Q4 2025 Saratoga Investment Corp Earnings Call
During today's presentation, all participants will be in a listen only mode [inaudible]
Speaker Change: Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investments Corporation's Chief Financial Officer and Chief Compliance Officer, Mr. Henri Steenkamp.
Sir, please go ahead.
Speaker Change: Thank you. I would like to welcome everyone to Saratoga Investment Corps 2025 fiscal full year and fourth quarter earnings conference call. Today's conference call includes forward-looking statements and projection.
Speaker Change: We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections.
Speaker Change: We do not undertake to update our forward-looking statements unless required to do so by law.
Today we will be referencing a presentation during our call.
Speaker Change: You can find our fiscal, full year and fourth quarter, 2025, share the presentation in the events and presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night.
Speaker Change: A replay of this conference call will also be available, please refer to our 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.
Thank you, Henry, and welcome everyone.
Speaker Change: Saratoga Investment Corps highlights this quarter include net positive originations generated from our pipeline, including one new portfolio company originated in the quarter and two new companies since quarter end, and increase in AUM on a fair value basis following significant repayments.
Speaker Change: Lower Statutory and Absolute Leverage from an increase in NAV, and importantly, the Core BDC portfolio demonstrating solid performance in a volatile macro environment.
Speaker Change: Building on our strong dividend distribution history with a base quarterly dividend of 74 cents per share declared and distributed for the fiscal fourth quarter we announced the transition to a monthly dividend structure increasing our quarterly based dividend by 1 cent per share to 25 cents per share per month
Speaker Change: From overall investment value and current yield perspective, our annualized first quarter dividend of 75 cents per share implies a 12.1 percent dividend yield based on the stock price of 24.86 per share on May 6, 2025.
Speaker Change: RQ-4 adjusted NII of 56 cents per share, further adjusted for a 13 cent per share annual excite tax expense.
Speaker Change: is 69 cents per share and reflects the impact of the past nine months trend of decreasing levels of short-term interest rates and spreads on Saratoga's investments largely floating rate assets and the full period impact of the recent outsized repayments.
Speaker Change: During the quarter, we continue to see the early stages of a potential increase in M&A in a lower middle market, reflected in multiple equity realizations in Q4 in addition to significant new originations.
Speaker Change: The three equity realizations generated $7.2 million of realized gains while we originated $41.8 million from a combination of one new portfolio company and six follow-ons.
Speaker Change: Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create attractive investment opportunities from high quality sponsors.
Speaker Change: These trends have continued since quarter-end with 45.5 million of originations, including two new portfolio companies and six follow-ons, and $24.5 million of partial or full repayments of investments.
Speaker Change: We continue to remain prudent and discerning in terms of new commitments in the current
Speaker Change: We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges.
Speaker Change: Where we have encountered significant challenges in four of our portfolio companies over the past year, we have completed decisive action and resolved all four of these companies' challenges through two sales and two restructur
Speaker Change: Our current core non-CLO portfolio is marked down by $3.4 million this quarter. The CLO and JV were marked down by $2.7 million and an unrealized appreciation charge of $1.5 million resulted in an overall reduction of $7.6 million in portfolio value.
Speaker Change: We had three equity realizations, generating overall realized gains of $7.2 million.
Speaker Change: The $1.5 million unrealized appreciation charge resulted from late changes in the pricing of one of the realizations.
Speaker Change: Our total portfolio fair value is now 2.2% below cost, while our core non-CLO portfolio is 1.6% above cost.
Speaker Change: The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting and are growing portfolio companies and sponsors in well-selected industry segments.
Our overall credit quality for this quarter
Speaker Change: Remains steady at 99.7% of credits rated in our highest category with two investments remaining on non-accrual status, being Zolage and Pepper Palace, both of which have been restructured, representing only 0.3% and 0.5% of fair value and cost respectively.
Speaker Change: With 88.7% of our investments at quarter-end in first-line debt and generally supported by strong enterprise values and balance sheets and industries that have historically performed well in stressed situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty.
Speaker Change: to deliver exceptional risk-adjusted returns to shareholders. Michael touched more on the impact of tariffs on our portfolio companies.
[inaudible]
Thank you.
Michael Grisius, Christian Oberbeck, Michael Grisius, Christian Oberbeck,
As always, and particularly in the current uncertain environment.
Speaker Change: Balanchine Strength, Liquidity, and NAV preservation remain paramount for us.
Speaker Change: At Quarter-Anne, we maintain a substantial $428 million of investment capacity to support our portfolio companies.
Speaker Change: with $136 million available through our existing SBIC-3 license, $87.5 million from our two revolving credit facilities, and $205 million in cash.
Speaker Change: This level of cash improves our current regulatory leverage of 162.9% to 186.2% net leverage, netting available cash against outstanding debt.
Speaker Change: Saratoga Investments 4th Quarter, Ethical 2020-25, Keep Performance Indicators, as compared to the quarters ended February 29th, 2024, and November 30th, 2024 are as follows.
Speaker Change: Our quarter end NAV was $329.7 million, up 6.1% from $370.2 million last year and up 4.7% from $374.9 million last quarter.
Speaker Change: The $17.8 million increase in NAVs equentially resulted from ATM sales of 1.2 million shares at NAV for net proceeds of $32.4 million, partially offset by net realized gains and unrealized appreciation.
Speaker Change: And our adjusted eye per share is 56 cents this quarter, down 40.4% from 94 cents last year, and down 37.8% from 90 cents last quarter, that in the annual exercise facts of...
Speaker Change: netting the annual exercise tax of 2.4 million dollars or 13 cents results in an adjusted NII of $0.69 in Q4.
Speaker Change: Adjusted NII yield is 8.4% this quarter, down from 14% last year and from 13.3% last quarter.
Speaker Change: Latest 12 months return on equity is 7.5% up from 2.5% last year and down from 9.2% last quarter.
Speaker Change: slightly below the industry average of 8.9%. And our NAV per share is $25.86 found from 27, 12 last year and down from 26, 95 last quarter.
Speaker Change: While these past 12 months have seen markdowns to a small number of credits in our core BDC portfolio, resulting in a latest 12 months return on equity of 7.5%, which is below the industry average of 8.9%.
Speaker Change: Slide 3 illustrates how our long-term average return on equity over the last 11 years is well above the BDC industry average of 10.3% versus the industry's 7%.
