Q2 2025 Saratoga Investment Corp Earnings Call

Speaker Change: Good morning ladies and gentlemen. Thank you for staying by. Welcome to Sarah Tolberg, Messman Corpse. To dozen 25 to a school setting quarter financial results conference call. So you should know that today's call is being recorded.

Speaker Change: Darn today's presentation on parties will be in listen only mode, following management preparing more school-open online for questions. This time, I'd like to turn it all over to Sir Toka Investance Chief Financial and Chief Comtines Officer, Mr. Henry Steenkamp, please go ahead.

Henry Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corps 2025, the fiscal second quarter earnings conference call.

Henry Steenkamp: 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 desert materially from these forward-looking statements and projections.

Henry Steenkamp: We do not undertake to update our forward-looking statements and this required to do so by law.

Henry Steenkamp: Today, we will be referencing a presentation during our call. You can find our fiscal second quarter 2025 share all the presentation in the events and presentation section of our investor relations website. A link to our IR page is 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. I would now like to turn the call over to our chairman and chief executive officer Christian Oberbeck, who will be making a few introductory remarks.

Christian Oberbeck: Thank you, Henri, and welcome everyone.

Christian Oberbeck: Sertog Investment Corps highlights this quarter, including the successful full repayment and resolution of our no-one investment. The last of our four non-acool or watchlist investments in our portfolio resolved this past year. Over return to increasing NAV per share and continued substantial over-earning of our record level of dividends.

Christian Oberbeck: Our annualized second quarter dividend of 74 cents per share implies a 12.7% dividend yield based on the stock price.

Christian Oberbeck: of 2326 per share on October 7, 2024. The substantial overturning of the dividends is quarter, continues to support the current levels of dividends, increases NAV supports increased portfolio growth and provides a cushion against adverse events.

Christian Oberbeck: And while short-term interest rates have decreased from their highs, this quarter's earnings continue to benefit from elevated levels of rates and spreads on Saratoga investments largely floating rate assets, while costs of long-term balance sheet liabilities are largely fixed but callable either now or in the future.

Christian Oberbeck: Our ongoing development of sponsor relationships continues to create distracted investment opportunities from high-quality sponsors despite the recent constrained general volume of M&A. We appear to be seeing the early stages of a potential increase in M&A in the lower middle market reflected in multiple repayments over the past few months. In addition to significant new originations,

Christian Oberbeck: including, importantly, two new portfolio investments closed subsequent to corridor land.

Christian Oberbeck: We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high quality nature, resilience and balance of our $1.04 billion portfolio in the current environment. Where we have encountered challenges in four of our portfolio companies over the past year, we have taken decisive action.

Christian Oberbeck: The Zollets Restructuring was completed last quarter and the pepper palace restructuring this quarter.

Christian Oberbeck: As a quarter-end, both investments are now being held at a total combined remaining fair value of $3.6 million. And Saratoga is taking control of both investments and brought a new CEO's through consensual restructuring with the prior sponsors and former management.

Christian Oberbeck: We continue to actively implement management changes, toporal structure improvements, and business plan adjustments, which have the potential for future increases in recovery value.

Christian Oberbeck: Our no-one investment, we've paid its full principle, as well as all accrued and reserved interests through a sale transaction.

Christian Oberbeck: As I've August 31st, 2024, we recognize the $7.9 million previously reserved interest into NII. And this also, and also booked a .5 million dollar unrealized appreciation.

Christian Oberbeck: This leaves $2.7 million that will be recognized into unrealized appreciation in the third quarter, reflecting full repayment of the investment subsequent to quarter end.

Christian Oberbeck: and our natural investment was also sold in the prior quarter, with full recovery of our invested debt capital and a modest overall return.

Christian Oberbeck: The remaining core non-CLO portfolio was relatively unchanged this quarter and the CLO and JV were marked down by $2.7 million for a total net reduction in portfolio value of $4.7 million this quarter.

Christian Oberbeck: Our total portfolio fair value is now 0.2% above cost, or a core non-Coloportfolio is 3.3% above cost.

Christian Oberbeck: with the completion of the Pepper Palace and Zalajry Square Springs, and no one to naturally are having repaid and full. We have resolved uncertainties related to all four portfolio companies on our watch list.

Christian Oberbeck: The overall financial performance in strong earnings power of our current portfolio reflects strong underwriting in our solid grilling portfolio companies and sponsors and well-selected industry segments.

Christian Oberbeck: We continue to approach the market with prudence and discernment in terms of new commitments in the current dynamic interest rate environment.

Christian Oberbeck: Originations discord or demonstrate that despite an overall robust pipeline, there are periods like the current one where many of the investments we reviewed do not meet are high-quality credit standards.

Christian Oberbeck: During the quarter, we originated no new portfolio company investments, about benefiting from five smaller follow on investments in existing portfolio companies, we know well, with strong business models and balance sheets.

Christian Oberbeck: With the rich nations to score their $2.6 million versus $60 million, 60.1 million of repayments in amortization, our quarter-end cash position has grown to $162 million.

Christian Oberbeck: Improving our effective leverage from 159.6% regulatory leverage to 172.0% net leverage, netting available cash against outstanding debt.

Christian Oberbeck: Subsequent to quarter-end, reflecting positive trends in our pipeline, we executed approximately $56.7 million of new originations in two new portfolio companies and two follow-ups.

Christian Oberbeck: and had the previously mentioned repayment of $20.5 million from no one for that increase in investments of $36.2 million.

