us.
Robert James Dodd: Willing to deploy new capital into new platforms, obviously, the existing book.
Michael Joseph Grisius: Sir, can you give us a little color there?
Robert James Dodd: Which is always great to have so can you give us any more color there.
Michael Joseph Grisius: Sure, and... It's hard to be too general, but if I think about the deals that we took a hard look at and decided to pass on, the majority of them were businesses that we just did not feel met our credit bar. So it wasn't that the leverage metrics or the pricing, in and of themselves, were the reason that we passed. It was more just that we didn't see businesses that really met our credit bar.
Michael Joseph Grisius: Sure.
Michael Joseph Grisius: <unk>.
Michael Joseph Grisius: It's hard to give.
Michael Joseph Grisius: B to general, but if I think about the deals that we took a hard look at and decided to pass.
Michael Joseph Grisius: The majority of them were businesses that we just did not feel met our credit bar.
Michael Joseph Grisius: It wasn't that the leverage metrics or the pricing in and of themselves were the reason that we passed it was more just that.
Michael Joseph Grisius: We didn't see businesses that really met our credit bar, that's not 100%, but thats. The majority of the case, we probably lost a couple of deals at the margin and competition, but.
Michael Joseph Grisius: That's not 100%, but that's the majority of the case. We probably lost a couple of deals at the margin of competition, but more than anything, we looked at things that we passed on. Now, what does that mean?
Michael Joseph Grisius: More than anything we looked at things that we passed on now what does that mean.
Michael Joseph Grisius: This is just us.
Michael Joseph Grisius: This is just us, kind of observing through our own lens, right? It feels like the quality of the businesses that are in the marketplace right now, all else equal, is not as strong, perhaps. And it could be that some of the stronger businesses are people are deciding to hold on to until they see a more favorable market. But I don't want to say that definitively. Our observation has just been that we haven't seen as many quality deals.
Michael Joseph Grisius: Observing through our own lens right.
Michael Joseph Grisius: It feels like the quality of the businesses that are.
Michael Joseph Grisius: In the marketplace right now all else equal are not as strong.
Michael Joseph Grisius: Perhaps it could be that some of the stronger businesses people are deciding to hold on to until they see a more favorable market.
Michael Joseph Grisius: But I don't want to say that definitively.
Michael Joseph Grisius: Our observation has just been that we haven't seen as many quality deals yet at the same time and we always are self reflective do we feel like we're doing a good job on the business development front, absolutely I mean, we have really worked hard over the last dozen plus years to develop a very significant presence at the lower end of the middle market.
Michael Joseph Grisius: Yet at the same time, we are always self-reflective. Do we feel like we're doing a good job on the business development front? Absolutely. I mean, we have really worked hard over the last dozen plus years to develop a very significant presence at the lower end of the middle market. And we feel like, of course, there's plenty of opportunities to expand that. But we do feel like we're getting a healthy look at what's out there in the marketplace.
Michael Joseph Grisius: Feel like of course, theres plenty of opportunities to expand that but we do feel like we're getting a healthy look at what's out there in the marketplace.
Robert James Dodd: Got it, got it. Thank you. I appreciate that, Colin. You gave us an update on Nolan's web performance, including a little bit in Pepper Palace, where there's a whole process in play on Zolidge, which was obviously the biggest Markdown in the quarter. Is there anything underway on that? Or are you satisfied with how the... The business is being operated, etc. It's just going to take time for everything to play out or, or is there something underway in that business as well? I've been proving the mark of the old.
Michael Joseph Grisius: Yes.
Speaker Change: Got it got it. Thank you I appreciate that color.
Robert James Dodd: US incremental color on Noland web performance.
Robert James Dodd: It could be a little bit and pepper pallets, whether the whole process in place almost knowledge, which is obviously the biggest.
Robert James Dodd: Markdown.
Robert James Dodd: In the quarter.
Robert James Dodd: Is there anything underway on that or is it youre satisfied with how the.
Robert James Dodd: The business is being operated et cetera, it's just going to take time for everything to play out.
Robert James Dodd: Or is that something underway on that business as well.
Robert James Dodd: Improving remarkably ultimately.
