Q1 2026 Saratoga Investment Corp Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Saratoga Investment Corp. S. Fiscal first quarter 2026 financial results Conference call. Please note that today's call is being recorded during today's 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, Sir Please go ahead.
Speaker Change: Thank you I would like to welcome everyone to Saratoga investment Corp's fiscal first quarter 2026 earnings conference call.
Speaker Change: <unk> Conference call includes forward looking statements and projections, we ask you to refer to our most recent filings with the SEC Four important factors that could cause actual results to differ materially from these forward looking statements and projections, we do not undertake to update our forward looking statements unless required to do so by law.
Speaker Change: Today, we will be referencing a presentation during our call you can find out fiscal first quarter 2026 shareholder presentation in the events and presentations section of our Investor Relations website.
Speaker Change: Link to our IR page is in the earnings press release distributed last night.
Speaker Change: New to our story. Please note that our fiscal year ended February 28, so any reference to Q1 results reflect how may 31st quarter end period.
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.
Henri Steenkamp: Thank you Henri and welcome everyone.
Speaker Change: Saratoga investment Corp. Highlights. This quarter include a 17, 9% increase in adjusted NII per share from the previous quarter continued growth of NAV to be a strong return on equity, beating the industry average two new portfolio company investments and most importantly, our continued solid performer.
Speaker Change: From the core BDC portfolio, and a volatile macro environment.
Speaker Change: Building on our historic historical strong dividend distribution history, we announced a base dividend of <unk> 25 per share per month or 75 cents per share in aggregate for the second quarter of fiscal 2026, our annualized second quarter dividend of <unk> 75 per share representing an 11, 8%.
Speaker Change: Yield based on the stock price of $25 44 as of July seven 2025 offerings strong current income from an investment value standpoint.
Speaker Change: Our Q1 adjusted NII of <unk> 66 per share continues to reflect the impact of the past 12 months trend of decreasing levels of short term interest rates and spreads on Saratoga investment's, largely floating rate assets and the continued effect of the recent repayments.
Speaker Change: This has resulted in $224 million of cash as of quarter end available to be deployed accretively in investments or to repay existing debt.
Speaker Change: During the quarter, we continued to see a slower level of deal volume and M&A activity in the lower middle market. Following the recent tariff developments and a slowdown in new debt issuances.
Speaker Change: Despite these macro factors our portfolio had multiple debt repayments and equity realizations. In Q1. In addition to healthy new originations generating $2 9 million of realized gains and $51 million invested in two new portfolio companies six follow ons and new investments in multiple double B CLO debt securities.
Speaker Change: Our strong reputation a differentiated market positioning combined with our ongoing development of sponsor relationships continues to create attractive attractive investment opportunities from high quality sponsors, while we remain prudent and discerning in terms of new commitments in the current volatile environment.
Speaker Change: We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges at the foundation of our strong operating performance is the high quality nature and resilience of our $968 $3 million portfolio in the current environment with all four challenged portfolio company situations.
Speaker Change: Resolved.
Speaker Change: Our current core non CLO portfolio was marked up by $2 $6 million this quarter and the CLO on JV were marked down by <unk> 2 million. We also had <unk> 6 million net realized appreciation on an equity realization at numerous debt repayments that generated $2 2 billion of life to date realized gains for.
Speaker Change: Other net realized gains of 0.7 million from escrow payments on that actually own hematite investments and <unk> 2 million of net appreciation in our new double b investments, resulting in a fair value of the portfolio, increasing by $3 $8 million during the quarter.
Speaker Change: As of quarter end, our total portfolio fair value was $2, 1% below cost while our core non CLO portfolio was one 7% above cost.
Speaker Change: The overall financial performance and solid earnings power of our current portfolio wrecked reflect strong underwriting and our growing portfolio of companies and sponsors and well selected industry segments.
Speaker Change: During the first quarter, our net interest margin expanded meaningfully from $13 7 million last quarter to $15 6 million driven by a $1 $4 million increase in non CLO interest income as the full benefit of Q4 originations was realized and repayments largely occurred late in Q1.
Average yields were relatively unchanged. This was further supported by a $5 million decrease in interest expense, reflecting the full quarter benefit of repaying $44 million in Spic's two debentures at year end and.