Christian Oberbeck: Overall, credit quality for this quarter increased to 99.7% of credits rated in our highest credit glory. With the two investments currently still on non-accrual being the fully-respected knowledge in Pepper Palace, representing only 0.3% and 0.4% of fair value and cost respectively.

Christian Oberbeck: With 85.2% of our investments at quarterback end in first lean debt and are overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations.

Christian Oberbeck: We believe our portfolio in leverage is well structured for challenging economic conditions and further changes in interest rates.

Christian Oberbeck: As always, and particularly in the current environment, balance sheet strength, liquidity and NAV preservation remain paramount for us.

Christian Oberbeck: A quarter-end we maintained a substantial $385.5 million of investment capacity to support our portfolio companies.

Christian Oberbeck: with the $136 million available to our existing SBIC-3 license, $87.5 million from our two revolving credit facilities, and $162 million in cash.

Speaker Change: Sir, a token best in second quarter demonstrated solid level performance within our key performance indicators as compared to the quarters ended August 31, 2023 and May 31, 2024.

Speaker Change: Our redjusted NI was $18.2 million this quarter, up 38.3% from last year and 26.9% from last quarter.

Speaker Change: All right, just it and I I per share is off the dollar 33 this quarter of 23.2% from a dollar eight last year and up 26.7% from a dollar five last quarter.

Speaker Change: I just said that I yield is 19.7% this quarter up from 15% last year and from 15.5% last quarter.

Speaker Change: Leides 12 months to return on equity is 5.8% down from 9.6% last year and up from 4.4% last quarter.

Speaker Change: R&AV per share is 20707 down 4.8% from 2844 last year and up 0.8% from 2685 last quarter.

Speaker Change: and a quarter in an AD was $372.1 million up from $362.1 million last year, and up from $367.9 million last quarter.

Speaker Change: Well, these past 12 months.

Speaker Change: has seen mark downs to a small number of credits in our core BDC portfolio. Slide three illustrates how our long-term average return on equity over the last 10 years is well above the BDC industry average at 10.0% versus the industry's 6.9%. And as a remain consistently strong over the past decade, the BDC industry ate up the last 10 years.

Speaker Change: As you can see on slide four, our assets under management is steadily and consistently risen since we took over the BDC 14 years ago, and the quality of our credits remain solid with the two credits on Monica Cruel down from three last quarter being the successfully

Speaker Change: Our management team is working diligently to continue this positive trend as we deploy our valuable capital into our pipeline, while at the same time being appropriately cautious in this volatile and evolving credit environment. With that I would like to now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Henri: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal second quarter ended August 31st, 2024, most of which Chris already highlighted.

Henry Steenkamp: of note the weighted average common shares outstanding in Q1 and Q2 of this year with 13.7 million shares, increasing from 12.2 million lost year.

Henry Steenkamp: Ajusted NII increased this quarter, up 38.3% from last year and up 26.9% from last quarter. This quarter's investment income increases were primarily due to the reversal of the Nolan interest reserve of $7.9 million. That was previously a non-accrual status following the investment full repayment subsequent to quarter-end, including a crude interest.

Henry Steenkamp: Investment Income reflects a weighted average interest rate of 12.6% consistent with last quarter and last year and does not yet reflect the future impact of declining rates.

Henry Steenkamp: The increases in investment income were primarily offset by first, increased interest expense resulting from the various new notes and its BA debenches issued during the past year and to increase incentive management fees from higher AUM and earnings.

Henry Steenkamp: Total expenses for the second fiscal quarter, excluding interest and date financing expenses, vice-management fees and incentive fees, and income and excise taxes, increased $1 million to $2.2 million as compared to $2.1 million last year, and decreased $0.7 million from $2.9 million last quarter.

Henry Steenkamp: This represented 0.7% of average total assets on an annualised basis, unchanged from last year and down from 1.0% lost quarter.

Henry Steenkamp: Also, we have again added the KPIs slides 26 through 29 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 37% increase in net interest margin over the past year.

Henry Steenkamp: Moving on to slide 6, NAV was $372.1 million as of this quarter aimed, a $4.2 million increase from last quarter and a $10.0 million increase from the same quarter last year.

Henry Steenkamp: This chart also includes our historical NAV Bishop, which highlights how this important metric has increased 22 of the past 28 quarters.

Henry Steenkamp: and following the recent resolution of our non-acruule investments up again this quarter as well with Q2 up 22 cents, Christian as compared to Q1.

Henry Steenkamp: Over the long term, our net asset value has steadily increased since 2011, and this growth has been treated as demonstrated by the long-term increase in NAV per share.

Henry Steenkamp: Over the past five years, NAVP is up $3.45 per share, or over 14%. We continue to benefit from our history of consistent, realized and unrealized games.

Henry Steenkamp: On Flight 7, you will see a simple reconciliation of the major changes in adjusted NII and NAV-Pachea on a sequential cordley basis.

Henry Steenkamp: Starting at the top, adjusted NI-Fish Air was up 28 cents, primarily due to the increase in non-CLO, net interest in cum resulting from the release of the Nolan non-acrule, and a three-cent decrease in operating expenses, or set by four-cent lower other income from reduced originations this quarter.

Henry Steenkamp: On the lower half of the slide, NAV per share increased by 22 cents. Primarily due to the gap, NAI excess earned over the Q1 dividend more than offsetting the 34 cents, net realized losses and unrealized appreciation.

Henry Steenkamp: Slide 8 outlines the drive-out available to us as of quarter-end, which totaled $385.5 million. This was sprayed between our available cash, undrawn HPA debensions, and undrawn secured credit facility.