Speaker Change: Our long-term return on equity has remained strong over the past decade plus, beating the industry every eight of the past eleven years and consistently positive every year.
Speaker Change: As you can see on slide 4, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago. Outside repayments offset healthy originations this year, resulting in our AUM declining. Yet a solid Q4 originations quarter put us back on the AUM growth trajectory.
Speaker Change: One quarter of AUM decline in Q3 does not detract from our expectation of long-term AUM growth.
Speaker Change: The quality of our credits remain strong with only two recently-restructured pepper palisons knowledge credits on non-accrual, consistent with last quarter. Our management team is working diligently to continue this positive trend as we deploy our significant levels of available capital into our pipeline.
Speaker Change: while at the same time being appropriately cautious in this evolving credit and volatile economic environment.
Speaker Change: With that, I would like to turn the call over to Henry to review our financial results, as well as the composition and performance of our portfolio.
Henri Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal fourth quarter ended February 28th on 25, most of which Chris already highlighted.
Henri Steenkamp: Of note, the weighted average common shares outstanding in Q4 was 14.5 million, increasing from 13.8 million and 13.6 million shares for last quarter and last year's fourth quarter respectively.
Henri Steenkamp: Adjusted NII decreased this quarter, down 37.2% from last year, and 35.4% from last quarter.
Henri Steenkamp: This court has adjusted investment income decreases where primarily due to two reasons [inaudible]
Henri Steenkamp: First, this quarter included $2.4 million of an annual excise tax expense due to the spill-over amount as of end of December 2024 versus $1.8 million last year.
Henri Steenkamp: The impact to N.I. Persia from this excite tax is 13 cents, which means that adjusted N.I. Persia is 69 cents for Q4 when adding this annual expense back.
Henri Steenkamp: Second, there was lower total investment income resulting from both lower base interest rates this year and lower AUM levels these past two quarters.
Henri Steenkamp: The weighted average interest rate on the core BBC portfolio of 11.5% this quarter compares to 12.6% as of the previous year and 11.8% in Q3.
Henri Steenkamp: The yield reduction primarily reflects the sofa base rate decreases over the past year.
Henri Steenkamp: AUM is down primarily due to the impact of the significant repayments experienced in Q3, with part of that offset by this quarter's net positive originations not yet fully reflected.
Henri Steenkamp: and Income and Excise taxes decreased $0.5 million to $1.4 million as compared to $1.9 million last year and decreased $1.4 million from $2.8 million last quarter.
Henri Steenkamp: Also, we have again added the KPI slides 28 through 31 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past two years.
Henri Steenkamp: and Slide 6 highlights the same key performance matrix for the full fiscal year as compared to the previous two years.
Henri Steenkamp: Moving on to slide 7, NAV was $392.7 million as a fiscal year end, a $17.8 million increase and a $22.5 million increase from the same quarter last year.
Henri Steenkamp: During this year, $35.4 million of new equity was raised at or above net asset value through our ATM program, of which $32.4 million was this quarter.
Henri Steenkamp: This chart also includes our historical NAV per share, which highlights how this metric has increased 22 of the past 30 quarters.
Henri Steenkamp: Seeing a recent decrease due to the special dividend declared in the third quarter [inaudible]
Henri Steenkamp: and write down this year in discrete assets, being Pepper Palace, Zolage, and our CLO and JV
Henri Steenkamp: Our History of Consistent Realized Games also continues this quarter with $7.2 million of Realized Games recognized on the three equity realizations this quarter.
Henri Steenkamp: On Slide 8, you will see a simple reconciliation of the major changes in adjusted NII and NOV We push here on a sequential, cordially basis.
Starting at the top [inaudible]
Adjusted NII per share was down 34 cents in Q4.
primarily due to first first.
Henri Steenkamp: The annual excise tax, which was 13 cents this quarter, related to unpaid spillover as previously mentioned, and second, a decrease of 22 cents in non-CLO net interest income due to both lower base rates and AUM.
Henri Steenkamp: Lower other income from lower originations and repayments, and dilution from the increased net ATM and drip share count, reduced earnings by an additional 3 cents each.
Henri Steenkamp: This was offset by a 6 cent increase from lower operating expenses.
Henri Steenkamp: On the lower half of the slide, NAV per share decreased by a dollar and nine cents, primarily due to the Q3 and special dividends declared in the fourth quarter outweighing net investment income, as well as naturalized gains and unrealized appreciation on investments of 53 cents per
Henri Steenkamp: On slide 9, you will see the same reconciliation, but now on a sequential annual basis [inaudible]
Henri Steenkamp: Starting at the top, adjusted NII per share decreased from $4.10 per share last year to $3.81 per share mainly due to the increased net share count from the DRIP and ATM programs resulting in a $0.57 per share decrease and a 10-cent decrease from increased operating expenses and excite taxes. [inaudible]
Henri Steenkamp: On the lower half of the slide, this reconciled the Dollar 26th NAV Peshade Decrease for the year.
Henri Steenkamp: $3.81 of Gap NII was more than offset by a $1.66 of naturalized losses and unrealized appreciation and $3.31 of dividends paid during the year.
Henri Steenkamp: There was a false internet accretion from the ATM and drip plan issuances during the year.
Henri Steenkamp: Slide 10 outlines the dry powder available to us as of quarter end, which totalled $428.2 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 44% without the need for external financing.
Henri Steenkamp: with 204.7 million dollars of quarter end cash available and thus fully accretive to NII when deployed and 136 million dollars of available SBA debentures with its low cost pricing also very accretive.
Henri Steenkamp: These calls are also available to be used prospectively to reduce current debt [inaudible]
Henri Steenkamp: We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet and the fact that almost all our debt is long term in nature.
Henri Steenkamp: Also, our data is structured in such a way that we have no BDC governance that can be stressed during volatile times, especially important in the current economic environment.
Henri Steenkamp: Now I would like to move on to slides 11 through 14 and review the composition and yield of our investment portfolio.
Henri Steenkamp: One CLO fund and one JV. Our first lean percentage is 88.7% of our total investments, of which 25% is in first lean lost out positions.
Henri Steenkamp: On slide 12 you can see how the yield on our core BBC assets, excluding our CLO, has changed over time, especially this past year, reflecting the recent decreases to interest rates.