Michael Joseph Grisius: Yeah, no, it's a good question, especially given that the mark changed pretty significantly in short order. And I'll comment on that for a second, too. Some of that was that the private equity sponsor, you know, made a decision that they were no longer going to support the business. That was just, you know, a decision they made, and as a result, it was... Orphaned is probably a stronger word, but I'm not, too strong a word, but I'm not finding another one.
Michael Joseph Grisius: Yes, no. It's a good question, especially given that the mark changed pretty significantly in short order and I'll comment to that for a second too I mean, some of that was that the private equity sponsor.
Michael Joseph Grisius: You made a decision that they were no longer going to support the business.
Michael Joseph Grisius: The decision they made and as a result it was.
Michael Joseph Grisius: But as a result, since it no longer had that support, the management team started to make, undertake some actions that we felt made things worse, a little bit desperate in terms of the course of action it took. So things got worse pretty fast.
Michael Joseph Grisius: Orphan, just probably a stronger word but.
Michael Joseph Grisius: Too strong a word.
Michael Joseph Grisius: I am not finding another one but as a result.
Michael Joseph Grisius: Since it no longer had that support the management team started to mixed.
Michael Joseph Grisius: Undertake some actions that we felt made things worse, a little bit desperate in terms of the course of action that takes us so things got worse pretty fast.
Michael Joseph Grisius: And we reacted very quickly.
Michael Joseph Grisius: And we reacted very quickly to get in front of the founder, former owner, and person who was a board member of the business to, you know, start engaging with him to jump in and start operating as the chief restructuring officer, which is what he's doing now. And we did take control of the company, and we're in active discussions with him, and we have sort of a general framework for an agreement where he will be investing dollars in that business.
Michael Joseph Grisius: To get in front of the founder.
Michael Joseph Grisius: Former owner and the person who was a board member of the business too.
Michael Joseph Grisius: Start engaging with him to jump in and start operating as the Chief restructuring officer, which is what he is doing now.
Michael Joseph Grisius: And we did take control of the company and we're in active discussions with him and have sort of a.
Michael Joseph Grisius: General free.
Michael Joseph Grisius: And he and some of his old team will be focused on resurrecting the profitability levels that they enjoyed in the past. The good news is that when we look at the business, we think a lot of the core fundamentals that we liked about the business initially remain in place. And so we feel like much of the underperformance was strategic decisions that were not right, mismanagement in a lot of respects, and then if we can get things back on track, i.e.
Michael Joseph Grisius: <unk> framework for an agreement, where he will be investing dollars in that business and he and some of his whole team will be focused on resurrecting the profitability levels that.
Michael Joseph Grisius: That they enjoyed in the past.
Michael Joseph Grisius: The good news is that when we look at the business. We think a lot of the core fundamentals that we liked about the business initially remain in place.
Michael Joseph Grisius: And so we feel like much of the underperformance was.
Michael Joseph Grisius: Strategic decisions that were not right mismanagement and a lot of respects and then if we can get things back on track I E. Undertake some of the approaches that the company had successfully done in the past that there is a good chance I mean, we've got to do it there's a lot of wood to chop, but theres a good chance that we can get the business.
Michael Joseph Grisius: undertake some of the approaches that the company has successfully done in the past, that there is a good chance, I mean, we've got to do it, there's a lot of wood to chop, but there's a good chance that we can get the business back to what it looked like before, and our founder and former owner has a lot of confidence at this juncture that it can do much, much better than that even. So we've got work to do, but we have a reasonable level of optimism that we can work hard together to recover some value for our shareholders.
Michael Joseph Grisius: Back to what it looked like before and.
Michael Joseph Grisius: R R.
Michael Joseph Grisius: The founder and former owner has a lot of confidence at this juncture that it can do much much better than that even.
Michael Joseph Grisius: So we've got work to do but we have it.
Michael Joseph Grisius: Reasonable level of optimism that we can.
Michael Joseph Grisius: Work hard together to recover some value for our shareholders.
Operator: Got it. Thank you. I really appreciate that. Thank you, one moment, for our next question.
Speaker Change: Got it. Thank you I really appreciate that color.
Operator: Thank you, one moment for our next question. Our next question comes from the line of Mickey Schleien of Lydensburg. Your line is now open.