Speaker Change: And the partial period impact of retiring the $20 million, 875% baby bond this quarter.
Speaker Change: In addition, the full period impact of a $1 2 million shares issued through the ATM program in Q4, and a partial impact of the additional 2 million shares issued in Q1, resulting in a four cent per share dilution to NII per share.
Speaker Change: Our overall credit quality for this quarter remained steady at 99, 7% of credits rated in our highest category with the two investments remaining on non accrual status being solid and Pepper palace, both of which have been successfully restructured representing only <unk>, three and <unk>, 6% of fair value and cost respectively.
Speaker Change: With 9%.
Speaker Change: Net of our investments at quarter end, and first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations. We believe our portfolio and company leverage is well structured for future economic conditions and uncertainty.
Speaker Change: As we continue to navigate the challenges posed by the current geopolitical landscape and the volatility seen in the broader underwriting and macro environment. We remain confident in our experienced management team robust pipeline strong leverage structure and high underwriting standards to continue to steadily increase the size quality and investment performance.
Speaker Change: Of our portfolio over the long term and deliver exceptional risk adjusted returns to our shareholders.
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 $430 billion of investment capacity to support our portfolio companies with a $136 million available through our existing Spic's free license.
Speaker Change: $70 million from our two revolving credit facilities and $224 million in cash.
Speaker Change: Of cash improves our current regulatory leverage of 163, 8% to 188, 1% net leverage netting available cash against outstanding debt.
Speaker Change: Moving onto Saratoga Investment's fiscal 'twenty, six first quarter key performance indicators as compared to the quarters ended May 31, 2024 and February 28 2025.
Speaker Change: Quarter end, NAV was $396 $4 million up seven 8% from $367 $9 million last year and up 9% from $392 $7 million last quarter.
Speaker Change: Our adjusted NII was $10 $1 million this quarter.
Speaker Change: Down 29, 3% from last year and up 26, 2% from last quarter.
Speaker Change: Our adjusted NII per share was <unk> 66 cents this quarter down 37, 1% from $1 five last year and up 17, 9% from 56 last quarter adjusted.
Speaker Change: Adjusted NII yield was 10, 3% this quarter down from 15, 5% last year and up from eight 4% last quarter latest 12 months return on equity was nine 3% up from four 4% last year and up from seven 5% last quarter and above the industry average of seven.
Speaker Change: Percent.
Speaker Change: And our NAV per share was $25 52 down from 2685 last year and down from $25 86 last quarter of note. The recently implemented change to monthly dividend distributions resulted in the March and April dividend record dates falling into this first quarter for an additional one time dividend.
Speaker Change: <unk> NAV per share by <unk> 50.
Speaker Change: Excluding this one time occurrence NAV per share would have risen to 26.
Speaker Change: Dollars, <unk>, reflecting a 16 or a 6% increase.
Speaker Change: While last year salt markdowns to a small number of credits on our core BDC slide three illustrates how our recent strong results have delivered and our return on equity of nine 3% for the last 12 months above the industry average of 7%.
Speaker Change: Additionally, our long term average return on equity over the past 11 years of 10, 2% is well above the BDC industry average of six 9% a long term return on equity has remained strong over the past decade, plus beating the industry eight of the past 11 years and consistently positive every year.
Speaker Change: Of note the weighted average common shares outstanding in Q1 was $15 3 million, increasing from $14 5 million and $13 7 million shares for the last quarter and last year's first quarter respectively.
Speaker Change: Adjusted NII was $10 $1 million this quarter down from 29, 3% down 29, 3% from last year and up 26, 2% from last quarter.
Speaker Change: This quarter's increase in adjusted NII as compared to the prior quarter was primarily due to the non reoccurring this quarter of the $2 $4 million annual excise tax recognized in the prior quarter. The decrease from the previous year's first quarter was largely due to lower AUM from recent significant repayments and lower base interest rates.
Speaker Change: Weighted average interest rate on our core BDC portfolio of 11, 5% this quarter compared to 12, 6% as of the previous year's first quarter and 11, 5% as of last quarter.
Speaker Change: The yield reduction from last year, primarily reflects the sofa base rate decreases over the past year.