Henri Steenkamp: This quarter, our core BDC yield decrease to 11.5% from 11.8% loss quarter, with two-thirds of the decrease due to the impact of decreasing core sofa base reps.
Henri Steenkamp: The CLO yield decreased to 16.4% from 24.6% last quarter, reflecting continued lower portfolio performance.
Henri Steenkamp: Slide 13 shows how our investments are diversified through the US, and on slide 14 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 JV which are included as structured finance securities.
Henri Steenkamp: And moving on to slide 15, 7.4% of our investment portfolio consists of equity interests which remain an important part of our overall investment strategy.
Henri Steenkamp: This slide shows that for the past 13 fiscal years we had a combined $39.6 million of naturalized gains from the sale of equity interests or sale or early redemption of other investments.
Henri Steenkamp: This is Nate of the Zolage, Nature and Pepper Palace, realized losses this year, slightly offset by the realized gains on our Invita investment in Q3 and our Nordicon, Victor and modern campus investments in Q4.
Henri Steenkamp: 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.
Thank you, Henry.
Henri Steenkamp: Today I'll focus on our perspective on the changes in the market since we last spoke with everyone in January and then comment on our current portfolio performance and investment strategy.
Henri Steenkamp: broader middle-market deal volumes were showing signs of improvement until the recent
Henri Steenkamp: which initially widened loan spreads and had a stapling effect on new debt-issuances.
Henri Steenkamp: The characteristic of the volatility resident in the larger loan markets, we've more recently observed spreads tightening again, and new issuances picking up as concerns about the potential economic impact of tariffs have somewhat abated, at least for the time being.
Henri Steenkamp: It's important to point out that the lower middle market in which we operate is generally not subject to such immediate volatility and tends to move in sync with medium-term macroeconomic variables.
Henri Steenkamp: Thus, our market has remained relatively unchanged throughout the economic turmoil, and we haven't experienced the roller coaster ride of the larger markets.
Henri Steenkamp: Deal volumes in our market have remained down significantly over 2024 and down further still as compared to 2021 to 2023.
Henri Steenkamp: We believe a number of factors are influencing the decline in lower-middle market deal activity.
Henri Steenkamp: including a disconnect between where Byerson Sellers are willing to transact.
Elevated interest rates making debt financing more expensive.
Henri Steenkamp: and a trend toward PE firms holding on to assets longer in order to meet their return expectations.
Henri Steenkamp: The combination of historically low M&A volume and an abundant supply of capital is causing spreads to tighten and leverage to remain full as lenders compete to win deals, especially premium ones.
Henri Steenkamp: We have experienced this over the course of this past year with a little over half of our repayment activity resulting from loans being refinanced on more favorable terms.
Henri Steenkamp: Notably in about two-thirds of these cases, we had the opportunity to stay in the investments.
Henri Steenkamp: Price alone was less of a determining factor, rather we weren't comfortable with either the new leverage profile or the structural features of the loan agreements.
Henri Steenkamp: Despite the volatility in the broader macro environment, loan terms in our market remain stubbornly borrower friendly, and we have not seen lenders revising their underwriting criteria, hiking spreads or cutting leverage.
Henri Steenkamp: These dynamics could, of course, change if the macroeconomic outlook changes materially.
Henri Steenkamp: The historically low deal volumes we're experiencing has made it more difficult to find quality new platform investments than in prior periods.
Henri Steenkamp: This may naturally prompt the question of what is our approach to operating in this difficult asset deployment climate.
Henri Steenkamp: First, the Saratoga Management Team has successfully managed through a number of credit cycles over many years and that experience has made us particularly aware of being disciplined when making investment decisions and being proactive in managing our portfolio. Thank you very much.
Henri Steenkamp: We'll continue to invest in high-quality assets and will not lower our investment standards and take on more risks than we feel is prudent just because the market is presently difficult.
Henri Steenkamp: We believe our shareholders will appreciate this approach in the long run.
Henri Steenkamp: Second, we're greatly expanding our business development efforts and are investing in resources to provide greater bandwidth for our professionals to dedicate themselves to this effort.
Henri Steenkamp: While we have developed a strong presence in the lower end of the middle market, the number of companies in our marketplace is vast compared to the traditional middle market and is occupied with hundreds of thousands of businesses.
Henri Steenkamp: We believe the number of deal sources in our market that we have yet to build relationships with far exceeds the number that we have built relationships with.
Henri Steenkamp: Further, our market benefits from a natural underpinning of deal flow driven by business owners seeking to transition ownership as they age.
Henri Steenkamp: We're in the early stages of our expanded business development initiatives but have already seen some positive results in our current pipeline and in the most recent portfolio company we closed in April .
Henri Steenkamp: Third, our existing portfolio serves as a healthy source of geoflow
Henri Steenkamp: Our payoffs tend to be lumpy as our portfolio investments reach scale and maturity, while our new portfolio companies tend to be small initially, and providing an embedded resource for asset deployment as we support their growth.
Henri Steenkamp: Because of the nature of the way we invest our capital in this manner, follow on activity has exceeded our new portfolio company deployment in each of our past five fiscal years.
Henri Steenkamp: In summary, the way we're approaching the currently challenging environment is to first stay disciplined on our asset selection.
Henri Steenkamp: The relationships and overall presence we built in the middle market in the marketplace combined with our ramped up business development initiatives give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accreted to our shareholders in the long run.
Henri Steenkamp: In the midst of these market conditions, we had $42 million gross and $26 million net asset growth
Henri Steenkamp: Before leaving this topic, I'll also point out that we continue to believe that the lower middle market is the best place in terms of capital deployment.
Henri Steenkamp: As compared to the larger end of the middle market, the due diligence were able to perform when evaluating an investment is much more robust.
Henri Steenkamp: The capital structures are generally more conservative with less leverage and more equity [inaudible]
Henri Steenkamp: The legal protections and coveting features in our documents are considerably stronger, and our ability to actively manage our portfolio, ongoing interaction with management and ownership is greater.
Henri Steenkamp: 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.
Henri Steenkamp: Now I'll move on to the subject of tariffs more directly.
Henri Steenkamp: Although their natural remains much uncertainty around tariffs and their potential impact on small businesses, we believe we are relatively well positioned if tariffs conditions persist. This is not the case, but it is not the case.
