Q3 2025 Saratoga Investment Corp Earnings Call

January 9, 2025

Yeah.

[music].

Okay.

Speaker Change: Good morning, ladies and gentlemen, thank you for standing by welcome to Saratoga Investment Corp, 2025 fiscal third quarter financial results Conference call.

Please note that this call is being recorded.

During todays presentation, all parties will be in a listen only mode.

Speaker Change: Following managements prepared remarks, we will open 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. Please go ahead Sir.

Speaker Change: Thank you I would like to welcome everyone to invest.

Speaker Change: Investment Corp's 2025 fiscal third quarter earnings conference call.

Speaker Change: Today's conference call includes forward looking statements and projections, we ask you to refer to our most recent filings with the S. E. C for important factors that could cause actual results to differ materially from these forward looking statements and projections.

Speaker Change: We do not undertake to update our forward looking statements unless required to do so by law.

Speaker Change: Today, we will be referencing a presentation during our call you can find our fiscal third quarter 2025 shareholder presentation in the events and presentations section of our Investor Relations website at.

Speaker Change: 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 earnings press release for details.

Speaker Change: 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.

Speaker Change: Thank you Henri and welcome everyone.

Speaker Change: Saratoga investment Corp. Highlights. This quarter include sequential quarterly increase of adjusted NII, excluding the effect of one time now on the interest reserve reversal.

Speaker Change: Improved latest 12 months return on equity of nine 2%, reflecting the solid high quality nature of our existing portfolio.

Speaker Change: Another increase in total <unk>.

Speaker Change: And steady NAV per share.

Speaker Change: The originations for both new and existing portfolio companies, while also experiencing outsized redemptions of successful investments and.

Speaker Change: <unk> continued over earning of our dividends.

Speaker Change: The substantial over earning the dividend this quarter continues to support the current level of dividends increases.

Speaker Change: Supports increased portfolio growth and provides a cushion against adverse events.

Speaker Change: This quarter's earnings reflects the impact of the past six months trend of decreasing levels of interest rates and spreads on Saratoga investment's, largely floating rate assets, while not yet recognizing the full time impact of the recent outsized repayments seen this quarter.

Speaker Change: The cost of most long term balance sheet liabilities are largely fixed they'll callable either now or in the near future.

Speaker Change: Context in the context of the significant level of available cash currently creating a negative arbitrage management is evaluating the use of such calls prospectively to reduce current debt.

Speaker Change: From an overall investment value in current yield perspective, our annualized third quarter dividend of <unk> 74 per share implies at 12, 2% dividend yield based on the stock price of $24 21 per share on January seven 2025, or 90% of our third quarter's NAV.

Speaker Change: During the quarter, we began to see the early stages of a potential increase in M&A in the lower middle market, reflecting in multiple repayments during the quarter. In addition to significant new originations as.

Speaker Change: As was the case in previous quarters, our strong reputation and differentiated market positioning.

Speaker Change: Bind with our ongoing development of sponsor relationships continues to create attractive investment opportunities from high quality sponsors despite level lower overall mergers and acquisitions volumes and elevated interest rate levels.

Speaker Change: We believe Saratoga.

Speaker Change: Continues to be favorably situated for potential future economic opportunities as well as challenges at the foundation of our strong operating performance as the high quality nature of resilience and balance of our $960 million portfolio in the current environment.

Speaker Change: Where we have encountered significant challenges in four of our portfolio companies over the past year, we've completed decisive action and resolved all four of these companies' challenges through to sales and two restructurings.

Speaker Change: Our current core non CLO portfolio was marked down slightly by $1 $4 million this quarter and the CLO and JV were marked down by $4 million. This was offset by net realized gains of $1 2 million this quarter on various repayments, most notably the <unk> investment and seven.

Speaker Change: Dollars of escrow realized gains mainly from the former natural investment, resulting in $3 5 million of total net reduction in portfolio value during the quarter or.

Speaker Change: Our total portfolio of fair value is now 7% below cost.

Speaker Change: Our core non CLO portfolio is 3% above cost.

Speaker Change: Our originations this quarter were elevated as we began to see the effect of declining interest rates and increased M&A activity in the market.

Speaker Change: Deployments during the quarter included $85 million in two new portfolio company investments and eight follow on investments in existing portfolio companies that we know well all with sound business models and strong balance sheets.

Speaker Change: Our quarter end cash position grew to $250 million largely due to an outsized $160 million of repayments of successful investments in five portfolio companies and amortizations exceeding the substantial $85 million of originations.

Speaker Change: The repayments include the recognition of a $4 8 million realized gain along with $67 million of debt repayments from our successful five year and Vita investment.

Speaker Change: This increase in our cash position improved our effective leverage from 161% regulatory leverage to 183, 2% net leverage netting available cash against outstanding debt.

Speaker Change: Our overall overall credit quality for this quarter remained steady with 99, 7% of credits rated in our highest category with the two investments currently still on non accrual status being solid and Pepper palace, both of which have been successfully restructured each representing only 3% of both fair value and cost with <unk>.

Speaker Change: 86, 8% 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 our well structured for challenging economic conditions and further changes in interest rates in either direction.

Speaker Change: As always and particularly in the current uncertain environment balance sheet strength liquidity and NAV preservation remain Paramount for us at quarter end, we maintain a substantial $474 million of investments in capacity to support our portfolio companies with $136 million available through our <unk>.

Speaker Change: <unk> Spic's three license $87 $5 million from our two revolving credit facilities and $250 million in cash.

Speaker Change: Saratoga Investment's third quarter of fiscal 2025 demonstrated a solid level of performance with our key performance indicators as compared to the quarters ended November 32023, and August 31 2024.

Speaker Change: Our adjusted NII is $12 $4 million this quarter down five 3% from last year and 31, 7% from last quarter.

Speaker Change: And our adjusted NII per share is 90.

Speaker Change: This quarter down 10, 9% from 101 last year and down 32, 3% from $1 33 last quarter when.

Speaker Change: When excluding the $7 $6 million, which is equivalent to <unk> 44 per share net impact of the nonrecurring Noland investment interest reserve released in the previous and current quarter from its successful sale adjusted NII increased <unk> <unk> per share from 89 to 90.

Speaker Change: As compared to the previous quarter.

Adjusted NII yield is 13, 3% this quarter down from 14, 6% last year and from 19, 7% last quarter.

Speaker Change: Latest 12 months return on equity is nine 2% up from six 6% last year and up from five 8% last quarter and beating the industry average of eight 5%.

Speaker Change: Our NAV per share is 26, 95 down one 7% from 2742 last year and down 4% from $27 seven last quarter.

Speaker Change: And our quarter end NAV was $374 $9 million up from $359 $6 million last year and up from $372 1 million last quarter.

Speaker Change: The $2 $8 million increase in NAV sequentially resulted primarily from after market sales of 108000 shares at NAV.

In addition to in addition.