Speaker Change: Total expenses for this first quarter 2026, excluding interest and debt financing expenses base management fees and incentive fees and income and excise taxes decreased $1 million to $2 8 million as compared to $2 9 million last year and increased $1 4 million from $1 $4 million last.
Speaker Change: Quarter.
Speaker Change: This represents 8% of average total assets on an annualized basis unchanged from last quarter and down from 1% last year.
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. Despite a slight pullback recently, reflecting significant repayments. This quarter saw significant repayments again offsetting solid originations. This recent AUM decline does not detract from our expectation of <unk>.
Speaker Change: Long term AUM growth the quality of our credits remains strong with only the two recently restructured pepper palisson solid credits on non accrual.
Speaker Change: Consistent with last quarter.
Speaker Change: Our management team is working diligently to continue this positive long term trend as we despite deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in its evolving credit and volatile economic environment with that I would like to now turn the call over to Henri to review, our financial results as well as the composition and performance.
Henri Steenkamp: Of our portfolio.
Okay.
Speaker Change: Okay.
Speaker Change: Thank you Chris.
Speaker Change: Moving on to slide six.
Speaker Change: $396 4 million as of fiscal quarter, and a $3 $7 million increase from last quarter, and a $28 $5 million increase from the same quarter last year.
Speaker Change: During this quarter $6 $4 million of new equity was raised at or above net asset value respectively. Throughout ATM program.
Speaker Change: This chart also includes our historically NAV per share, which highlights how this important metric has increased 22 of the past 51 quarters seeing a decrease this quarter is solely due to the transition to monthly dividends in March resulting in the March and April dividend record date, both falling into this first fiscal quarter reducing.
Speaker Change: NAV per share by an additional 50 cents.
Speaker Change: Excluding this one time reduction.
Speaker Change: <unk> per share would have risen to $26 <unk>, reflecting a 6% increase over.
Speaker Change: Over the long term our net net asset value has steadily increased since 2011 and growing by $3 55 per share or 16% over the past eight years.
Speaker Change: Also we have again added the Kpis slides 26 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past two years.
Speaker Change: <unk> is a new slide comparing our non accruals to the BDC industry.
Speaker Change: You will see that our nonaccrual rate of <unk>, 6% of cost is significantly lower than the industry average of three 7% and that the broader industry has experienced an increase in non accruals of 3% since the previous quarter, while ours have remained steady and low.
Speaker Change: This highlights the strength and credit quality of our core BDC portfolio.
Speaker Change: Moving onto slide seven you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis, starting at the top adjusted NII per share was up 10 cents in Q1, primarily due to first the nonrecurrent of the annual exercise.
Speaker Change: Tax, which was <unk> 13 in the previous quarter related to unpaid spill over there and second an increase of nine <unk> in non CLO net interest income, reflecting the full period impact of Q4 originations.
Speaker Change: This was offset by an increase in operating expenses, excluding excise taxes and dilution from the increased Nate the ATM and drip share count, reducing NII by <unk>, <unk> and <unk>, respectively.
Speaker Change: On the lower half of the slide NAV per share decreased by 34, primarily due to the 50% reduction from the change to a monthly dividend payment structure discussed earlier.
Speaker Change: Realized gains and unrealized depreciation added 25 cents to <unk> NAV per share there was no dilution from the ATM and drip program.
Speaker Change: Slide eight outlines the dry powder available to us as of quarter end, which totaled $433 million. This was spread between our available cash undrawn SBA debentures, and Undrawn secured credit facility.
Speaker Change: This quarter end level of available liquidity allows us to grow our assets by an additional 44% without the need for external financing with $224 million of quarter end cash available and thats fully accretive to NII when deployed and $136 million of available SBA debentures with its low cost pricing.
Speaker Change: Also very accretive.
Speaker Change: In addition, all $301 million of our baby bonds effectively all of our 6% plus debt is callable now, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin if needed. These.
Speaker Change: These calls are also available to be used prospectively to reduce current debt.
Speaker Change: 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.
Speaker Change: So our data is structured in such a way that we have no BDC covenants, there can be stress during volatile times, especially important in the current economic environment.
Speaker Change: Now I would like to move on to slides nine through 12 and review the composition and yield of our investment portfolio slide.