Henry Steenkamp: This quarter-in-level of available liquidity allows us to grow our assets by an additional 77% without the need for external financing.

Henry Steenkamp: with $162 million of quarter-in cash available and that's fully accretive to NIR wind deployed and $136 million of available SBA debenches with its low-cost pricing, also very accretive.

Henry Steenkamp: We also include a column showing any cold options of our date.

Henry Steenkamp: The shows that our 321 million dollars of baby bonds effectively all our 6% plus date is callable either now or 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.

Henry Steenkamp: Additionally, during this quarter, we upsized our three-year live oak bank secured revolving credit facility from $50 to $75 million, included in these numbers.

Henry Steenkamp: We remain pleased with our available liquidity and our 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-SBAC debt maturing within the next two years.

Henry Steenkamp: Also, I did a structured in such a way that we have no BBC confidence that can be stressed during such volatile times.

Speaker Change: Now, we'd like to move on to slides 9 through 12 and review the composition and yield of our investment portfolio.

Speaker Change: Slide 9 highlights that we now have $1.04 billion of AUM at Fair Value, and this is invested in 50 portfolio companies, one CLO fund and one joint venture, a first lean percentage is 85.2% of our total investments of which 34% is in first lean, lost out positions.

Speaker Change: On slide 10 you can see how the yield on our core BBC assets, excluding our CLO, has changed over time, especially the past two years.

Speaker Change: This quarter are called BDC yields remain the same at 12.6% with base rates remaining relatively unchanged during the fiscal quarter and some decline being seen at the end of the quarter. We expect to continue to see right decline over the next 12 months.

Speaker Change: The CLO yield increased slightly to 13.0% from 12.4% last quarter reflecting lower say of values. The CLO is performing and current.

Speaker Change: Slavery Levin shows how our investments are diversified through the US, and on Slavery 12 you can see the industry breadth in diversity that our portfolio represents, spread over 41 distinct industries, in addition to our investments in the CLO and JV, which are included a structured finance securities.

Speaker Change: Moving on to slide 13, 8.5% of our investment portfolio consists of equity interests which remain an important part of our overall investment strategy.

Speaker Change: This slide shows that for the past 12 fiscal years, we had a combined $27 million of naturalised gains from the sale of equity interests or sale of early redemption of other investments.

Speaker Change: This is Nate of the Zollage, Natriot and Peppa Palace, realized losses booked for accounting this year.

Speaker Change: This long-term realized game performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE.

Speaker Change: That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market.

Michael Grisius: Thank you, Henry.

Michael Grisius: Today I will focus on our perspective on the changes in the market since we last spoke with everyone. And then comment on our current portfolio performance and investment strategy.

Michael Grisius: While broader middle market deal volumes are showing signs of improvement.

Michael Grisius: Deal Activity in the lower middle market where we operate as yet to pick up. Year to date deal volumes through calendar Q3 for transactions below $150 million are down significantly over prior year and down further still over 2021 and 2022.

Michael Grisius: We believe a number of factors are influencing the decline in lower mental market deal activity.

Michael Grisius: including a disconnect between where buyers and sellers are willing to transact.

Michael Grisius: Elevated interest rates, making depth in answering more expensive, and a trend toward PE firms holding on to assets longer in order to meet their return expectations.

Michael Grisius: The combination of historically low M&A volume and an abundant supply of capital is causing spreads to titan and leverage to remain full as lenders compete to win deals.

Michael Grisius: especially premium ones.

Michael Grisius: As a result, we're anticipating further payoffs like we saw this quarter. In some cases due to lenders offering extremely aggressive pricing on some of our low-level assets.

Michael Grisius: This historically low deal volume we're experiencing has positive and less positive elements.

Michael Grisius: On the positive side, we've been experiencing fewer payoffs and our follow-on deal activity alone has outpaced our repayments over the past 12 months.

Michael Grisius: On the last positive side, lower market activity has made it more difficult to find quality new platform investments than in prior periods.

Michael Grisius: And that said, the relationships and overall presence we've built in the marketplace.

Michael Grisius: Combined with our ongoing business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be a creative to our shareholders in the long run.

Michael Grisius: Since quarter and we close two new platform investments and our investment pipeline is solid.

Michael Grisius: Also point out that we continue to believe that the lower middle market is the best place to be in terms of capital deployments.

Michael Grisius: As compared to the larger end of the middle market, the due diligence were able to perform when evaluating investment is much more robust.

Michael Grisius: The capital structures are generally more conservative with less leverage and more equity.

Michael Grisius: The legal protections and covenant features in our documents are considerably stronger.

Michael Grisius: and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater.

Michael Grisius: As a result, we continue to believe that the lower middle market offers the best risk adjusted returns, and our track record of realized returns reflects this.

Michael Grisius: The Certo Gamassment Team has successfully managed through a number of credit cycles, and that experience has made us particularly aware of the importance of first being disciplined when making investment decisions and second being proactive in managing our portfolio.

Michael Grisius: and an environment that has seen ever-shifting expectations for the economy due to inflation and rising interest rates among other factors. We have stayed largely focused on managing and supporting our portfolio.

Michael Grisius: Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital.

Michael Grisius: As Seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 29 follow-ons thus far this calendar year, including delayed draws.

Michael Grisius: While we invested in no new platform investments this fiscal year through the end of the second quarter, subsequent to quarter-end, we executed approximately 56.7 million of new originations in two new portfolio companies and two follow-ons.