Henri Steenkamp: A large majority of our portfolio companies are SaaS businesses or businesses that operate in the domestic services sector.
Henri Steenkamp: with direct cost structures that should largely not be affected by tariffs.
Henri Steenkamp: While we're still actively working with the management teams and ownership of each of our portfolio companies to fully assess the potential exposure
Henri Steenkamp: It appears that for the handful of companies with more direct tariff exposure, only a portion of their input costs would potentially be affected.
Our underwriting bar remains high as usual.
Henri Steenkamp: Yet we continue to find opportunities to deploy capital. As seen on slide 16, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 40 follow-ons in calendar year 2024.
Henri Steenkamp: While we invested in two new platform investments last calendar year, we focused much of our time and resources towards supporting our portfolio and managing a discrete few challenge credits.
Henri Steenkamp: More recently during calendar Q1, we have closed two new platform companies and a third one in April .
Henri Steenkamp: As our business development efforts continue to ramp up despite these low-volume markets [inaudible]
Henri Steenkamp: Overall, our deal flow remains steady 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.
Henri Steenkamp: A portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams.
Henri Steenkamp: They remain two portfolio companies that we are actively managing as discussed in previous quarters and I will touch on them shortly. But in general, our portfolio companies are healthy.
Henri Steenkamp: Notably, the fair value of our core BDC portfolio is 1.6% above its cost.
Henri Steenkamp: 88% of our portfolio is in first lean debt and generally supported by strong enterprise values, in industries that have historically performed well in stress situations.
We have no direct energy or commodities exposure.
Henri Steenkamp: In addition, the majority of our portfolios comprise the businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention.
Henri Steenkamp: We have the same two investments on Nonocrol, namely Pepper Palace and Zology, consistent with last quarter.
Henri Steenkamp: We continue to hold them on a cruel following their restructurings, but their combined remaining fair value, including equity, is just $5.5 million.
Henri Steenkamp: Looking at leverage on this same slide, you can see that industry debt multiples increased slightly for senior debt.
Henri Steenkamp: Total Leverage for our overall portfolio decreased slightly to 5.35 times, excluding Pepper Palace and Solage, reflecting lower leverage across our several portfolio companies.
Henri Steenkamp: Slide 17 provides more data on our deal flow. As you can see, the top of our deal pipeline is up from the end of the year, despite the current M&A activity in the lower middle market remaining low.
Henri Steenkamp: This recent increase is as a result of recent business development initiatives.
Henri Steenkamp: 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. Thank you.
Henri Steenkamp: as we rigorously screen opportunities to execute on the best investments.
Henri Steenkamp: As you can see on slide 18, our overall portfolio credit quality and returns remain solid.
Henri Steenkamp: As demonstrated by the actions taken and outcomes achieved on the non accrual and watchless credits we had over the past year
Henri Steenkamp: Our team remains focused on deploying capital and strong business models where we are competent than under all reasonable scenarios. The enterprise value of the businesses will sustainably exceed the last dollar of our investment.
Henri Steenkamp: Our approach in underwriting strategy has always been focused on being thorough and cautious at the same time.
Henri Steenkamp: Since our management team began working together almost 15 years ago, we've invested $2.28 billion in 120 portfolio companies, and have had just three realized economic losses on these investments.
Henri Steenkamp: Over that same time frame, we've successfully exited 78 of those investments, achieving gross unleabored, realized returns of 15.1% on 1.2 billion dollars of realizations.
Henri Steenkamp: Even taking into account the recent write-downs of a few discrete credits are combined, realized and unrealized returns on all capital-industed equals 13.5%.
Henri Steenkamp: We think this performance profile is particularly attractive for Portfolio predominantly constructed with first lean senior debt.
Henri Steenkamp: Consistent with the previous couple of quarters, we have only two investments on non-acroll.
Henri Steenkamp: Although Pepper Palace and Zology have been restructured, we are still classifying Pepper Palace's red and Zology's yellow, with a combined fair value of $5.5 million including
Henri Steenkamp: We continue to have majority control over Pepper Palace with a turnaround specialist we have been working with in the role of CEO and owning significant equity in the business.
Henri Steenkamp: Management of the company by us continues as we explore avenues to expand the business.
Henri Steenkamp: The total fair value of the remaining investment is $1.5 million.
Salas continues to show positive signs of improvement and profitability.
Henri Steenkamp: The previous owner has invested meaningful dollars in the business, is leading the enterprise, and has reassembled some of the former senior leadership.
Henri Steenkamp: He and the management team are working in partnership with us with the immediate goal of returning to business to its former profitability levels and the ultimate objective of exceeding those levels.
Henri Steenkamp: Many of the initiatives management has undertaken have resulted in improved key performance indicators for the business.
Henri Steenkamp: We have equity in a first lean term loan in the company with a current fair value of $3.9 million with the equity marked up this quarter to reflect the recent positive financial performance of the company.
Henri Steenkamp: In addition, during the year we recognized $3.4 million net realized depreciation in our core non-CLO portfolio, including Pepper Palace and Solage.
Henri Steenkamp: About half of this depreciation represents adjustments to market multiples and prepayment premiums. Well, the other half is a $1.5 million mark down to our stretch zone investment, reflecting slower than projected sales growth combined with increased investment in corporate management team.
Henri Steenkamp: Company management and ownership are undertaking initiatives to address these trends.
Henri Steenkamp: and the sponsor has provided meaningful credit support to the business.
Henri Steenkamp: The CLO and JV have $2.7 million of unrealized appreciation this quarter, reflecting primarily markdowns due to individual credits in these vehicles.
Most notably in the investment in the first CLO's F-Node.
Henri Steenkamp: and importantly, we recognize net realized gains of $7.2 million on the equity sales of our modern campus, Nauticon, and vector investments this quarter.
Continuing our history of healthy real-life games [inaudible]
Henri Steenkamp: Our overall investment approach has yielded exceptional realized returns in recovery of our invested capital, and our long-term performance remains strong, as seen by our track record on this slide.
Henri Steenkamp: I'm moving on to slide 19. You can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons.
Henri Steenkamp: and we are currently ramping up our new SBIC-3 license with $136 million of lower cost, undrawn debatures available, allowing us to continue to support US small businesses.
Both New and Existing.