Speaker Change: Slide nine highlights that we have $968 million of AUM at fair value and this is invested in 46 portfolio companies, one CLO fund one joint venture and various new debt will be investments.
Speaker Change: Our first lien percentage is 86, 9% of our total investments of which 22% is in first lien last out positions.
Speaker Change: On slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments has changed overtime, especially this past year, reflecting the recent decreases to interest rates.
Speaker Change: This quarter, our core BDC yields remained unchanged from last quarter at 11, 5%. Despite the 10 basis points reduction in average sofa.
Speaker Change: The CLO yield decreased to 13, 7% from 16, 4% last quarter, reflecting the inclusion of the new double B CLO debt investments to this category that have a yield of approximately 10%.
Speaker Change: Slide 11 shows how our investments are diversified through primarily 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 JV and double B CLO debt Securities, which are all included a structured final.
Speaker Change: <unk> Securities.
Speaker Change: Moving on to slide 13, seven 9% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy.
Speaker Change: Slide shows that for the past 13 fiscal years, we had a combined $42 $5 million of natrium as gains from the sale of equity interest or sale or early redemption of other investments. This includes $2 2 million of realized gains on the sale of our identity equity investment this quarter.
Speaker Change: This long term realized gain performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long term Roe.
Speaker Change: That concludes my financial and portfolio review, our Chief Investment Officer, Michael <unk> will now provide an overview of the investment market.
Speaker Change: Thank you Henry.
Speaker Change: Today, I will give an update on the market since we recently spoke with everyone. It may.
Speaker Change: And then comment on our current portfolio performance and investment strategy.
Speaker Change: Year to date deal volumes in our market have been down significantly every month as compared to 2024, and our down further still as compared to 2021 through 2023.
Speaker Change: We believe that M&A activity will invariably revert to historical levels, but that pickup in deal volume appears to be postponed for the time being.
Speaker Change: The combination of historically low M&A volume in the lower middle market 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.
Speaker Change: We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms.
Speaker Change: The historically low deal volumes, we're experiencing just made it more difficult to find quality new platform investments than in prior periods.
Speaker Change: As we noted on last quarter's call. This may naturally prompt the question of when.
Speaker Change: What is our approach to operating in this difficult asset deployment climate.
Speaker Change: 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.
Speaker Change: Taking this approach has allowed us to produce unlevered realized returns in our core non CLO portfolio of 15%.
Speaker Change: The weighted average return on our exits this quarter were consistent with our track record at 14, 9%.
Speaker Change: We will continue to invest in high quality assets, and we will not lower our investment standards and take on more risk than we feel is prudent just because the market is presently difficult.
Speaker Change: We believe our shareholders will appreciate this approach in the long run.
Speaker Change: Second we are greatly expanding our business development efforts and are investing in resources to provide greater bandwidth for our professionals to dedicate themselves to this effort.
Speaker Change: We have a new managing director joining us this summer who has a strong origination and investment track record in our markets.
Speaker Change: We've also recently hired a VP of portfolio management, and our business development analyst and we have two new investment associates joining us this summer.
Speaker Change: All of these investments will allow our professionals to better leverage themselves and ship more emphasis on investment origination.
Speaker Change: While we have developed a strong presence in the lower end of the middle market. The number of companies in our marketplaces fast compared to the traditional middle market and is occupied with hundreds of thousands of businesses.
Speaker Change: We believe the number of deal sources in our market that we have yet to build relationships with.
Speaker Change: Far exceeds the number that we have.
Speaker Change: Further our market benefits from a natural underpinning of deal flow driven by business owners seeking to transition ownership.
Speaker Change: Age.
Speaker Change: 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.
Speaker Change: Third our existing portfolio serves as a healthy source of deal flow.
Speaker Change: Our payoffs as against the in this quarter tend to be lumpy as our portfolio investments reached scale and maturity, while our new portfolio companies tend to be small initially and provide an embedded resource for asset deployment as we support their growth.
Speaker Change: 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.
Speaker Change: In summary, the way we are approaching the currently challenging environment is to first stay disciplined on asset selection.
Speaker Change: Second invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us.
Speaker Change: And third continued to support our existing healthy portfolio of companies as they pursue growth.
Speaker Change: The relationships and overall presence we've built in the marketplace combined with a ramped up 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: In the midst of these market conditions, we had $50 million of gross originations in the lower end of the middle market This quarter.