The 356000 shares were sold to the market at NAV for $9 $6 million subsequent to quarter end, resulting in total sales of $12 $6 million.

Speaker Change: While the past 12 months have seen markdowns to a small number of credits in our core BDC portfolio slide three illustrates how our recent strong results have delivered a return on equity of nine 2% for the last 12 months above the industry average of eight 5%. Additionally.

Speaker Change: Additionally, our long term average return on equity over the last 10 years of 10, 4% remains well above the BDC industry average of six 9% and that has remained consistently strong over the past decade, beating the industry eight of the past 10 years.

Speaker Change: 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.

Outsize repayments offset strong originations this quarter, resulting in our AUM declining if this does not impact our expectation of long term AUM growth.

Speaker Change: The quality of our credits remains solid with only the two recently restructured pepper palisade solid credits on non accrual consistent with last quarter.

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

Henri Steenkamp: Thank you Chris Slide five highlights our key performance metrics for the fiscal third quarter ended November 32020, full most of which Chris already highlighted.

Henri Steenkamp: Of note the weighted average common shares outstanding in Q3 of this year was $13 8 million $13 8 million shares.

Henri Steenkamp: Creasing from $13 7 million and $13 1 million as compared to last quarter and last year's third quarter, respectively.

Henri Steenkamp: Adjusted NII decreased this quarter down five 3% from last year and 51, 7% from last quarter.

Henri Steenkamp: This quarter's investment income decreases as compared to last quarter were primarily due to the impact of the nonrecurring Noland interest reserve reversal of $7 9 million last quarter following the investments full repayment, including accrued interest.

Henri Steenkamp: By higher prepayment and structuring and advisory fees this quarter reflective of the high level of both originations and repayments in Q3.

Henri Steenkamp: Excluding the Noland interest reserve reversal adjusted NII per share increased one <unk> per share to <unk> 90 per share as compared to the previous quarter.

Investment income reflects a weighted average interest rate of 11, 8% as compared to 12, 5% as of the previous year and 12, 6% last quarter.

Henri Steenkamp: Approximately two thirds of the interest rate reduction is due to sofa base rate decreases and one third due to the higher yields of the recent repayments.

The impact of this quarter's outsized repayments is not yet fully reflected in this quarter's results as most repayments occurred in the last month of the quarter.

Henri Steenkamp: Total expenses for this years third quarter, excluding interest and debt financing expenses base management fees and incentive fees and income and excise taxes increased to $2 8 million.

Henri Steenkamp: As compared to $2 3 million last year, and $2 2 million last quarter.

Henri Steenkamp: This represented 0.9% of average total assets on an annualized basis up from 8% last year and 7% last quarter.

Henri 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 largely maintained.

Henri Steenkamp: Moving on to slide six.

Was $374 9 million as of this quarter and a $2 $8 million increase from last quarter and a $15 3 million increase from the same quarter last year.

Henri Steenkamp: This chart also includes our historical NAV per share, which highlights how this important metric has increased 22 of the past 29 quarters and has stabilized over the past couple of quarters since the resolution of the recent discrete non accrual.

Henri Steenkamp: Over the long term, our net asset value has steadily increased since 2011 and grown by 53% over the past five years and this growth has been accretive as demonstrated by the long term increase in NAV per share.

Henri Steenkamp: Over the past four and a half years.

Share is up $1 84 per share all over 7%, we continue to benefit from our history of consistent realized and unrealized gains.

Henri Steenkamp: On slide seven you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis.

Henri Steenkamp: Starting at the top adjusted NII per share was down 43.

Henri Steenkamp: Primarily due to first the impact of the nonrecurring Noland interest reserve reversal last quarter as previously noted and second the decrease in non CLO net interest income, reflecting lower sofa rate in Q3, and the partial impact of the quarters repayments.

Henri Steenkamp: These decreases were partially offset by higher prepayment and structuring and advisory fees this quarter reflective of the high level of originations and repayments.

Henri Steenkamp: On the lower half of the slide <unk> NAV per share decreased by <unk> <unk>.

Henri Steenkamp: Early due to the 16th over earning the dividend being more than offset by the 20, <unk> quarterly natrium <unk> gains and unrealized depreciation on investments.

Henri Steenkamp: Slide eight outlines the dry powder available to us at quarter end, which totaled $473 7 million.

Henri Steenkamp: This was spread between our available cash Undrawn, SBA debentures, and Undrawn secured credit facility.

Henri Steenkamp: This quarter end level of available liquidity allows us to grow our assets by an additional 49% without the need for external financing with $250 million a quarter in cash available and thats fully accretive to NII when deployed and $136 million of available SBA debentures with its low cost <unk>.

Henri Steenkamp: <unk> also very accretive.

We also include a column showing any call options of our date this shows that $321 million.

Henri Steenkamp: $321 million of baby bonds effectively all of our 6% plus date is callable either now or within the next four months, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin if needed.

Henri Steenkamp: This call is also available prospectively to reduce current debt.

Henri Steenkamp: We remain pleased with how 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 FDIC data maturing within the next two years.

Henri Steenkamp: Yes.

Henri Steenkamp: Also.

Henri Steenkamp: It is structured in such a way that we have no BDC covenant there can be stress during such a volatile time.

Henri Steenkamp: Now I would like to move on to slides nine through 12 and review the composition and yield of our investment portfolio.

Henri Steenkamp: Slide nine highlights that we have $960 1 million.

Henri Steenkamp: AUM at fair value and this is invested in 48 portfolio companies, one CLO fund and one joint venture.

Henri Steenkamp: Firstly in percentages 86, 8% of our total investments of which 25, 7% is in first lien last out position.

Henri Steenkamp: On slide 10, you can see how the yield on our core BDC assets, excluding CLO has changed overtime, especially this past quarter, reflecting the recent decreases to interest rates this quarter, how core BDC yield decreased to 11, 8% from 12, 6% with about <unk>.

Henri Steenkamp: Two thirds of the decrease due to core sofa base rates decreasing during the fiscal quarter.

Henri Steenkamp: The CLO yield increased to 24, 6% from 13.0% last quarter purely reflecting lower fair values.

Henri Steenkamp: Hello, it's performing in current.

Henri Steenkamp: Slide 11 shows how our investments are diversified throughout the U S.

And on Slide 12, you can see the industry breadth and diversity that our portfolio represents spread over 40 distinct industries. In addition to our investments in the CLO and joint venture, which are included a structured finance securities.

Henri Steenkamp: Moving onto slide 13, 9.0% of our investment portfolio consists of equity interest, which remain a very important part of our overall investment strategy.

Henri Steenkamp: This slide shows that for the past 12 fiscal year as we had a combined $32 $4 million of natrium as gains from the sale of equity interest or sale early redemption of other investments.

Henri Steenkamp: This is net of the knowledge natrium and pivot pallets realized losses this year.

Henri Steenkamp: Longtime realized gain performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long term Roe.