Michael Grisius: Overall, our deal flow remains solid, and our consistent ability to generate new investments over a long term, despite ever changing and increasingly competitive market dynamics is a strength of ours.

Michael Grisius: portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams.

Michael Grisius: Deremein 2 portfolio companies that we are actively managing as discussed in previous quarters. And I will touch on them shortly.

Michael Grisius: But in general, our portfolio companies are healthy. 70% of our portfolio is generating financial results at or above the prior quarter, and the fair value of our core BDC portfolio is 3.3% above its cost.

Michael Grisius: and the issues in our all walks list or non-accrual investments previously discussed have been addressed.

Michael Grisius: 85.2% of our portfolios in first-ling debt, and generally supported by strong enterprise values and industries that have historically performed well in stress situations.

Michael Grisius: We have no direct energy or commodity exposure.

Michael Grisius: In addition, the majority of our portfolios comprise the businesses that produce a high degree of recurring revenue and it historically demonstrated strong revenue retention.

Michael Grisius: We now only have two investments on non-acruc.

Michael Grisius: Namely, Pepper Palace and Zalaj, as compared to three investments as of last quarter.

Michael Grisius: We continue to hold them on non-accrual following their restructuring, but the remaining fair value is just $3.6 million or 0.3% of our total portfolio fair value.

Michael Grisius: Looking at leverage on the same slide, you can see that industry debt multiples have remained relatively unchanged from last quarter.

Michael Grisius: Total leverage for our overall portfolio was 4.5 times, excluding pepper palisins' knowledge, while the industry remains around 5 times leverage.

Michael Grisius: Slide 15 provides more data on our deal flow.

Michael Grisius: As you can see, the top of our deal pipeline is down from prior periods. In part because we made a conscious effort to improve the quality of our deal pipeline and in part because the market activity is down considerably as previously discussed.

Michael Grisius: We are starting to see signs of growth and deal flow again.

Michael Grisius: Overall, 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 Grisius: as you can see on slide 16.

Michael Grisius: Our overall portfolio credit quality and returns remain solid. It's demonstrated by the actions taken and outcomes achieved on the non-accrual and watchless credits we had over the past year. 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 be will sustainably exceed the last dollar of our investment.

Michael Grisius: 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.

Michael Grisius: Over the dozen plus years that we've been working together, we've invested $2.2 billion in 116 portfolio companies.

Michael Grisius: We've had just re-realized economic losses on these investments.

Michael Grisius: Over that same time frame, we've successfully exceeded 74 of those investments achieving gross, unlevered, realized returns of 15.2% on $1.03 billion of realizations.

Michael Grisius: Even taking it to account the current right down to the few discrete credits, are combined realized and unrealized return on all capital invested equals 13.6%.

Michael Grisius: We think this performance profile is particularly attractive for Portfolio, predominantly constructed with first lean senior death.

Michael Grisius: with Natria Salt and Nolan repaid.

Michael Grisius: We now only have two investments remaining on non-accrual, with both pepper palace and solids restructured but still classified as red, and with a combined fair value of only 3.6 million dollars.

Michael Grisius: During the quarter, pepper palace restructuring was successfully completed with us taking over majority control of the business.

Michael Grisius: The turnaround specialist we have been working with who has this substantial, successful experience in similar situations has invested significant equity in the business and become the CEO and a board member.

Michael Grisius: As a result of the restructuring, we recognized $34 million of realized loss this quarter, and marked the investment down a further $1.7 million to $1.5 million.

Michael Grisius: and following the Zalaj restructuring of the balance sheet during the first quarter that resulted in us taking over the company and starting to actively manage this investment.

Michael Grisius: The founder and previous owner invested meaningful dollars in the business.

Michael Grisius: is leading the enterprise and has reassembled some of the former key senior leadership.

Michael Grisius: He and the management team are working in partnership with us with the immediate goal of returning to business to its former profitability levels.

Michael Grisius: and the ultimate objective of exceeding those levels.

Michael Grisius: We still have equity in a first lean term loan in the company with a current fair value of $2.2 million.

Michael Grisius: Of great value to our shareholders is that subsequent to quarter-end are no-one investment repaid our full principle as well as all accrued and reserved interests.

Michael Grisius: In addition to making this investment up in Q2 and marking this investment up in Q2 and recognizing 7.9 million of interesting income into the P&L.

Michael Grisius: There remains an additional 2.7 million that will be recognized into unrealized apreciation in the third quarter to reflect the payoff at par.

Michael Grisius: When taking into account the recognition of past you interest.

Michael Grisius: plus the right-up in fair value of investment. The total change in economic value will be over $11 million.

Michael Grisius: It's worthy to mention that the attributes that made us attracted to Nolan as a credit to begin with.

Michael Grisius: including its industry leadership and the strong return on investment and produce for its customers. With the same attributes that enabled it to recover from the pandemic.

Michael Grisius: Attract interest from several strategic acquires and ultimately allowed us to recover all of our capital.

Michael Grisius: This investment produced a 12.5% unlovered, realized return for our shareholders.

Michael Grisius: In addition, we recognized $.5 million real-life gain on our book for time, class A preferred investment, resulting from the sale of the company.

Michael Grisius: and the CLO and the JBE had $2.7 million of unrealized depreciation this quarter reflecting primarily markdowns due to individual credits.

Michael 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 Grisius: Moving on to slide 17.

Michael Grisius: You can see our second SBIC license is fully funded and deployed.

Michael Grisius: and we are currently ramping up our new FBIC3 license with $136 million of lower cost, undrawn debatures available. Allowing us to continue to support U.S. small businesses, both new and existing.