Speaker Change: Thank you Omar for next question.
Mickey Max Schleien: Our next question comes from the line of Mickey <unk> of.
Operator: Ladies.
Mickey Max Schleien: Good afternoon, everyone. Chris, on this call, everyone mentioned, you know, the uncertain, excuse me, the uncertain outlook for the economy. This current quarter, you've received a nice repayment from NetRio, so I'm curious whether you're thinking about taking those proceeds to take some leverage off the balance sheet, given the uncertain economic outlook, or do you think the pipeline is interesting enough to reinvest those proceeds?
Mickey Max Schleien: Line is now open.
Speaker Change: Good afternoon, everyone.
Mickey Max Schleien: Chris in this call.
Mickey Max Schleien: Everyone's mentioned.
Mickey Max Schleien: Excuse me the uncertain outlook for the economy.
Mickey Max Schleien: This.
Mickey Max Schleien: Current quarter, you've received a nice repayment.
Mickey Max Schleien: Net Rio so I'm curious, whether you're thinking about taking those proceeds to take some leverage off the balance sheet.
Mickey Max Schleien: Given the uncertain economic outlook.
Mickey Max Schleien: Or do you think the pipeline is interesting enough to reinvest those proceeds.
Christian L. Oberbeck: Well, I think, you know, as you can appreciate, we're always looking at our capital structure and our liability structure. And we have a number of our debt instruments that are callable. And so we do have the flexibility to call some. We do have some revolving credit that we can repay. But we also want to be mindful of what the replacement cost would be if we repay them.
Mickey Max Schleien: Okay.
Christian L. Oberbeck: Well I think.
Christian L. Oberbeck: As you can appreciate.
Christian L. Oberbeck: So we're always looking at our capital structure and our liability structure and we.
Christian L. Oberbeck: We have a number of our debt instruments are callable and so we do have the flexibility to call. Some we do have some revolving credit that we can we can repay.
Christian L. Oberbeck: We also want to be mindful of what the replacement cost would be if you repay them.
Christian L. Oberbeck: You know, and so we are obviously taking all that into account. I think in terms of the uncertain environment. We kind of always, you know, maybe it's more uncertain today than it was before, but that's not really what drives our investment activity. Our investment activity is generally more driven by the quality of the companies that, you know, either we find or come our way, as Mike indicated earlier. And, you know, we haven't really seen them this past quarter.
Christian L. Oberbeck: And so.
Christian L. Oberbeck: We are obviously, taking all that into account.
Christian L. Oberbeck: In terms of the uncertain environment.
Christian L. Oberbeck: We kind of always.
Christian L. Oberbeck: Maybe it's more uncertain today than it was before but thats not really what drives our investment.
Christian L. Oberbeck: Activity investment activity is generally more driven by the quality of the companies.
Christian L. Oberbeck: Either we find our come our way as Mike indicated earlier and we.
Christian L. Oberbeck: We haven't really seen them this past quarter, we did see in the quarter before so.
Christian L. Oberbeck: We did see them the quarter before. So, you know, we're always on the lookout, and we want to be prepared and ready to, you know, support our existing portfolio companies or make further investments. And so with that said, we don't have a specific plan for the repayment proceeds for NetReo, but we're always evaluating both the asset opportunity side and the liability optimization side.
Christian L. Oberbeck: So we are always on the lookout and we want to be prepared and ready to support.
Christian L. Oberbeck: Support our existing portfolio of companies are making further investments.
Christian L. Oberbeck: And so with that said, we don't have a specific plan for the repayment proceeds for debt trio, but we're always evaluating both the asset opportunity side and the liability optimization side.
Mickey Max Schleien: I understand. Thanks for that explanation and a follow-up sort of right-hand side of the balance sheet question. As expected, your undistributed taxable income climbed meaningfully last year, and if I'm calculating it correctly, it's well north of $3 a share. So that's resulting in some meaningful excise tax accruals. I don't, off the top of my head, remember when the board needs to decide what to do with all that UTI, but are you leaning more toward retaining it and doing a deemed distribution or rewarding shareholders for their patients or something else that's not occurring to me?