Michael: That concludes my financial and portfolio review, our Chief Investment Officer, Michael <unk> will now provide an overview of the investment market.

Speaker Change: Thank you Henry.

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.

Speaker Change: While broader middle market deal volumes are showing signs of improvement deal activity in the lower middle market, where we operate has yet to pick up.

Speaker Change: Year to date deal volumes through calendar <unk>.

Speaker Change: Q4 for transactions below $150 million are down significantly over prior year by more than 34%.

Speaker Change: And down further still as compared to 2021 and 2022.

Speaker Change: We believe a number of factors are influencing the decline in the lower middle market deal activity.

Speaker Change: Including a disconnect between where buyers and sellers are willing to transact.

Elevated interest rates, making debt financing more expensive.

Speaker Change: And the trend toward p/e firms holding on to assets longer in order to meet their return expectations.

Speaker Change: The combination of historically low M&A volume in an abundant supply of capital is causing spreads to tighten and leveraged to remain full as lenders compete to win deals, especially premium ones.

Speaker Change: This was evidenced this past quarter with outsized repayments being experienced in some cases due to lenders offering an extremely aggressive pricing on some of our low leveraged assets.

Speaker Change: The historically low deal volume we're experiencing currently has made it more difficult to find quality new platform investments than in prior periods.

Speaker Change: Now that said the relationships and overall presence we've built in the marketplace 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 accretive to our shareholders in the long run.

Speaker Change: This quarter, we closed two new platform investments and our investment pipeline is solid.

I'll also point out that we continue to believe that the lower middle market is the best place to be in terms of capital deployment.

Speaker Change: As compared to the larger end of the middle market due diligence, we were able to perform when evaluating an investment is much more robust the capital structures are generally more conservative with less leverage and more equity.

Speaker Change: The legal protections and covenant features in our documents are considerably stronger.

Speaker Change: Our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater.

Speaker Change: 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.

Speaker Change: The Saratoga management team 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.

Being proactive in managing our portfolio.

Speaker Change: Our underwriting bar remains high as usual, yes, we continue to find opportunities to deploy capital.

Speaker Change: As seen on slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 40 follow ons. This calendar year versus two investments in new platform portfolio companies.

Speaker Change: During the fiscal quarter, we invested $85 million through a combination of two new platform investments and eight follow on investments.

Speaker Change: Overall, our origination platform 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.

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

Speaker Change: There remain two portfolio companies that we are actively managing.

Speaker Change: Discussed in previous quarters, and I will touch on them shortly.

In general our portfolio companies are healthy and the fair value of our core BDC portfolio is 3% above its cost.

Speaker Change: 86, 8% 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.

Speaker Change: We have no direct energy or commodities exposure.

Speaker Change: 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.

Speaker Change: We have the same two investments on non accrual, namely pepper palisson solid consistent with last quarter, we continue to hold them on non accrual following the restructurings, but theyre combined remaining value, including equity is just $5 8 million or 6% of total portfolio fair value.

Speaker Change: With solid just fair value being written up this quarter, reflecting positive company performance.

Speaker Change: Looking at leverage on the same slide you can see that industry that multiples remain above five times.

Speaker Change: Total leverage of our overall portfolio increased to five five to six times, excluding pepper palestine's knowledge, reflecting both the repayment of a handful of low leverage investments as well as follow on debt this quarter by some.

Speaker Change: By us to some of our existing investments.

Speaker Change: Slide 15 provides more data on our deal flow.

Speaker Change: As you can see the top of our deal pipeline is down from last year in part because we made a conscious effort to improve the quality of our deal pipeline.

Speaker Change: And in part because market activity is down considerably as previously discussed.

Speaker Change: Despite these macro trends our investment volume was the highest we've had in the past six quarters.

Speaker Change: 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.

Speaker Change: As you can see on slide 16, our overall portfolio of credit quality and returns remain solid.

Speaker Change: As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list 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 sustainably exceed the last dollar of our investment.

Speaker Change: Yes.

Speaker Change: Our approach and underwriting strategy has always been focused on being thorough and cautious at the same time.

Speaker Change: Since our management team began working together a dozen plus years ago, we've invested to two $4 billion and 119 portfolio companies and it had just three realized economic losses on these investments.

Speaker Change: Over that same timeframe, we have successfully successfully exited 78 of those investments achieving gross unlevered realized returns.

Speaker Change: 15% on $1 2 billion of realizations.

Speaker Change: Even taking into account the recent write downs of a few discrete credits are combined realized and unrealized returns on all capital invested equal 13, 6%.

Speaker Change: We think this performance profile is particularly attractive for portfolio predominantly constructed with first lien senior debt.

Speaker Change: As was the case in the previous quarter with Nolan repaid we have only two investments on non accrual.

Speaker Change: Although pepper, although both pepper palisson solids have been successfully restructured we're still classifying pepper palace is red <unk> has been elevated back to yellow with a combined fair value of only $5 8 million, including equity.

Speaker Change: During the previous quarter, the Pepper Palace restructuring was successfully completed with us taking over majority control of the business.

Speaker Change: The turnaround specialists, we have been working with who have substantial successful experience in similar situations has invested significant equity in the business and became the CEO and a board member.

Speaker Change: Total fair value of the remaining investment is $1 $6 million.

And following the solid restructuring of the balance sheet. During the first quarter that resulted in us taking over the company and starting to actively manage the investment.

Speaker Change: The founder and previous owner has invested meaningful dollars in the business and is leading the enterprise and as reassembled some of the former senior leadership.

Speaker Change: He and the management team are working 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.

Speaker Change: We still have equity in a first lien term loan in the company with a current fair value of $4 $2 million.

Speaker Change: With the equity marked up this quarter to reflect the recent positive financial performance of the company.

Speaker Change: In addition, we recognized a $4 8 million realized gain on our <unk> equity, resulting from the sale of the company.

Speaker Change: And recognized a $7 million of realized gain on our <unk> escrow payment.

Speaker Change: Further improving the overall positive outcome of that investment sold earlier this year.

The CLO and JV had a $4 million of unrealized depreciation this quarter, reflecting primarily markdowns due to individual credits.

Speaker Change: Most notably in the first CLO.

Speaker Change: 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.

Speaker Change: Moving on to Slide 17, you can see our second Spic's license is fully funded and deployed.

Speaker Change: Although there is cash available there to invest in follow ons and we are currently ramping up our new Spic's three license with a $136 million of lower cost.

Speaker Change: Drawn debentures available.

Speaker Change: 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. Thank you Mike.

Speaker Change: As outlined on slide 18, our latest dividend of <unk> 74 per share for the quarter ended November 32024 was paid on December 19 2024.

Speaker Change: So unchanged from last quarter. This reflects a 3% at a 9% increase over the past one and two years, respectively. Additionally.

Speaker Change: Additionally, we paid a special dividend of <unk> 35 per share concurrently.