Speaker Change: This concludes my review of the market, and I'd like to turn the call back over to our CEO, Chris.

Chris: Thank you, Mike.

Chris: As outlined on 518, our latest dividend of 74 cents per share for the quarter-ended August 31, 2024 was paid on September 26, 2024. Though unchanged from last quarter, this reflects a 4% and a 37% increase over the past one and two years, respectively.

Chris: The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors, including the current interest rate environments impact on our earnings. As the Fed has begun to cut interest rates and the pace at which further cuts will calm the still unclear, Saratoga's Q2 over earning of its dividend has a de-leveraging effect by building an AV, providing a cushion against adverse events, and potential future base rate declines. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors.

Chris: Moving to slide 19 are total return over the last 12 months, which includes both capital appreciation and dividends, as generated total returns of 2%. I'm characteristically low and underperforming the BDC index of 15% for the same period. A longer-term performance is outlined on our next slide 20.

Chris: Our five-year return places us almost in line with the BDC Index, while our three-year performance is now slightly below the index, reflecting the impact of the recent latest 12 months performance and discrete credit issues.

Chris: since CERC took over the management of the BDC in 2010, our total return has been 699% versus the industry is 274%.

Chris: On slide 21, 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, and AI yield, and dividend growth and coverage, all of which are positive and reflect the growing value our shareholders are receiving.

Chris: The Living Return on Equity in NAV for sheer metrics is past year. A primarily due to the discrete non-acruals, knowledge and type of palace previously discussed.

Chris: Our dividend coverage in dividend growth has been one of the strongest in the industry. We continue to be one of the few BDCs of grown NAC over the long term, and we've done it creatively, and our long term return equity remains 1.5 times the long term industry average.

Chris: Moving on to 5.22, all of our initiatives discussed in this call are designed to make seroton investment on reading BBC that is attractive to the capital markets community.

Chris: 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.

Chris: These differentiating characteristics, many previously discussed, including including obtaining where the highest levels of management ownership in the industry at 12.5% ensuring we are aligned with our shareholders.

Chris: We'll think ahead on slide 23, we will make confident that our reputation, experience, management team, historically strong underwriting standards and time and market tested investment strategy will serve us well and navigating through the challenges and uncovering opportunities in the current and future environment.

Chris: and that our balance sheet, capital structure and liquidity will benefit Saratoga shareholders in the near and long term.

Chris: In closing, I would again like to thank all our shareholders for their ongoing support and I would like to now open the call for questions.

Speaker Change: Thank you. At this time we'll look at the question and session. To ask the question, you need to press the R11 on your telephone and we three links to the announce. To withdraw your question, please press the R11 again. Can you stand by while we compile the Q&A roster?

Speaker Change: The End

Speaker Change: Offers question, comes from a line of Eric Swift of the Chicago Market's July and it's now open.

Eric Swift: Thank you. Good morning, everyone. I wanted to start first just on some of the commentary you gave about the, I guess, kind of the market in the most recent quarter. The investments that would have been, you know, kind of new investments for the platform that you reviewed that did not meet your characteristics. One of you could just add a little bit more color there. Where were they coming up short? Were there any common characteristics or more just kind of one-off issues with each of the individual credits that you reviewed decided to pass on? Yeah. [inaudible]

Eric Swift: Yes, this is Mike to answer your question directly. There are more unique to the individual credits. I recall a couple of them had constant constraint, customer concentration, for example, that was above what we were comfortable with. Each of them had their own unique elements to them, but once that we didn't feel like we're suitable for our investment bar.

Speaker Change: Thanks, Mike. I appreciate that there. And then kind of moving on to the sensitivity of the portfolio and the balance sheet to interest rates. We've obviously got, you know, 50 basis points of cuts from the Fed funds are so far market's predicting, you know, more of her coming quarters. Henry, I know you may give some commentary in terms of the amount of debt that you have that's called, but that could be refinanced, but as the balance sheet stands today, how would you quantify the impact to NII from, you know, for each 25 basis points reduction and short term rates and baserads?

Eric Wittick: Yes, Eric Wittick.

Henry Steenkamp: Erik, so we actually have a table in our MDNA in the market risk section, so you can see there the sensitivity. Every 25 basis points is about 3 cents on a quarterly basis. And that obviously is just a very static perspective looking at it exactly as it is right now. It doesn't factor in any other variables, like you said, the ability to refinance some of our debt that's definitely probably 100 basis points lower than what our current eight and a half's and eight percent's are. And then obviously, you know, any actions that we take on utilizing some of our cash and originating, you deal opportunities that might provide that might be out there.

Erik: Great. That's helpful. And I guess just a follow up on that, trying to think about, you know, worst case scenarios. You know, if we went into a period where, you know, maybe we did go into a hard landing recession and the debt markets made it, you know, a little bit harder to refinance. Some of those notes that are callable, I guess you feel, you know, confident kind of giving your cast position that you'd be able to, you know, manage through for a quarter or two before you had the, you know, maybe opportunity to refinance again and not have the, you know, the dividend, the at risk. Is that a fair assessment? Yeah.

Speaker Change: Yeah, I think Erik, one of the things to always consider with regards to rate increases or decreases is that they don't occur immediately, right? So we have assets that either reset monthly or reset quarterly. So you could have situations where, you know, the Fed changes rate by 25 basis points, but that only flows through three months later depending upon the timing of IUM. And so, you know, the effect is not immediate. It obviously does impact us after a period of time, but, you know, at this point in time, you know, we still think we're over earning the dividend quite significantly at the moment.