Henri Steenkamp: This concludes my review of the market. I'd like to turn the call back over to our CEO , Chris. Thank you, Mike.
Chris: As outlined on slide 20, our latest dividend of $0.74 per share for the quarter-ended February 28th, 2025.
was paid on March 25th, 2025. [inaudible]
Chris: This reflects a 1% increase over the past year and 7% increase over the past two years. 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 and macroenvironments impact on our earnings.
Chris: Moving to slide 21, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of 26% outperforming and doubling the BDC indexes 13% for the same period. Our longer term performance is outlined on our next slide, 22.
Chris: Our five-year return places as well above the BDC index, while our three-year performance is in line with the index. Of note, the five-year performance for the BDC industry is uncharacteristically high due to the five-year period starting during the COVID-19 market crash.
Chris: Since Saratoga took over management of the BDC in 2010, our total return has been 831% versus the industry's 308%.
Chris: On slide 23, you can further see our last 12 months performance placed in the context of the broader industry and specific to certain key performance metrics.
Chris: We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage all of which reflect the value our shareholders are receiving.
Chris: While return on equity, NAV per share, growth, and dividend coverage are lagging this past year, this is largely due to the two discrete non-accrual investments previously discussed, as well as the impact a recent lower base interest rates and AUM levels. [inaudible]
Chris: Reflecting the full period impact of recent third quarter debt repayments [inaudible]
Chris: In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. We also continue to be one of the few BDCs to have grown NAV accretively over the long term, with our long-term return on equity at 1.5 times the industry average.
Chris: Moving on to slide 24, all of our initiatives discussed in this call are designed to make Saratoga investment a leading BDC 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 include maintaining one of the highest levels of management ownership in the industry at 11.2% ensuring we are strongly aligned with our shareholders.
Chris: Looking ahead on slide 25, as we navigate through a reshaped yield curve environment with decreasing short-term and increasing long-term rates.
Chris: and an uncertain economic outlook in the face of an ever-evolving geopolitical landscape.
Chris: Recognizing the challenges posed by the current tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure and liquidity places us in a strong position to successfully address these types of uncertainties.
in closing.
Speaker Change: I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions. Certainly, and ladies and gentlemen, if you would like to ask a question at this time, please press star 11 on your telephone. If your question has been answered and you'd like to move yourself from the Q Simply Press star 11 again, our first question comes from the line of Erik Zwick from Lucid Capital Markets, your question, please.
Thanks, good afternoon everyone.
Eric Zwick: I'm encouraging to hear your comments on the pipeline strengthening. I'm curious if you can maybe add a little color in terms of what that mix looks like in terms of new versus add on opportunities as well as any particular industries where you're seeing strength at this point.
Thank you for watching!
Eric Zwick: That's a difficult question to answer mostly because there's so much...
Eric Zwick: going on in the marketplace, particularly some of the uncertainty that's being driven by the tariff environment. I think that plus the low volume of deals in the marketplace makes it
Eric Zwick: Bit challenging to look out at the pipeline with any real level of certainty. I would say that
Eric Zwick: We feel very confident in the initiatives that we're undertaking to reinforce our business development efforts and that in the space that we occupy in the lower and middle market
Eric Zwick: the enormous number of businesses and deal sources there, and that over time our asset deployment
Eric Zwick: Exceed the payoffs that we experience in the marketplace. A little bit hard to say too much about where our pipeline is right now. It's kind of reflective of what you've seen in the last couple of quarters. Be the best way to characterize it.
Speaker Change: Thanks, and maybe just a bit of a follow-up, you know, want to be initiatives that you talk about on slide 24 is that the commitment to grow AOM and I realized to, you know, a large degree that's dependent on, you know, market opportunities for new lending, as well as, you know, paybacks.
Speaker Change: We're just taking a look from maybe a different perspective just your current kind of personnel and infrastructure capabilities. What is the ideal size for the portfolio from your perspective?
Speaker Change: Well, I don't know that we think about it in terms of ideal size. I mean, we've certainly grown the business to a point where it's...
Speaker Change: at a decent scale, a scale that works very well in the market that we're in.
Speaker Change: We do think that there are opportunities for us to grow quite significantly without any change in strategy, in the marketplace that we're in we could be quite a bit larger.
Speaker Change: but we don't feel like we're under scale and that's a weakness in any respect.
Speaker Change: either. So, I don't know if that helps answer your question. I would say this.
Speaker Change: Just to reinforce what I've mentioned on the business development front, we are actively investing in personnel growth.
Speaker Change: So we've added people on the portfolio management side, we've added people on the business development side.
We've invested in...
other resources.
Speaker Change: to help make our business development efforts that much more efficient.
Speaker Change: and free up our investment professionals to also get much more involved in...
Outward facing activities that should feed our pipeline and we're seeing some evidence of that.
Speaker Change: Baring Fruit, but it's a little bit early to tell, as you can imagine, you know, by our nature our DNA is to be cautious and it's it's it's not an easy environment to invest in right now because the deal flows are are down but but we feel
Speaker Change: Very good that we can grow our portfolio over time [inaudible]
Speaker Change: If I could just add a little bit to about the nature of the markets that we're addressing.
in the smaller middle market.
Speaker Change: We're often investing in companies that are founder, the founders still present, and often transition, the founders try to affect the transition either.
Speaker Change: a complete sale or a partial sale in anticipation of moving out an institutional capital coming in and we're often the first institutional capital in some of these situations.
Speaker Change: and the presence in the volume of those deals is kind of an actuarial thing. It has to do with how many founders are in their mid-60s and 70s and starting to think about what's the next stage for their business and their state planning and things like that. So...
and I think as Mike had said, [inaudible]
that... that... that...
Speaker Change: You know, those type of deals are out there almost regardless of the environment and it's really incumbent on us.
Speaker Change: to find those and address those. So I think we have an opportunity in the smaller middle market.
Speaker Change: to generate deal flow in an adverse environment like we're in, it's a little easier, there's more prevalent deals than there would be in the larger markets that are driven much more by the broader market trends.
Speaker Change: I appreciate the decal commentary there. I appreciate the comments you gave regarding potential impact to terrorists. I'm curious if you could kind of address any potential exposure you have to government contracts that could be impacted by this federal agency to consider reductions.
Speaker Change: We don't see anything in our portfolio that makes us feel like we're significantly exposed to that in any way.