Speaker Change: With one with $1 nine per share of total distributions fulfilling our fiscal 2024 requirements.

Speaker Change: Board of directors will continue to evaluate the dividend level or at least a quarterly basis, considering both company and general economic factors, including the current interest rate environments impact on our earnings.

Speaker Change: Moving to slide 19, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of 4%, which is uncharacteristically low and underperforms. The BDC index of 13% for the same period.

Speaker Change: Our longer term performance is outlined on our next slide 20.

Speaker Change: Our five year returns are in places us in line with the BDC index, while our three year performance is slightly below the index, reflecting the impact of the recent latest 12 months performance and discrete credit issues.

Speaker Change: Since Saratoga took over management of the BDC in 2010, our total return has been 740% versus the industry's to 184%.

On Slide 21, you can further see our differentiated performance placed in the context of the broader industry and specific to certain key performance metrics.

Speaker Change: We continue to focus.

Speaker Change: On our long term metrics, such as return on equity and NAV per share NII yield and dividend growth and coverage all five of which are above industry averages, reflecting the growing value our shareholders are receiving.

Speaker Change: The negative NAV per share metrics. This past year is primarily due to the two discrete on accruals solids and Pepper Palace previously discussed yet we continue to be three times better than the industry average at negative 4% versus negative one 2% for the industry.

Speaker Change: Our dividend coverage and dividend growth has been one of the strongest in the industry. We also continue to be one of the few bdcs have grown NAV over the long term and we have done it accretively and our long term return on equity is one five times the long term industry average.

Speaker Change: Moving on to slide 22, all of our initiatives discussed on this call designed to make Saratoga investment a leading BDC that is attractive to the capital markets community.

Speaker Change: 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. These.

Speaker Change: These differentiating characteristics. Many previously discussed include maintaining one of the highest levels of management ownership in the industry at 12, 1%, ensuring we are aligned with our shareholders.

Speaker Change: Looking ahead on slide 23, as we navigate through a reshaped yield curve environment with decreasing short term and increasing long term rates and an uncertain economic outlook. We remain confident that our reputation experienced management team robust pipeline and historically strong underwriting standards and time in market test investment.

Speaker Change: <unk> will serve us well to continue steadily increase our portfolio size quality and investment performance over the long term.

Speaker Change: This will allow us to deliver exceptional risk adjusted returns to shareholders and to navigate through the current challenges in the market and uncover opportunities in the current and future environment.

Speaker Change: We also believe that our strong balance sheet capital structure, and liquidity will benefit Saratoga shareholders in the near and long term.

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

Speaker Change: Thank you as a reminder, if you would like to ask a question. Please press star one one on your telephone.

Speaker Change: If you would like to remove yourself from the queue plus press Star. One again, we also ask that you wait for your name and company to be announce before you proceed with your question one moment. Please.

Speaker Change: Our first question will come from Erik Zwick.

Speaker Change: Lucid capital markets. Your line is open.

Erik Zwick: Thank you and good morning, Chris and Mike.

Speaker Change: Good morning, Eric.

Speaker Change: So wanted to start first just looking at slide 23, since we kind of just wrapped up there you remain committed to expanding the asset base and growing the investment portfolio.

Speaker Change: You made comments during the call that the pipeline remains solid and you had a pretty good quarter here.

Speaker Change: Here the one that just wrapped up so I guess, maybe the harder part for.

Speaker Change: Me and maybe for you guys as well to have a longer term view and it is just the pace of repayments, which was obviously strong in the most recent quarter. So to the degree that you have some sort of pipeline at least over the next maybe three to six months what are your expectations. There just given that some of it seem to be the repayments in this most recent quarter were driven by the <unk>.

Speaker Change: Up in the M&A market and do you expect that to continue as well. So just I'm just trying to kind of balance the outlook for.

New growth versus repayments as well.

Mike: I guess I'll start Mike.

Speaker Change: Can follow up.

Speaker Change: If you look at the last quarter.

Speaker Change: We had $85 million of originations, which is a pretty robust origination.

Speaker Change: About and then we also are in beta investment of five year investment.

Speaker Change: Essentially.

Speaker Change: It was about half of the $160 million of redemptions. So.

Speaker Change: If you just take that one out basically we are kind of neutral.

Speaker Change: On that and these things happen I mean, you have different different cycles of investment redemption and investments made and.

It's hard to predict exactly when over that five year period of time that investment would come home I think Mike what investments started out as what $6 million investment.

Speaker Change: Yes, it's actually a hallmark investment for us and a lot of ways just in terms of what we do and where we play in the marketplace. So that was initially a $6 million debt deal.

Speaker Change: Accompanied with a $2 million of equity.

Speaker Change: We were in it for roughly five years, and we're able to support the company's growth and I think the debt position got well into the high <unk> as the company successfully grew and then of course, we realized a $4 $8 million gain on our equity investments. So the gross return that our shareholders.

Speaker Change: Received on that deal was quite substantial over that five year time, one of the challenges that we get when you deploy this model, but we think in the long run.

Speaker Change: The best way to deploy capital in our market in a really healthy thing is that when you add new portfolio companies. They tend to be on the smaller side, a little bit more granular and then the really successful ones and you've seen this in our portfolio for some of our larger positions, we have an opportunity to support them with growth over time now ultimately when they pay off.

Speaker Change: They can be pretty lumpy.

Speaker Change: And it takes it takes more platform companies to replace those those lumpy payoffs and in this particular quarter as Chris was pointing out we happened to have a couple of pretty sizable lumpy payoffs that were.

Speaker Change: Kind of out of the ordinary if you will.

Speaker Change: In general yes.

Speaker Change: Yes, and so.

Speaker Change: It's just hard to it's hard to predict precisely what our origination will be and we have a we have a pretty robust portfolio of larger portfolio and.

Speaker Change: And we get.

Calls from our portfolio. They wanted to have a large acquisition and we have a big follow on investment. So it's not really something we're able to predict I mean, I think if you look forward you say, yes, we've got a lot of cash on hand and.

Speaker Change: Yes, we've got sort of what we've done historically on our pipeline but.

Speaker Change: What the redemptions and what the origination is going to be it's not really something thats.

Speaker Change: Its something thats really able to be predictive in it's probably not prudent for us to try and predict that.

Eric Zwick: And Eric we often talk about how core quarters can be lumpy right either that you have a lot of originations and repayments were one quota or even none.

Eric Zwick: And slide four as the baseline to sort of illustrate how we think of things, which is long term and being able to grow on a long term basis rather than quarterly.

Eric Zwick: Be a lot more volatile.

Eric Zwick: I'd add to it.

Eric Zwick: Because it is obviously something that we as a management team are very focused on.

The market in general is characterized by law.

Eric Zwick: Lots of add on activity and that's particularly true at the lower end of the middle market, where new M&A activity is way down.