Speaker Change: Before leaving this topic I will also point out that we continue to believe that the lower end of the 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. The due diligence we are able to perform when evaluating an investment is much more robust.
Speaker Change: The capital structures are generally more conservative with less leverage and more equity <unk>.
Speaker Change: The legal protections and covenant features in our documents are considerably stronger.
Speaker Change: And our ability to actively manage our portfolio through ongoing interaction with managed 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: A new initiative I'd like to highlight is that we have recently seen a new opportunity to invest double and triple B CLO debt securities.
Speaker Change: These investments have performed well through numerous economic cycles in the past experiencing very low long term default rates, while also providing enhanced yields relative to comparably rated corporate debt securities.
Speaker Change: Further our underwriting process driven by quantitative metrics that measure individual manager and deal level performance allows us to identify those managers and deals. We believe will outperform over the long term and provide an attractive risk adjusted returns for our shareholders.
Speaker Change: During this past quarter, we invested nine different CLO double b securities across seven different CLO managers for a total notional amount of $13 million.
Speaker Change: We anticipate third party managed CLO double BS and to a lesser extent CLO Triple BS.
Speaker Change: Play a role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high yield credit markets.
Speaker Change: Our underwriting bar remains high as usual.
Speaker Change: In a very tough market, 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 eight follow ons in calendar year 2025, thus far and we have invested in three new platform investments this calendar year as well.
Speaker Change: More recently during calendar Q2, we closed one new portfolio company.
Speaker Change: Overall, our deal flow is increasing as our business development efforts continue to ramp up.
Speaker Change: 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 the same two portfolio companies that we are actively managing as discussed in previous quarters.
Speaker Change: But in general our portfolio of companies are healthy and the fair value of our core BDC portfolio is one 7% above its cost.
Speaker Change: 86, 9% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress situations, we have no direct energy or commodities exposure.
Speaker Change: In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and historically demonstrated strong revenue retention.
Speaker Change: At quarter end, we had the same two investments on nonaccrual, namely Pepper Palisson solids, consistent with last quarter.
Speaker Change: We continue to hold them on non accrual following their restructurings with solids, particularly demonstrating notable improvement in company performance.
Speaker Change: Looking at leverage on the same slide you can see that industry debt multiples increased north of five times with unit tranche loans in the mid fives.
Speaker Change: Total leverage for our overall portfolio decreased slightly to five two times, excluding pepper, palisson solids, reflecting lower leverage across several portfolio companies.
Speaker Change: Slide 15 provides more data on our deal flow.
Speaker Change: As you can see the top of our deal pipeline is significantly up from the end of calendar year 2024. Despite the current M&A activity in the lower middle market remaining low.
Speaker Change: This recent increase of deal sourced as as a result of our recent business development initiatives with 18 of the term sheets issued over the last 12 months being from deals that came from new relationships.
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 credit quality and returns remain solid.
As demonstrated by the actions taken and outcomes achieved on the nonaccrual on 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: 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 almost 15 years ago, we've invested $2 $3 $6 billion and 122 portfolio companies and had had just three realized economic losses on these investments.
Speaker Change: Over that same timeframe, we have successfully exited 82 of those investments achieving gross unlevered realized returns of 15% on $1 $2 6 billion of realizations.
Speaker Change: Even taking into account the recent credit write downs of a few discrete credits are combined realized and unrealized returns on all capital invested equal 13, 4%.
Speaker Change: Total realized gains for the quarter were $2 9 million of which this quarter's identity.
Speaker Change: Any realization produced a gross IRR of 22, 6% with a $2 $2 million realized gain continuing our track record of successful capital deployment.
Speaker Change: We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien debt.
Speaker Change: Consistent with previous couple of quarters, we have only two investments on non accrual, although both pepper palace and solids have been restructured where still classifying pepper palaces red and knowledge is yellow with a combined fair value of $6 9 million, including equity.
Speaker Change: Pepper Palace continues to be managed actively with several initiatives underway.
Solid as demonstrated notable improvements in company performance that resulted in a $1 $1 million a appreciation in its value this quarter.
Speaker Change: In addition, during the quarter, our overall core non CLO portfolio was marked up by $2 $6 million of net <unk> appreciation.