Speaker Change: Alright, that's good to hear. And last one for me, and on the stuff aside, I may have missed it in the prepared comments. Do you mention where the spillover level currently stands at this point?
Speaker Change: No, we didn't, but it's been disclosed in the 10Q, Erik, that we just, a 10K that we just filed, and also just, it's similar to what we mentioned last quarter, it's sort of just over the $3 a share at the moment.
Speaker Change: Thanks, Senator. And, Chris and Mike, I appreciate that. Answering my questions is well. Thanks, Devs.
Speaker Change: Thank you. Thank you. And our next question comes from the line of Sean Paul Adams from Be Riley's Securities. Your question, please.
Speaker Change: Yeah, it's good afternoon. I doubted on a little bit late, so apologies if this already got asked, but
Speaker Change: You know, when I'm looking at the net deployment for the quarter, it looks like there was a significant upcheck in repayments versus deployments.
Speaker Change: You know, is there a certain, you know, given the cash on hand, is there a? [inaudible]
Speaker Change: that you guys are looking for for new deals where you would expect to deploy capital and is the deal flow pipeline kind of aligned with previous quarters?
Speaker Change: We're seeing our pipeline up slightly to address that question, but as I...
Speaker Change: mentioned in prepared remarks. It's a tough market out there. We think our efforts to...
Get out in front of potential deal sources are-
Speaker Change: You know, the marketplace is relatively challenged in that respect. And then I'm sorry, what was the other part of your question?
Speaker Change: Just be like, if there's a specific yield or structure that you guys are looking for for the new deal.
Speaker Change: Generally, the way we're looking at the market and any deals that we do is we're looking at They're all in cost of capital and making sure that we're pricing deals
Speaker Change: Cognizant of what our all-in-cost capital is so that we can make sure that as we're deploying our capital that it's a creative to our shareholders. Now, where we occupy in the lower end of the middle market,
Speaker Change: We've seen that generally over time the spreads that we can achieve are a bit higher than where they are.
Speaker Change: in the upper market. That's not always the case at every moment, but by and large, we tend to operate in a wider spread in market.
for spread environment than the upper market.
Speaker Change: This market is a little bit volatile, so it's hard to tell, but we're finding deals and certainly the deals that we're investing in right now, we're looking at them from a standpoint of what's our cost to capital and making sure they're creative from that standpoint.
Speaker Change: Yeah, and Sean Paul, just to clarify, so we actually did grow in AUM in Q4 this quarter, we're actually up about 26 million or so, the big reduction that we referenced the whole time and that you've seen was in Q3.
Speaker Change: Q3, we had healthy originations, 88 million, but we had 160 million of repayments in the one quarter, which probably a record for a quarter for us. And so that obviously resulted in the client and AUM and Q3, and most of the cash that we have on our balance sheet at the moment, but Q4 was actually growth.
Speaker Change: I would add to that, too, one of the things I should have mentioned, just thinking about our cost of capital, one of the things that we benefit from is that we do have an SBIC license.
and that gives us access to very favorable
Costa Capital for the Deals.
Speaker Change: that qualify for SBIC financing and the vast majority of what we do does qualify for SBIC financing. So it makes it easier for us, even in market conditions like now, where pricing is pretty tight because everybody's clamoring for good assets.
Speaker Change: to deploy capital in a way that's still very creative to our shareholders.
Got it. I appreciate the color. Thank you.
Speaker Change: Thank you. Thank you, and our next question comes from the line of Casey Alexander from Compass Point Research. Your question, please.
Casey Alexander: Yeah, first of all, Henri, did you repay some of the debentures on SBA2 during the quarter?
Casey Alexander: We did, absolutely, yeah. We repaid $44 million of SBIC-2 debentures because we're at the end of our reinvestment period in SBIC-2 so when it makes sense, we'll start using available cash that is in SBIC-2 to repaid adventures and we did that in February and of February . And what was the cost on those that you repaid? What was...
Speaker Change: What was the interest rate? I think on average they were about six million or so, sorry six percent or so.
Speaker Change: 6%. What's the rate on the new SBA debentures when you take them down right now?
Speaker Change: Yeah, the most recent ones were priced around about the high falls. I think all in it's probably like five and a quarter
All right. Order.
Okay.
Speaker Change: Have you considered moving to recognizing the exercise tax quarterly as opposed to annually and kind of removing some of the distortion that such a large exercise tax creates on your results?
Speaker Change: Yeah, we actually did, and we actually walked through all the accounting with our accountants, but the way the accounting works is you only recognize it once you know it's definitive.
Speaker Change: and you can, you know, depending upon when you pay your spill over, you have to the end of December to pay it. So, if, for example, you pay it on December 30th, you won't have any exercise tax.
Speaker Change: So it's a point in time, so only once you hit January 1 is the expense definitive and do you pay it?
Speaker Change: Is it an obligation? I mean, with $3 a share in spillover, you know you're going to have it though. You could accrue for it on a quarterly basis and reduce some of the distortion, can't you?
Speaker Change: You have the opportunity, so we'll face a point again, come the end of December where we can pay that $3 and whatever else is built up since then on December 30th and then you wouldn't have an Alive Illiterary obligation.
Okay.
Speaker Change: Okay, can you remind me because I have looked at the management contract recently? Is cash subtracted from gross assets for the purpose of calculating the management fee?
Okay.
Speaker Change: and Mike, you said that there was one deployment in April . Is there any way you can share with us how large it was?
Speaker Change: I'm looking at a Henry, I mean I think we generally haven't done that. I think it's interesting, Casey, I'm not trying to be evasive because what we're trying to avoid is getting right up to the earnings call and just...
Speaker Change: saying everything that we've done in our portfolio right up to that date, I think the way we think about it, and I know you appreciate this.
Speaker Change: is that we think of growth of our portfolio more centered around adding portfolio companies a little less about the size of that particular investment.
and more about…
Speaker Change: Every time we add a portfolio company, that is fuel for...
Speaker Change: Additional Capital Deployment Over Time. And I think I referenced in the prepared remarks that over the last five years we've actually done more add-ons.
Speaker Change: and then we have initial portfolio companies because most of what we...