Eric Zwick: And it continues to be down we're hopeful that some of the things that have been driving the decline in M&A volume will reverse themselves.

Eric Zwick: As interest rates potentially come down and some other things sort of work in our favor we're confident that that will reach a new equilibrium and that there'll be an uptick in M&A activity.

Eric Zwick: And we will capitalize on that.

Eric Zwick: To date most recently.

Eric Zwick: If you looked at.

Eric Zwick: Our our portfolio.

<unk>.

Eric Zwick: We certainly were not.

Eric Zwick: On an origination pace that is as healthy as it was let's say a couple of years ago, but interestingly enough because M&A activity was down our repayments were down as well and we in most of the.

Eric Zwick: The last several quarters many quarters, we actually grew through that so we didn't have as high of origination activity, but we didn't have much repayments. So we were able to grow our portfolio through that in this most recent quarter. Despite.

Eric Zwick: Pretty healthy production, we haven't had some pretty lumpy repayments and I think.

Eric Zwick: In the long run.

Eric Zwick: Intermediate to long run we have a great degree of confidence that with our origination efforts with the relationships that we have in the market with those relationships continuing to grow and were doubled the doubling down on all of our business development activity that our pace of deployment will outpace any repayments that.

Eric Zwick: We have over time.

Speaker Change: Yeah. That's helpful. I appreciate all the color there and Youre right year looking at some of the slides you put in there you've demonstrated your ability to do just what you guys have.

Eric Zwick: I've mentioned there.

Eric Zwick: Second line of questioning looking at slide eight and.

Henri Steenkamp: I think Henry you addressed that the opportunities to potentially.

Speaker Change: With the publicly traded notes I think S. E. T is that like 6% J Y and Z are all above 8%. So there is opportunity to realize some savings there if you were to pay those down or refinance.

Speaker Change: Looking at the FDIC, the debentures that getting the call period com it because now for those but curious how the mechanics of potentially calling those are trying to re price those wood.

Speaker Change: How that would play out given that those are kind of tied to specific assets.

Speaker Change: Maybe I should have started maybe remind me what the current average cost of those debentures are now and maybe that's not even.

Speaker Change: A topic or not.

Speaker Change: Yes, no I think.

Eric Zwick: I think the most important thing when youre in a license is whether you are still in their reinvestment period Eric.

Eric Zwick: Three for example, it's a new a license if we get a repayment, we obviously get cash, but we can redeploy we would use that cash and redeploy it in new assets, we wouldnt repay debentures. Once you get outside of your reinvestment period, which we are in FDIC to.

Eric Zwick: You can only use cash for when you get a repayment you can only use cash flow follow ons of existing investments to continue to support them. So you then have a decision to make when you have cash in our licenses that is outside of its reinvestment period, where that you feel like youre going to hold the cash and then because you believe.

Eric Zwick: You know the companies and you think they might have some follow on needs or whether you repay existing <unk> debentures and the mechanics, how it works, it's pretty straightforward you have two opportunities in the year.

Eric Zwick: At the end of <unk>.

Eric Zwick: <unk> and at the end of February.

Eric Zwick: To make a decision whether you want to repay debentures. If you decide not to let's say at the end of August then youre holding those debentures until the.

Eric Zwick: Next six month period comes around but that's why I say their core level because for US for example, now in February we'll have a decision to make whether we want to use some of the cash in <unk> to repay some of the existing debentures.

Eric Zwick: <unk> was a lot of those debentures were issued when rates are pretty low and so.

Eric Zwick: There is a there is an arbitrage there too to think through on whether we want to just continue earning for example, cash and keep it for potential follow on opportunities, whether we want to repay it in real estate that again come mid February.

Eric Zwick: Got it. Thank you and then last one for me you noted.

Eric Zwick: Your success in the past with realizing some some equity gains with your investments there remind me just how you think about the potential to realize future gains is it really just tied to if the company itself and those transaction or do you typically sometimes proactively go out and seek to commoditize.

Eric Zwick: Our fair value might be well above kind of your holding.

Eric Zwick: So on the equity side.

Eric Zwick: Typically we're a minority investor in the equity.

Eric Zwick: And we think it's a really.

Eric Zwick: A key element of our investment strategy to augment our returns on the debt with co investments in the equity.

Eric Zwick: And most of the relationships that we have whether they be PE sponsors or management teams et cetera.

Eric Zwick: Kind of value that.

Eric Zwick: Climate of interest that we can achieve by co investing in the equity what what happens, though is a minority investor youre not typically controlling the exit instead, you have the right to exit when when the company sold or Theres, some realization along those lines and Thats generally when we realize.

Our return on equity from a from a strategy standpoint.

Eric Zwick: The way, we think about it is that we do such thorough work on these businesses.

Eric Zwick: That we feel like as part of that work.

Eric Zwick: We're pretty well equipped to feel like we can make an assessment as to whether the co investment opportunity in the equity makes sense and it's also been our experience that.

Eric Zwick: If you were to draw a diagram in the overlap between what you would like for a really solid credit and what you'd like for a business that likely a very good equity investment massive overlap there businesses that generally distinguished themselves in markets that have really strong dynamic.

Eric Zwick: Really good management teams, producing really high free cash flow characteristics a lot of the things that we look for businesses are the very same things that make them good equity investments and that's the reason why we've been able to get 15% Unlevered returns on our portfolio over time.

It's.

Eric Zwick: The majority of that is coming from the debt return, but certainly getting to 15%.

Eric Zwick: As a result of successful equity co investments and we continue to.

Eric Zwick: I think that's kind of a cornerstone of our strategy.

Thank you thanks for taking my questions.

Speaker Change: Thanks Frank.

Eric Zwick: Thank you one moment for the next question.

And our next question will be coming from the line of Casey Alexander.

Casey Alexander: Excuse me of Compass point research and trading. Please go ahead.

Casey Alexander: Hi, Good morning, Thank you for taking my questions.

Speaker Change: I do find it interesting when we all sounds sort of disappointed when you get large repayments because that's kind of the goal alright.

Casey Alexander: Yeah.

Casey Alexander: And thank you for that.

Speaker Change: And I guess, you're a platform that originate small and repays big so I.

Casey Alexander: I get that.

Casey Alexander: But.

Casey Alexander: One question I would ask is that you discussed.

Casey Alexander: The reduction in weighted average yields as being two thirds rate and one third higher yielding loans paying off.

Speaker Change: And looking at the quarter over quarter. It looks like your portfolio yields declined by about 80 basis points. So would it be fair to say that you are only about halfway through the resetting function of the 100 rates base rates have gone down do you still have about about halfway to go.

Casey Alexander: That seems like the reasonable math to me.

Speaker Change: Yes.

Speaker Change: It's a little more than half I would say, we more about two thirds of it being reflected in the way our loans reset and when they reset I'd say about two thirds of the decrease has been reflected.

Speaker Change: Definitely haven't because they because there's been a sort of a reset in four at September <unk>.