Mickey Max Schleien: I understand thanks, thanks for that explanation and a follow up sort of right hand side of the balance sheet question.
Mickey Max Schleien: As expected.
Mickey Max Schleien: Your undistributed taxable income climb meaningfully last year, and if I'm calculating it correctly, it's well north of $3 a share so thats, resulting in also some meaningful excise tax accruals.
Mickey Max Schleien: I don't off the top of my head remember when the board.
Mickey Max Schleien: Needs to decide what to do with all that UTI, but Ken are.
Mickey Max Schleien: Are you leaning more toward retaining it and doing a deemed distribution or.
Mickey Max Schleien: Rewarding shareholders for their patience or something.
Mickey Max Schleien: Something else, that's not occurring to me.
Christian L. Oberbeck: Well, I think that's a good and important question. I think, as you rightly point out, our over-earning of our dividend is creating incremental retained earnings, and the excise tax is a reflection of that. You know, one characteristic of having that outstanding is that the cost of the excise tax is four percent. And so if you consider this character of liability as a debt, a 4% rate on that debt is actually quite a good rate in today's environment.
Christian L. Oberbeck: Well I think thats.
Christian L. Oberbeck: A good and important question I think as you rightly point out.
Christian L. Oberbeck: Our over earning our dividend is creating incremental.
Christian L. Oberbeck: Retained.
Christian L. Oberbeck: Earnings and the excise tax is a reflection of that.
Christian L. Oberbeck: I think.
Christian L. Oberbeck: No.
Christian L. Oberbeck: One characteristic of of having that outstanding is at the cost of the excise taxes, 4% and so if you consider.
Christian L. Oberbeck: This character of liability.
Christian L. Oberbeck: As of that 4% rate on that debt is actually quite a good rate in today's environment. So I think it's advantageous.
Christian L. Oberbeck: So I think it's advantageous to utilize that source of capital, if you will. I think you may recall, Mickey, since you've covered us for so long, there was a period, and I think at that time, we were actually borrowing on some of our SBIC capital at substantially less than 4%. So 4%, not that many years ago, was actually sort of a high rate relative to some of the things we were able to access. So that's one characteristic.
Christian L. Oberbeck: <unk>.
Christian L. Oberbeck: Two.
Christian L. Oberbeck: To run.
Christian L. Oberbeck: To utilize that source of capital. If you will I think you may recall Mickey since you've covered us for so long there was a period of time, where we had almost no spillover.
Christian L. Oberbeck: And I think at that time, we were actually borrowing on some of our spic's capital at substantially less than 4%. So so 4%.
Christian L. Oberbeck: Not that many years ago was not was actually sort of a high rate relative to some of the things we were able to to access. So that's one that's one characteristic and as you rightly pointed out we are we are building.
Christian L. Oberbeck: And as you rightly point out, we are building taxable income. There's some that gets deferred, and some that needs to be paid. And I think that's an ongoing discussion internally as to how we address the amount that is paid. And that will be something coming probably later in the summer when we make our final determination on that.
Christian L. Oberbeck: Taxable income there is some that gets deferred and some that needs to be paid and I think that's an ongoing.
Christian L. Oberbeck: The discussion internally as to how we address the amount that is paid and that'll be something coming probably later in the summer as well.
Christian L. Oberbeck: Make a final determination on that.
Mickey Max Schleien: I understand. Those are all my questions this afternoon. Thanks for your time.
Speaker Change: I understand those are all my questions. This afternoon and thanks for your time.
Mickey Max Schleien: Yeah.
Christian L. Oberbeck: Thank you. This concludes the question and answer session. I would now like to turn it over to Christian Oberbeck for closing comments.
Speaker Change: Thank you.
Christian L. Oberbeck: Thank you. This concludes our question and answer session I would now like.
Christian L. Oberbeck: Ill turn it over to Christian Oberbeck for closing comments.
Christian L. Oberbeck: Well, we'd like to thank everyone for joining us today, and we look forward to speaking with you again next quarter.
Christian L. Oberbeck: Well, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Christian L. Oberbeck: Thank you for your participation in today's conference.
Christian L. Oberbeck: Could the program you may now disconnect.
Operator: Okay.
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