Investing is small [inaudible]
Speaker Change: Henri, I think we do say what? We did this so far, right? We did this close, Casey, I think it's in the actual earnings release. We had 45 odd million since year-end and that was two follow-ons and I think, sorry, two new portfolio companies and five follow-on, so that gives you a sense of sort of the size and how it's spread over multiple investments.
Speaker Change: So that's what your deployment is thus far in this new year, 45 million.
Correct, from March 1st. Yep. Yep. Okay.
Speaker Change: I hate to go back to an old sticking point but you entered the quarter with 250 million of cash and still somehow chose to raise 32 million in equity capital in a quarter where you only put out 26 million.
Speaker Change: You know, it just seems dilutive to your earnings and not in the best interests of shareholders.
Speaker Change: Well, Casey, you know, I think appreciate the question and I think it's a totally legitimate question and we have discussed this before.
and I think, you know, if we were...
Speaker Change: Managing on a quarter to quarter basis or you know you're right it's not the right thing you have to do if you're saying what are we trying to maximize this quarter but I think you know one of the beauties of the BDC is it's a permanent capital vehicle and you know and you know
Speaker Change: We're not forced to deploy capital, like a fund would be I'd use it or lose it or anything like that, so we take a long-term view on growth and again I think as we've emphasized in our presentation our long-term performance is substantially above the industry's long-term performance.
Speaker Change: And so we're very focused on that. We think right now, while the earnings are what they are as we've presented and
Speaker Change: and our repayments and our net originations are as robust as they have been in other periods of time, our balance sheet is incredibly strong and I think in an uncertain environment like this.
are on our list.
Speaker Change: and long dated maturities and things like that, but also I think that this raising of the equity does the leverage.
in this environment. So...
Speaker Change: Yes, we have a lot of capital on hand, so on the one hand you're saying, well that costs us something, which it does, but on the other hand we're incredibly well positioned with a fortress balance sheet. We've never had such a strong balance sheet position in our history.
Speaker Change: and Strike, having a super strong balance sheet, we think it is very, very important.
The other thing I would say is that…
Speaker Change: Again, I don't have the data at the tip of my tongue here, but you know this very well yourself. If you look at the history of BDCs, you can only raise equity capital in certain types of environments. Equity capital is not a continuously available.
Resource, and often the times when you want to be able to ploy.
like, for example, during the COVID.
downturn.
You know, nobody, you couldn't sell any equity.
Speaker Change: but there was tremendous opportunities to invest and we invested a lot of capital we were very well prepared in that downturn.
Speaker Change: and grow our assets under management very well and improve our relationships with sponsors and things like that but there was absolutely no equity to be raised during that period of time when there was a very robust pipeline opportunities and very fat spreads in a lot of the things we were doing and so I think thinking about the long run...
Speaker Change: You kind of have to raise equity capital when you can, as opposed to when you need to, and then strengthen your balance sheets so that, you know, as the opportunities change and evolve, you're in a very strong position to do so [inaudible]
Speaker Change: So again, it's a long-term investment in our foundational equity structure which is the cornerstone of all the leverage and all the things that we do and that's how we view it.
Thank you for taking my questions.
Speaker Change: Thank you. Our next question comes in line, Robert Dodd, from Raymond James. Your question, please.
Robert Dodd: Hi guys, just to go back to the spillover question, I mean it looks to me like you've got about three dollars and thirty cents per current share, I was just going to check out and check.
I mean that's more than four quarters of current one rate dividend.
So is
Robert Dodd: There, I mean, it's the spillover balance too high. It's what it boils down to because I mean, it's an issue that you're sort of
Almost mandated to grow the dividend or payout.
Special Distributions again as you did in the third quarter.
Robert Dodd: versus what earnings might do. So, I mean, is there a case to be made that, like, lowering it more than the 35 cents special?
Thank you very much.
Well, I think-
You've just been a lot of...
Robert Dodd: A lot of change in the marketplace, and I think, for example, we talked about that length sort of outsized redemptions affecting our earnings level. The good news is those were redemptions of very successful investments, some of them competing back five and more years.
Robert Dodd: and so on the one hand, we had realized equity gains and things like that so it's reflective of a solid portfolio with strong underwriting.
Robert Dodd: But nonetheless, it does reduce earnings relative to our dividends. But we do have a dividend level and we do have a spill over as you remarked but
Henri Steenkamp: A lot of things remain to be seen. I mean, there may be some opportunities to substantially deploy capital and pay out, you know, sufficiently. And then further as Henry mentioned in answering the question, the...
Henri Steenkamp: earlier about the counting for the spillover, we do have until the 30th of December to decide
Henri Steenkamp: Lay it out, you know, things sort of continue on the path or continuing. Yeah, there would be a special dividend, you know, to be paid, but to reduce the spillover and the excise tax and things like that.
are a relative performance over the balance of the year.
Speaker Change: I appreciate that. Another one I forgot. On the catch. I mean,
Speaker Change: Obviously you've deployed some of your portfolios growing again, the AUM is growing again, so you're going to consume that cash over a period of time.
Speaker Change: What point does it make sense? And you've mentioned for many, many quarters that some of this higher cost, the baby bonds, for example, are a callable now.
Speaker Change: Utilize some of that cash which would be accretive to earnings.
Thank you very much. Thank you.
Speaker Change: in a market where deployment opportunities are there, but, you know, 200 plus million, I mean, that's a lot. So, any thoughts there?
Speaker Change: Well, I think if you look at the baby bonds, you've got to look at the remaining time outstanding the cost of the call and then also the cost of reassurance to the extent we would grow subsequent to calling them. We did
Speaker Change: At one point in our history, we have a couple of years ago, we did call a baby bond end.
Speaker Change: I regretted it six months later. So I think we want to be careful. The baby bonds are some of the most favorable types of financing available to companies. You know, they're interest only.
Speaker Change: No covenants and callable and so there are tremendous features to those that are very very attractive but you want to make sure you don't [inaudible]
You know...
Speaker Change: And then also you need to look at what the reassurance costs are. And it'd be one thing if our baby bonds were trading, you know...
several hundred basis points higher in cost.
Speaker Change: Dramatically, later, if you had to reissue and all the costs of the breakage and the calling so there's not enough juice in it.
Henri Steenkamp: Right now relative to what we think we can do on a deployment basis for us to make a bold move. I mean, I think it's Henry mentioned. We have repaid some of our outstanding debt, opportunistically here and there, but calling the baby bonds is...