Speaker Change: And so I would say about two thirds and then there's obviously since quarter end there has been still.

Speaker Change: A slight decline in sofa since then as well.

Speaker Change: So right.

Speaker Change: That's what I meant I mean, when I look at it across the entire 100 basis points of what the fed has done it would seem to me that that you've reflected about 50 basis points in your results as of the end of November and maybe there is another 50 bps to go counting what the fed has done subsequent to the end of your quarter.

Speaker Change: Yes.

Speaker Change: I haven't done like the exact count, but but I would guess, it's again slightly more than that probably in the low <unk>.

Speaker Change: Okay.

Speaker Change: Well I think in terms of of.

Speaker Change: A decline in rates higher yielding loans paying off clearly a reduced portfolio balance that's going to take some time to build up.

Speaker Change: Do you still feel comfortable or is there maybe a quarter or two here where maybe.

Speaker Change: It might seem reasonable to to actually under earn the dividend a little bit until you can build a portfolio of backup.

Casey Alexander: Well Casey.

Casey Alexander: You can appreciate I don't think we've really ever under earned our dividend and that's certainly not something that we would.

Casey Alexander: We would welcome doing.

Casey Alexander: Obviously, some things are not in our control like rate of repayments.

Casey Alexander: And deployments, but we do have a.

Casey Alexander: We have a solid pipeline and we also.

Casey Alexander: As Mike was discussing earlier there has been a.

Casey Alexander: I'll hold back in M&A activity, a lot of times a lot of private equity firms are holding on to.

Casey Alexander: No.

Casey Alexander: Assets that arent meeting their.

Casey Alexander: Goals, but there is a tremendous pressure in the system and.

Casey Alexander: It may well be with the new administration et cetera that sort of a new era different antitrust approaches different types of things like that that.

Casey Alexander: There may be a real resurgence in deal activity.

Casey Alexander: Coming up and people have been waiting.

Casey Alexander: Some deals where its been.

Casey Alexander: Turned down by the Justice Department that Youll start really shake your head at why they would.

Casey Alexander: Turning to have something eight.

Casey Alexander: $8 billion deals being projected as antitrust type things and so I think there I think.

Casey Alexander: Not to overplay that but I think on a macro level I think there's a lot of people on the sidelines that are ready to do more business going forward and so the timing and the pace of that is not something that.

Casey Alexander: We are in a position to predict but.

Casey Alexander: But we certainly feel that there is going to be a fair amount of activity going forward and exactly how that shapes up for us on a quarter on quarter basis, we don't know, but we.

Casey Alexander: We.

Casey Alexander: We don't we arent anticipating under earning our dividend.

Casey Alexander: But that's not something we can control.

Casey Alexander: Okay.

Speaker Change: Looking at slide 17, with $77 million of cash in Spic's II hen.

Henri Steenkamp: Henry said here.

Henri Steenkamp: You are no longer in the reinvestment period, there is it reasonable to think that there could be that much follow on activity.

Henri Steenkamp: Or or does it make sense to at least start paying down some of those and when do you start dusting off the paperwork on Spic's bore.

Henri Steenkamp: Okay.

Casey Alexander: First of all Casey.

Speaker Change: I think I think it's fair to say that I think the current rate on cash is higher than the cost of the debentures and SAIC too and so theres, a positive arbitrage and not paying off the debt inside of that.

Casey Alexander: <unk> and <unk>.

Casey Alexander: So.

Casey Alexander: If it were the reverse we probably would decrease it and so we're watching that very carefully to the extent extended goes to a negative arbitrage. It makes them. It makes sense to pay it off and then obviously we have to look carefully on.

Casey Alexander: On what type of acquisition activity, we are anticipating from those companies with regard to SAIC for you showed a sustained Henry roll his eyes.

Casey Alexander: That is a major.

Casey Alexander: Paperwork exercise, but we still have a long way to go on Spic's three and we've had a very successful program down there we don't anticipate.

Casey Alexander: Having problems with.

Casey Alexander: Getting the <unk> license.

Casey Alexander: More of a timing issue and I think there's also some metrics in terms of investment levels before you start that yes, yes definitely clearly.

Casey Alexander: It's been great it's too bad.

Speaker Change: Yes, sorry to Pat Henry to Bad Henry that's your job to the paperwork.

Speaker Change: But there's definitely there is a new process in licensing way, it's like a repeat.

Speaker Change: Can you repeat issue effectively.

Speaker Change: That is definitely streamline the process of yesterday, just wanted to find out Casey youre very familiar with it too which has been great.

Speaker Change: But but we do still have $136 million of debentures, and we haven't had much realizations and spic's three yet an actual realizations in the fund is one of the one of the things I look at very closely.

Speaker Change: As part of that sort of assessment.

Speaker Change: My last question here is.

Speaker Change: You knew at the end of the quarter that you were going to have very high repayments I am not sure.

Speaker Change: Hey.

Speaker Change: Using selling equity into the market when you have $250 million in cash seems irrational and that was done right at the end of the quarter and at the beginning of the succeeding quarter can you explain the rationale for that because it doesn't seem rational when compared against the cash back.

Speaker Change: A $250 million, where youre talking about.

Speaker Change: A negative arbitrage and paying down some of your debt.

Speaker Change: Sure. So I think that's a good question and that's something that we do.

Speaker Change: <unk> discussed substantially internally, but I think if you look at the history of Bdcs in general and certainly our BDC.

The ability to raise equity really which has to do with whether you are.

Speaker Change: Able to sell stock at NAV and in this instance, we were very close and the manager subsidized the sales to get us to NAV.

Speaker Change: Those those are not.

Speaker Change: Moments to sell and size do not come that often and.

Speaker Change: Adage.

Speaker Change: On Wall Street that I'm sure everyone. On this call is familiar with which is.

Speaker Change: It's hard to sometimes it's hard to raise money when you need it.

Speaker Change: It's easier to raise money when you don't need it.

Speaker Change: And equity is permanent capital and and when you have the opportunity to raise it I think.

What needs to take advantage of it.

Speaker Change: And I think in other calls we have been.

Speaker Change: It's been discussed our leverage levels and there is several ways to.

Speaker Change: Dress leverage.

Speaker Change: One is to repay debt and the other is to build up your equity.

Obviously, our most desired way to build up equity is through capital gains and we've done that successfully.

Speaker Change: Throughout our time period here, but also selling new equity we have done periodically and so we view the sale of equity as more of a long term strategic.

Speaker Change: Decision and not necessarily colored by what our cash balances at this moment in time.

Speaker Change: We have $250 million of cash right now, but there have been times, where we've said it didn't have much cash at all and we're struggling to find liquidity to invest in our.

Speaker Change: And our pipeline and so.

Speaker Change: We view the cash as kind of a short term issue and the equity is really kind of a long term issue and really the cornerstone for long term growth of our BDC and we see we don't see I mean other than sort of deal volumes, but.