Speaker Change: and then this last one, looking at the amount of pick interest in the most recent quarter it was out quarter of a quarter. I guess anything that was, you know, non-recurring there, or is that a decent rate going forward looking into the third quarter?

Speaker Change: No, actually Eric is a good question, most of that is non-recarrying because most of what you see there is that actually the whole increase you see quarter over quarter is related to our no-land investment because a portion of that one-off interest reserve that was released was pick related and then the rest was cash

Speaker Change: Okay, great, that temple is going back to the run rate prior to this would be a better way to think about it.

Speaker Change: Great, thanks for taking my questions today.

Speaker Change: Thank you for the next question.

Speaker Change: Our next question goes from line of Robert Todd for Whitman James, the line is not open.

Robert Todd: Hi guys, on the pipeline and the market client going back to it, I mean, on slide 15, we can see that the biggest decline.

Robert Todd: for those three quarters, calendar quarters is 24, is in term sheets issued. You self-sourced a lot of deals, that's only down 13%, the term sheets were down 60, and you mentioned unique issues, and it mentions on the slide based on credit quality, but is term sheet issue is relatively early in the process. So is that kind of what you're talking about on the customer concentration, and things you're seeing early, or are some of the other issues on the ask is too much on leverage, or what is it that's tripping these things out earlier in the process rather than after deeper due diligence.

Speaker Change: Yeah, it's a good question. I mean, one thing, it's hard for me to compare exactly how we, how our processes matches up vis-a-vis other firms. But I would say generally we are more careful to do a lot of diligence on the front end.

Speaker Change: More so than others we've seen anyways before we issue a term sheet.

Speaker Change: and the reason being that...

Speaker Change: We win a lot of deals because people feel like if we issue a term sheet.

Speaker Change: and we tell them that, look, there's a, we really like this deal. We've done a lot of work on it. There are a couple things that we're narrowing in on that are kind of going to be the remaining gating items.

Speaker Change: but it's an approach that we take that gives our relationships greater certainty of execution.

Speaker Change: and we often win deals that way. So I think the way we approach it, these would be some of our competitors, is that we're careful, we don't just...

Speaker Change: Thro term sheets out, almost as a marketing set in the process. So that might differentiate us versus other people. But to answer your question more directly, in the cases where we were not issuing a term sheet, it was because we did a fair amount of diligence, and we could see elements of the credit that didn't make us comfortable issuing an official term sheet.

Speaker Change: God, thank you. Appreciate it. I call it all. I'm a congratulations on the recovery on Nolan. I don't wish he'd never be out of that long. I'll get away with you.

Speaker Change: and everything back. What's your level of optimism on a village and pepper power, which you'll missy much earlier when the process is only just in the rest of the future?

Speaker Change: in terms of the potential for getting all that, meaning to hire McCugrid and McCugrid for their values. And then, kind of like time frame, I mean, is that like 18 months, it happens where we three to five years, any color that.

Speaker Change: Yeah, I wish I had a crystal ball on that and it's I certainly commend you for asking the question Here's the way I'd think about it, first of all just context. I would say that

Speaker Change: are DNA is a lot different than many of our competitors. So I would say that some of our competitors probably would just not have had the chops to try to get to where we've gotten in those deals. It took an awful lot of resources, a manpower and...

Speaker Change: and just I think we'll experience to be able to negotiate the train to control, find really good managers.

Speaker Change: to come in and operate these businesses, and then also structure deals with them where they were investing new capital alongside us in a way where we feel like we've got a terrific alignment of interest with the new management teams.

Speaker Change: and we think we've got the right people, the very best people to try to recapture value for our shareholders.

Speaker Change: Now, having said that, there were challenges that these businesses were facing clearly to get to the point that they did. At the same time, there's elements of what we originally liked in the businesses that are intact as well.

Speaker Change: and so the management teams in both of those cases...

Speaker Change: are charged with and are making some progress, but it's early to try to get those companies back on track and capitalize on the elements of those businesses that we think are really strong. But their projects, no doubt, and it's probably going to take some time I wouldn't want to oversell that.

Speaker Change: Got it, thank you. Well, one more if I tap on. The dividend not spill over. If I remember, I mean, it is the beginning of the year, I looked in the care, right? I mean, I'm distributed income was 46 million. I think that's right. So that was almost $2 a share. You've obviously overrun since then. So can if there was any any perspective on how much undistributed spillover you balance, you have currently, obviously that colors on on.

Speaker Change: on how you manipulate to go down a lot, this is a very simple system.

Speaker Change: Yeah, no shirt, I'm...

Speaker Change: So, you know, at the Wasteful Overworks Robert is your dividend's post the year and count towards the prior spillover, right? So, all the dividends we've paid since February has counted towards that $45 million.

Speaker Change: that you've been talking about, so that's good covering the spill of obviously from a rick perspective, at the same time from March 1, you know, our new earnings is like building up.

Speaker Change: and a new spillover for the current year. So, you know, the way we think of it is and to your point about, you know, how much spillover is there that, you know, would need to be paid out at some point and could be thought about in the context of a dividend is we probably have over $3 per share currently of spillover that's been built up again that, you know, would have to be paid out at some point and obviously it's part of what we think about as we also think about the dividend and the climbing interest rate.

Speaker Change: God, thank you.

Speaker Change: Hi!

Speaker Change: Next question, come from a line of Mickey Sween of Ladybird Domin, your line is now open.