Henri Steenkamp: is something that is not, you know, something we're actively looking at at this moment in time. And Robert, also, you know, we are currently and have been for a while now earning about four and a quarter percent on the cash.
Speaker Change: So when you think of the negative drag, it's not six to eight percent, it's sort of two to four percent and then as Chris says
Speaker Change: You know, you want to be A, it's really great to have a strong capital [inaudible]
Speaker Change: You know, there is a real reassurance cost in this market that we wouldn't be able to issue at at least at the moment so the bond market hasn't changed yet.
Speaker Change: You know, maybe it will with, you know, if rates start changing but at the moment, you know, your break even is quite an extended period and so then the value of this cash and the capital structure is quite valuable.
Oh, I understand your point. I mean, my point is you said that...
Speaker Change: You wouldn't need to immediately refinance. It's kind of the point where the amount of cash you have. I certainly wouldn't encourage you refinancing them right now. The question is more motivated by using your lowering fast balance, paying them off but I understand your point. Thank you for the answer.
Speaker Change: Yeah, if I could just go back, you know, sort of tying these two questions together a little bit to the spillover conversation before. I think what's important to note is that the excise tax...
Speaker Change: is amounts to a one-time payment of 4% of the obligation. And so one can look at it as quite low-cost financing in this environment.
In years past, again, when we had…
Speaker Change: SBIC debentures below 4% we didn't run any spill over at all but it's something that you know it's part of our capital deployment considerations.
Speaker Change: and so the cost of the spillover is a pretty favorable one right now.
Thanks, Robert.
Thank you.
Speaker Change: Thank you and our final question for today comes from the line of Mickey Schleien from Luttonburg, your question please.
Mick Sladen: Yes, good afternoon, everybody. As usual, your prepare remarks were very thorough and a lot of folks have already asked a lot of a great question. So I just have a couple of more straightforward questions, I suppose. I noticed it to portfolio yield.
Mick Sladen: did not change quarter to quarter at the same time the portfolio's allocation.
by security didn't change, but so far or average so far went down about 50 basis points. So I was hoping you could triangulate how portfolio yields will stable in that environment.
Slide 12, you'll see...
Mick Sladen: You know, it's important to differentiate the CLO and the joint venture out of the sort of the overall interest and portfolio, so what we call the core portfolio went down from 11.8 to 11.5, that was 30 basis points and about two thirds of that was so far, which changed by about 20 basis points during the quarter, and then the other third was just sort of like he said the mix and [inaudible]
Henri Steenkamp: Okay, that's helpful. And Henri, was there any sort of reversal of interest income during the quarter?
No
Henri Steenkamp: No, and just want to make sure I understand and following up on Casey's question did the external managers subsidize some of the common share issues during the quarter?
Henri Steenkamp: Yes, we did. Consistent with what we've done in other quarters as well, and so all the issuances were done at the NAV, or even slightly above, while we were trading anything from like three to seven, three to eight percent below NAV.
Okay, and lastly...
on the balance sheet leverage question, maybe a question for...
for Chris, just thinking long-term. I do understand obviously that.
Henri Steenkamp: You have a series of unsecured notes outstanding and that gives you flexibility that's you know superior to having secured debt, but the leverage ratio is quite high and the regulatory app.
Henri Steenkamp: coverage ratio is quite low. At the same time, that economic risk is increasing.
Speaker Change: Just thinking broadly and longer term, would you like to see balance sheet leverage? Perhaps trend down some more? You specifically talked about issuing equity last quarter to help that along the way. Is that the long-term goal of management?
Speaker Change: Well, that's a very good and complex question that we wrestle with ourselves with our board quite a bit like what is the right leverage level at a given point in time. I think, as we mentioned earlier,
The the issuance of equity
Speaker Change: is something that's kind of opportunistic because, you know, certainly BDCs are sized, don't have the opportunity to do that on a regular basis. There's only certain times in places where you can do that and we think you have to do that in our intent and our history has been one of significant long-term growth.
Michael Grisius, Henri Steenkamp
Speaker Change: that with a maturity structure, two to ten years out, that leverage is very different than asset-based leverage, which you have got marked-to-market risks and things like that. We don't have marked-to-market risks.
and if...
Speaker Change: but a lot of people, a lot of entities that have the asset-based lending. If there's some event like happened in 2008 or COVID or something like that, the market market risks have to be addressed immediately or else there's a foreclosure kind of action that takes place. But we don't have that risk.
really at all. So we think we've got a very...
Speaker Change: That's sort of like a huge risk factor that's really not present for us. So that gives us confidence to run with a higher leverage rate because over time we feel
Speaker Change: The U.S. economy we confident in our underwriting, our underlying companies and all that so we think there may be dislocations in short periods of time but over long periods of time we think we're going to be all right with everything we're going to hang in
Speaker Change: and so that's that kind of governs a lot of how we look at that.
Speaker Change: So we don't feel that we're over leveraged right now, and I think also I think if you go back to the comments that Mike was making about our portfolio and Henri, our portfolio right now is in very good shape.
Speaker Change: You know, I don't know what all the other portfolios you cover look like, but you know are, you know,
We have, you know, our, our-
Speaker Change: You know, our quote, problems are very, very minor. We have some very solid companies very well underwritten.
Speaker Change: So we feel like we've got a very solid portfolio, and so that gives us also more confidence that the leverage level that we're at right now is certainly not too high relative to all those things that we've just mentioned.
Speaker Change: If I could just follow up, Chris, I hear what you're saying, but you do have market a market risk on your assets, right?
Environment...
Speaker Change: You know, I could pay in a picture where you would trip your regulatory asset coverage ratio and you'd have to suspend the dividend. Are you saying that you're willing to take that risk at this point in time?
Speaker Change: I think what I'm saying is that I don't foresee, given the nature of our portfolio, a very substantial mark to market risk in the type of businesses that we're financing.
Speaker Change: Okay, I appreciate that. Those are all my questions this afternoon. Thanks for your time.
Speaker Change: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Christian Oberbeck for any further remarks.
Christian Oberbeck: Okay, well I'd like to thank everyone for joining us today and we look forward to speaking with you next quarter.
Speaker Change: Thank you, ladies and gentlemen, for your participation in today's conference. This does include the program. You may now disconnect. Good day.