Speaker Change: The the opportunity set for the type of investment we make as fast and so we don't see a slowdown on that on a long term basis, and we see a lot of growth in our future and so all of that went into the decision.

That's all my questions. Thank you.

Speaker Change: Thank you.

Speaker Change: One moment for the next question.

Speaker Change: And our next question will come from the line of Mickey Chilean Laitenberger. Your line is open.

Speaker Change: Yes, good morning, everyone.

Speaker Change: First question I'd like to ask is could you give us a sense of how much more refinancing risk you believe exists in the portfolio given the current terms available in the market.

Speaker Change: That's a good question Mickey just in terms of what we could see in terms of pace of repayments.

Speaker Change: To answer it candidly you could see for several quarters, we were getting almost no repayments.

Speaker Change: And a lot of that was just due to the fact that there wasn't much M&A activity.

Speaker Change: We haven't seen some deals that have that.

Speaker Change: Exited our portfolio because somebody.

I approached the owner with with terms that were just way below kind of the rates that we play in in the marketplace.

Speaker Change: But we don't see generally when we look at our portfolio now a lot of exposure to that dynamic. It doesn't mean that doesn't exist, but I don't think we are highly vulnerable to that.

Speaker Change: Our expectation is that when M&A activity picks up our origination pipeline will pick up in.

Speaker Change: In earnest.

Speaker Change: And that will probably be the same time that we will start to see payoffs kind of resumed to their normal pace and we think that this last quarter was a bit of an anomaly just having some pretty chunky payoffs all at once.

Speaker Change: Okay. So that's.

Henri Steenkamp: That's helpful. Thanks, Mike question for Henri could you give us a sense of where you are.

Speaker Change: Spillover taxable income stands net.

Speaker Change: Net of the special and are you envisioning for special dividends to get that number down a little bit.

Speaker Change: We do some of the drag from the excise tax.

Sure Mickey.

Speaker Change: The most recent dividend that included the special dividend covered our fiscal 2024, So February 24.

Speaker Change: Next year.

Speaker Change: So it's cleaned out a spillover fully.

Speaker Change: Now in our February 25 fiscal 'twenty five.

Tax year, and so we're effectively about three quarters in which means it's just over the $3 <unk>.

Speaker Change: Over at the moment.

Speaker Change: Reflecting reflecting the taxable income of the last three quarters.

Speaker Change: And.

Henri Steenkamp: It's still relatively high Henry.

Henri Steenkamp: And then there is the excise tax that you pay on that is the board thinking about.

Henri Steenkamp: Distributing some more of that to shareholders.

Mickey: Well I think Mickey on the excise tax.

Henri Steenkamp: Sure.

Henri Steenkamp: Interest rates have changed and the likely excise taxes, 4% and it's among the cheapest sources of financing out there right now so.

Henri Steenkamp: If we were to replace.

Henri Steenkamp: <unk> reduced our liabilities it would make more sense from a pure economic basis to call some of our higher priced.

Henri Steenkamp: The bonds were eight 7% for example.

Henri Steenkamp: It's more than twice the.

The marginal cost of doing baby bonds today is somewhere in the 7% to 8%. So the marginal cost of financing is substantially higher than the excise taxes. So the excise taxes.

Henri Steenkamp: Posits.

Henri Steenkamp: Barry.

Henri Steenkamp: A good source of financing if you will and in addition, Mickey excise tax is a point in time tax it's not an accrual so in other words.

Henri Steenkamp: You get no credit for for example, distributing something today versus like December 30th.

No I agree I understand I'm just.

Henri Steenkamp: Curious how the board is thinking about it in <unk>.

Henri Steenkamp: This I completely agree with you on the debt I mean.

Henri Steenkamp: To me it seems like at least some of your.

Henri Steenkamp: That it's a no brainer to call call that given where you could probably.

Henri Steenkamp: Deploy that capital, but those are all my questions. This morning. Thank you for your time.

Henri Steenkamp: Well maybe I'll.

Speaker Change: It'd take slate issue with you a no brainer.

Henri Steenkamp: If you look at the yield curve.

Speaker Change: The increase of the 10 year.

Henri Steenkamp: As you know.

Henri Steenkamp: At the same it's gone up as much as the short end has gone down in <unk>.

Henri Steenkamp: And the cost of.

Selling.

Henri Steenkamp: Five year debentures.

Henri Steenkamp: It may even go up in the coming year, So I think I think.

Henri Steenkamp: Theres just a lot of a lot of considerations on the absolute cost of debt and then as you point out.

Henri Steenkamp: Relative to what our origination paces and again, it's a new year its a new administration.

Henri Steenkamp: It's a new outlook on many things and so.

Henri Steenkamp: We're going to just be cautious on making too many dramatic moves until we get a little more a little more information about this next environment, we're moving into.

Speaker Change: Yes, I understand your point, Chris but you are also you have the highest leverage amongst all listed BDC. So I was also.

Speaker Change: Taking that into consideration, but I appreciate your time. This morning. Thank you.

Mickey: Thank you thanks Mickey.

Mickey: Thank you one moment to the next question.

And our next question will be coming from the line.

Speaker Change: Bryce Rowe of B Riley your line is open.

Bryce Rowe: Thanks, a lot good morning, most of most of my questions have been.

Speaker Change: <unk> been asked and answered.

Bryce Rowe: Didn't want to kind of get a feel for.

Speaker Change: Some of it some of the marks we saw.

Speaker Change: Movement in March we saw.

Speaker Change: <unk> over over quarter.

Speaker Change: The debt portfolio continues to be marked.

Speaker Change: At very high levels, only and only a handful that are even below below the low costs, but from a from an equity perspective, I think we did see a few.

Speaker Change: Consumer more consumer facing.

Speaker Change: Investments get marked lower.

Speaker Change: And obviously you had some offsets with.

Speaker Change: Some other businesses getting marked higher but just wanted to get a feel for just the overall health.

Speaker Change: Some of the more consumer related consumer related businesses that you have within the portfolio.

Speaker Change: That's a good question I think.

Speaker Change: The March that you saw.

Speaker Change: Down in a handful of our portfolio investments.

Speaker Change: Were reflective of a bit softer performance generally and of course equity is going to be more would be.

Speaker Change: As a result of an underperformance then then that will be.

Speaker Change: I don't know that I would tie that to some person.

Speaker Change: Broader perspective, we have on the consumer while it's a good question, we wouldn't necessarily draw that conclusion to the extent that there is a handful of.

Modest write downs in some of our portfolio companies little bit more specific to just the dynamics of those particular businesses and less.

Speaker Change: In our view lesser result of macro trends that we're seeing.

Speaker Change: At least.

Speaker Change: From our vantage point.

Speaker Change: Okay. Okay. That's helpful. Mike.

Speaker Change: And then maybe a different topic you are talking about a solid pipeline from an origination perspective does that refer to.