Mickey Sween: Yes, good morning everyone, hope all as well. Mike, wanted to get your perspective on how you anticipate the potential reduction in base race that a forward curve implies will impact lower-middle market M&A volumes over the next several quarters.

Speaker Change: That's really a tough question to answer. I would say this, that there are...

Speaker Change: There are signs that the larger middle market, the kind of standard middle market, is showing some signs of recovery.

Speaker Change: Historically, we've seen that the lower-middle market lags that.

Speaker Change: Right now, if you look at lower middle market deal activity and you go back, even

Speaker Change: Pre-pandemic times, they're really all-time blows.

Speaker Change: and it's for some of the reasons that I outlined in my prepared remarks.

Speaker Change: Um...

Speaker Change: All else equal, typically with interest rates coming down, the cost of debt capital coming down generally has a positive influence on deal activity. So, one would think that that might help spur, you know, in increasing deal activity. The one thing that I do know is that at some point there will be a change in the amount of deals that we see in the lower middle market. It's a, it's...

Speaker Change: It's the end of the market that's populated with the most businesses by far in our economy and at some point people will transact for a lot of reasons that are driving that for businesses that are owned by baby boomers. There are a lot of reasons why they're sellers at the right price at the right time. And there are PE funds that are holding on to assets longer than they have historically. And ultimately, those assets will trade. And given all the investments that we've made in...

Speaker Change: Getting our name into the marketplace and really the presence that we've built in the marketplace. We're very confident in the long run that as that market comes back, our deal activity, and our opportunity to deploy capital and new platforms will grow, and it will outpace our payoffs as it has historically.

Speaker Change: Thanks for that, Mike. That's helpful. You talked a little bit about the broader markets and I did notice that Saratoga decided not to reset the COLO's liabilities. I'm curious why you decided not to do that. What are your expectations for how the portfolio or that portfolio will run off now that it's outside of its reinvestment period? Yeah, I did.

Speaker Change: Mickie, I think that's obviously a very important part of one of our investments and a good question.

Speaker Change: A couple of things are going on. On the liability side of the CLO world, there's been tremendous demand and a lot of CLOs have been raised and reset and we explored that.

Speaker Change: and I'm...

Speaker Change: The Young.

Speaker Change: on the asset side, the supply of new because of it.

Speaker Change: and M&A, the supply of new assets.

Speaker Change: is sort of not in the same sea class, right? So there's not as many, you know, primary originated.

Speaker Change: is a part of the syndicated loans, as there is demand from a lot of people to be finnathing at the CLOs. And so given the dynamics of the market place at that time, and currently...

Speaker Change: We thought, uh...

Speaker Change: and we would...

Speaker Change: Basically.

Speaker Change: Refinance part of the liability structure to take advantage.

Speaker Change: of the improved rates on the liability side.

Speaker Change: but not necessarily reset.

Speaker Change: the entire CLO, which also would have required a new level of equity investment in this area at this moment in time. We have a short non-claw period on that and so we are prepared and ready should the market improve and we find it attractive to sort of reset the CLO for further investment. We are prepared and ready to do that. In the meantime we are operating more and sort of a runoff mode in that particular CLO.

Speaker Change: and Chris given, yeah, first of all I completely agree with you. I mean, a spread compression in the more liquid markets has been, you know, severe. Does your comments also impact your view on the senior loan fund and your willingness to continue to grow that fund?

Speaker Change: Again, you know this, it's a...

Speaker Change: I had to say it depends, but it depends and there was just a lot of dislocations in the marketplace and just the absence of M&A activity in the absence of primary product.

Speaker Change: You know, I just, you know, create the spread compression you referenced.

Speaker Change: and so when does that a date? When does that change? I mean it will change at some point, but it just happened. We're poor people and ready, and we obviously have many years experience in this marketplace.

Speaker Change: and so, you know, our view right now is not good.

Speaker Change: and not to make incremental equity investments into this space.

Speaker Change: Take advantage as best we can of improvements on the liability and the financing structure of it. And then when things changed, I think we're ready to step up should that be what's warranted or continue our client sort of current stance.

Speaker Change: I understand that thanks for that, Christian. In terms of the capital at the BDC, obviously the stock is trading at a discount to NAB, not as much today, but still at a discount. Given your liquidity, it would seem that repurchasing your stock would be one of the best uses of capital. Why haven't you done that in the last couple of quarters?

Speaker Change: Well, I guess there's a lot of considerations. There's short-term considerations, which is the stock trading below NAB, and the opportunity to buy our own portfolio, which is obviously in our view, we're very happy with our portfolio, and so that is attractive. On the other side, we do have leverage issues, and acquiring equity would sort of increase leverage and the question is that the right thing to do to increase our leverage in this context, even though it is for an attractive investment, and then the other side is that

Speaker Change: You know, we've had this part of the reason we had to build up and cash.

Speaker Change: and we have tremendous amount of financing over $350 million, we could grow our portfolio with. So we have a tremendous opportunity on the asset deployment side. There's just been a real slowdown in M&A and everybody's experiencing it, but that could change and it might change and we want to make sure that in the long run, right? I mean, there was like in this six month period or something, it might have made more sense to repurchase the stock, but if the M&A market opens up next year, we're able to deploy this capital, we're able to build new relationships and set the stage for substantial long-term growth, you know, we think it's important to have the liquidity.

Speaker Change: for that. Both offensively, which should open up and the deal business gets a lot more robust.

Speaker Change: but also defensively. If you have economic problems out there, you know, having cash, it can be important on the other side. In terms of, you know, companies needing to refinance and having a more attractive refinancing.