Speaker Change: Our pipeline of new opportunities for both new and existing.

Speaker Change: Yes.

Speaker Change: A really good question and we have certainly enjoyed the ability to continue to grow.

Speaker Change: A pretty healthy pace by supporting our existing portfolio of companies, we expect to.

Speaker Change: Be able to continue to do that at a pace thats consistent with what we've done in the past generally we're not seeing as many new platforms.

It's interesting, though because.

Speaker Change: You're always a.

Speaker Change: A time like this you always kind of pause.

Speaker Change: Try to look back or look across your portfolio and what your pipeline consists of right now if you looked at our pipeline even some of the new.

Speaker Change: Opportunities that we're chasing are actually not new opportunities for the sponsor.

Speaker Change: They're they're upsizing that we're getting an opportunity to look at where the sponsors either outgrown their existing lender or something else is happening in the capital structure, where we have a chance to come in and replace the existing lender.

Speaker Change: So that would be further sign of.

Speaker Change: Yes.

Speaker Change: Owners holding on their businesses longer looking to drive value in their existing portfolio not as much uptick in M&A activity. So I would say more than half of what we're looking at right now where we have term sheets out we're chasing things that we're really excited about are not actually new M&A deals there.

Speaker Change: Yes.

Speaker Change: Upsizing of some sort.

Speaker Change: Okay.

Speaker Change: Okay, one more for me and kind of on the topic of leverage certainly it's come up on on past calls.

Speaker Change: But we've seen we've seen just net overall net debt to equity come down pretty substantially.

Speaker Change: Especially this quarter with healthy repayment activity.

Speaker Change: Any thought and if we think about maybe two or three years ago.

Speaker Change: It certainly.

Speaker Change: A little bit higher than it might have been in 'twenty, two but lower than what we saw in 2023 and 'twenty four.

Speaker Change: Any any kind of further thought around how you expect to manage balance sheet leverage going forward, especially given that you do or you have historically carried over the last couple of years more leverage than almost all bdcs that are out there.

Speaker Change: Sure a couple of thoughts on that and that is definitely something we spent a lot of time thinking about.

Speaker Change: I think there is some.

Speaker Change: I'm not going to say unique, but some particular aspects of Saratoga that arent necessarily shared with the whole BDC universe and that is all.

Our large Spi C.

Speaker Change: Portfolio and investments and <unk>.

Speaker Change: The leverage the leverage in those.

Speaker Change: It's not counted the same as <unk>.

Speaker Change: Baby Bond leverage for example in terms of the regulatory leverage and so I think from a regulatory leverage. It's one thing from a total leverage it's something else and the character of the debt and we've talked about this many times in our quarterly calls.

Speaker Change: Leverage if you have short term leverage this asset based and you're up to the limits of what the asset based formulas are and something goes against you.

Speaker Change: You get foreclosed on by your banks, you can have a big accident.

Speaker Change: And it may be something temporary in nature like when Covid hit.

Speaker Change: And things like that.

Speaker Change: But if you have leverage like for example, the <unk> debt leverage which those are 10 year instruments interest only with no covenants and.

Speaker Change: And so a lot of things can happen in 10 years, but if you're only requirement is to repay the interest the nature of that debt in terms of being something thats dangerous. If you will to your to your to the health of the overall company is very very low.

Speaker Change: And so and then the baby bonds are also very similar in that they are long term instruments bullet maturities interest only no covenants. So we've got very little almost all of our debt has no covenants to speak of.

Speaker Change: Interest basically.

Speaker Change: Cover our interest and the interest is very small relative to our liquidity relative to our earnings relative to everything else and so our overall debt structure is incredibly safe relative to the amount that it is and so.

Speaker Change: So thats the liability side.

Speaker Change: Even our asset based loan that we have although that lowly drone, though they also have no recourse to the BDC I know BDC covenants in them either we think they are all different and the BD and their own special purpose vehicles, so that so that our leverages.

Speaker Change: <unk> and structured in a very sort of low impact way now our cost of capital as a result of that is slightly higher perhaps than some other bdcs, but it's a whole lot safer. So we've got a we've got a very solid safe long term debt structure with maturities coming out anywhere from small.

Speaker Change: Amount in the next year, but largely it's like two to 10 year maturities out there and so.

Speaker Change: And we've been very it's been.

Speaker Change: A lot of work on our part to get that debt structure and have it out there in place and so you want to be very careful changing that and then so thats. The liability side now the asset side is something else and I think as you look at our portfolio.

Speaker Change: Have talked at length about these discrete portfolio issues two of which were losses and then the other two we've kind of got back back hallmark.

Speaker Change: In the last year or so but.

Speaker Change: If you look past those and you look at what our portfolio is right now in terms of.

Largely 85% plus type of senior debt senior secured we are in the <unk>.

Speaker Change: Senior lender and we were involved in decision, making close to the company et cetera, and then you look at the quality of credit quality and the performance of that portfolio, we have a very solid performing asset base. So.

Speaker Change: We don't we think that equation is a sound one not and so I think talking about leverage in isolation or in comparison with other bdcs without talking about these character elements of both the asset side and the liability side.

Speaker Change: It doesn't paint.

Speaker Change: So I think I've got two dimensional conversation about like a four dimensional situation and so we don't view our leverage as <unk>.

Speaker Change: As particularly high or particularly dangerous and we view it as a tremendous asset and the average cost of this leverage structure.

Speaker Change: <unk>.

Speaker Change: Much less than our dividend right now our dividend yield is like 12%. Our average cost is what five or 6% of it.

Speaker Change: So our debt cost is very very accretive to our equity.

Speaker Change: As structured and again.

Speaker Change: If you look at what happened in Covid just to pick one example.

Speaker Change: Number of Bdcs. It had some real issues in terms of having to repay or fund or <unk>.

Speaker Change: Some of their short term asset based credit facilities, where we didn't we.

Speaker Change: Period after Covid, we put a lot of capital to work because we were well structured for that type of environment.

Speaker Change: And that's with a lot of leverage and that was a tremendous period of growth for us and high quality growth and we had some very very good investments and we deepened our relationships because we were able to help our sponsors in critical times, all because of the nature of our debt structure was impervious to that type of event.

Speaker Change: Yes.

Speaker Change: In the short term and so we believe we're very well structured.

The environment, we're in and we just don't believe that this debt structure is a negative we think our debt structure is a positive.

Speaker Change: Did we lose you.

Speaker Change: No we're good.

Speaker Change: Alright, I was on mute.

Speaker Change: Thanks, a lot for the color.

Brad: Alright, Thanks, Brad.

Christian Oberbeck: Thank you that does conclude today's Q&A session I would now like to turn the call back over to Christian for closing remarks. Please go ahead.

Speaker Change: Okay, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.

Christian Oberbeck: Thank you.

Christian Oberbeck: Thank you all for joining in today's conference call you may now disconnect.

Christian Oberbeck: Okay.