Speaker Change: Situation. So as of right now, do we have more cash and more investment capacity? Then we have had in the past, yes. And the question is, what do we do with it? And I think at the moment, we think it's very prudent to maintain.

Speaker Change: you know, so the stance of being, you know, structured and prepared for, you know, incremental asset growth to take our assets up.

Speaker Change: You know, buy another several hundred million dollars, you know, thoughtfully and carefully. And, you know, sometimes and we've had periods of time where we can do that quickly and in this period of time where it takes longer. But we think that in a long run is the most important, you know, place to, you know, use of our capital is to its growth and improving our earnings and improving our NAV for share. [inaudible]

Speaker Change: I understand, Chris, thank you for that. And in terms of liquidity, just to follow up on the undistributed taxable income question, it is over $3, which is a lot, $3 for share, which is a lot, and Henri talked about it a little bit. Could you perhaps give us a little more insight in terms of what timing we can expect for the board to take a decision on that UTI, and is a deemed distribution part of the calculus?

Speaker Change: Again, we haven't fully determined exactly how we're going to do that.

Speaker Change: a deemed distribution, you're talking about it in kind, is that you're a part of it?

Speaker Change: Yes. Well, obviously, an in-kind is an option that the industry has to do. I mean, I think there's a fair amount of complication and cycles, and you'd have to figure out how large your distribution was relative to all of that. I think that the magnitude of our distribution, that may or may not be required, has not been finally determined, but I think that's something that's probably more revealing in the next quarter on precisely what that calculation is, but it's not going to be a very substantial number, and we don't believe at this time that the distribution is appropriate.

Speaker Change: I understand. And my last question, and also a follow-up on the assets that's the asset sensitivity question, that market risk table that Henri alluded to shows that adjusted and I, for sure, would decline about 25 cents per quarter with a 200 paces point decrease in interest rates, which is sort of in line with the forward curve and where base rates were at the end of your most recent quarter. And that would result in NII below the current dividend. So can you just review what tactics you plan to pursue to avoid that situation?

Speaker Change: Sure, I guess there are a couple of comments there.

Speaker Change: You know, that's not to, that's a way of anything off, but I think the full recovery has not been.

Speaker Change: that I accurate over the last bunch of years and agreed back to where he is and the exact course of interest rates.

Speaker Change: has been a prediction of these declines for a long time that has not occurred. And we're not saying it's not an occurred, we're just saying the history is not that great in terms of those predictions. I think the economy is still strong and working. So the question why and when would you have such a drastic cut in interest rates and would you have that in a robust economy or not? There's still a question what that will happen. Your question

Speaker Change: You know, this is one, you know, one dimension, right? Okay, so let's go down to one of the various points and you look at our last quarter, what would that do and then you have the calculation, right?

Speaker Change: But the question is, is that if that were to happen there's so many other dynamics that need to be taken, you know, you have them, if you're running a model right, you have to assume different things and the question is, you know, do we deploy more capital right, I mean, we have, we have capital as a deploy, you know, what, what does something like that do to the refinancing marketplace, maybe there's a bunch of...

Speaker Change: New deals that come down that get refinanced and we can deploy our cash which is the first most incremental investment we have and then we can some of our SBIC capital. So, so, after deployment is one of the...

Speaker Change: Midagence. I'm not going to say that's a tactic because we're not going to deploy the capital unless we find the deals that we find attractive. But in that type of environment, there may be some very attractive investments coming. I think Henry's discussed it in the past that, you know, all of our baby bonds are callable. We do have floating rate instruments and, you know, we have access. We could we can re-screpture some of our debt. We could call some of our fixed grade longer term debt and we could replace that with, you know, more of the sort of variable, lower spread, you know, cheaper debt that's out there. And so, you know, we have we have a lot of.

Speaker Change: Factors are at our disposal, you know, should that happen and so...

Speaker Change: I don't think, and then the other thing that Henry mentioned is there's also a flag, you know, that was, you know, some of this stuff won't take place

Speaker Change: You know, even if that cuts for play.

Speaker Change: It wouldn't take place all at once, right? There would probably, you know, because of lags and because of adjustments and things like that, there's probably, you know, 6 to 12 months of adjustment.

Speaker Change: before the fall impact of that would hit us and during that period of time we would have time to do some of these.

Speaker Change: These tactical things, you know.

Speaker Change: The light building side as we discussed is a certain, you know, there's a lot of targets there. Should we, you know, should we want to decrease our cost of funding?

Speaker Change: and then to the planet. So I think those are the main things that we would be focusing on.

Speaker Change: The cost of funding shouldn't be understated, right? Because the 25 basis points are very static perspective. It just views our debt structure as fixed effectively. And, you know, we structured our debt portfolio very purposefully the way we did. We think the call options have always had immense value, especially in the declining rate environment. And so, you know, we already know from what we're being advised by various banks that, you know, our baby bonds is a hundred basis points plus cheaper than what it is currently now. So, there's already sort of a built-in value there at the right time. And, you know, history has suggested is baby bond rates and privatization, market rate, move down as the Fed cuts that...

Speaker Change: and that hopefully I'll cross the financing we'll move with that. So that would have a meaningful impact to that 25-century reference and we'd obviously act on that in the right time and the right place when it makes sense, you know.

Speaker Change: I understand and I agree that that's it for me this morning. I appreciate your time as always.

Speaker Change: Thank you, I'm showing all further questions at this time, I'm not like turnip back to Christian Oberbeck, for those remarks.