Speaker Change: <unk> pepper, palisson solid, reflecting the strength of our overall portfolio.
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: Now moving on to Slide 17, you can see our second Spic's license is fully funded and deployed although there is cash available there to invest in follow ons and we are currently ramping up our new <unk> Spi seat three license with $136 million of lower cost Undrawn 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 to our CEO Chris.
Speaker Change: Okay.
Chris: Thank you Mike.
As outlined on slide 18, our latest dividend of <unk> 75 per share in aggregate for the quarter ended May 31, 2025 was paid and three monthly increments of 25.
Chris: Recently, we declared that same level of 75 for the quarter ended August 31, 2025, marking the second quarter of our new dividend payment structure.
Chris: Board of directors will continue to evaluate the dividend level at least a quarterly basis, considering both company and general economic factors, including the current interest rate and macro environments impact on our earnings.
Chris: Moving to slide 19, our total return over the last 12 months, which includes both capital appreciation and dividends has generated total returns of 22%, beating the BDC index is 3% for the same period by over seven X.
Chris: Our longer term performance is outlined on the next slide 20.
Chris: Also our five year and three year returns both place us above the BDC index and since Saratoga took over management of the BDC in 2010, our total return has been 826% versus the industry is 294%.
Chris: On Slide 21, you can further see our last 12 months performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long term metrics such as return on equity and NAV per share NII yield and dividend growth and coverage all of which reflect the value our shareholders have received.
Chris: Hey.
Chris: <unk> NAV per share growth and dividend coverage are lagging in this past year. This is largely due to last year's two discrete nonaccrual investments previously discussed as well as the aforementioned impact of the shift to a new dividend structure impacting this quarter's NAV per share growth.
Chris: In addition, we had significant recent repayments net of reduced Q1 NII.
Chris: AUM has recently shrunk, resulting in us having healthy levels of cash to deploy.
Chris: In this volatile macro environment, we'd be prudent 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 have grown NAV accretively over the long term with a long term return on equity at one five times the industry.
Chris: Bridge.
Chris: Moving on to slide 22, all of our initiatives discussed on this call.
Chris: Are designed to make Saratoga investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined in this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics. Many previously discussed include maintaining one of the higher.
Chris: Levels of management ownership in the industry at 11, 1%, ensuring that we're strongly aligned with our shareholders.
Chris: Looking ahead on slide 23, as we navigate through a reshape yield curve environment with decreasing short term and increasing long term rates and an uncertain economic outlook in the face of an ever evolving geopolitical landscape. We remain confident that our reputation experienced management team robust pipeline and historically strong underwriting standards and <unk>.
Chris: <unk> and market tested investment strategy will serve us well to continue to steadily increase our portfolio size quality and the investment performance over the long term.
Chris: 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.
Chris: <unk> 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.
Chris: In closing I would again like to thank all of our shareholders for their ongoing support I would like to now open the call for questions.
Chris: Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: And our first question will be coming from Erik Zwick.
Speaker Change: Lucid capital markets. Your line is open Eric.
Erik Zwick: Thank you good morning, everyone hope, you're all doing well.
Erik Zwick: Wanted to kind of just start on.
Erik Zwick: Your commitment to kind of getting back to <unk>.
Erik Zwick: Expansion and I realize there's some variables outside of your control that have.
Erik Zwick: Kind of driven the declines over the past couple of quarters, but as you kind of frame up the opportunities now it sounds like the efforts you've made on the non sponsored origination cider are showing some positive trends.
Erik Zwick: I think that the.
Erik Zwick: Things that are harder predict now or just the level of prepayments going forward.
Erik Zwick: To some extent you may have some visibility into potential relatively large maturities that could be coming due over the next quarter or two but as you kind of frame. Those all together what is your expectation for your ability to return growing the portfolio over the next quarter or two.
Mike: Well, let me I'll start and then hand, it off to Mike.
Erik Zwick: Yes.
Speaker Change: Look I think.
Erik Zwick: You expect it very well.
Erik Zwick: Redemptions are difficult to predict as our originations.
Erik Zwick: I think the.
Erik Zwick: I think one of the important things that we have focused on is portfolio quality and I think Henry had some slides of some metrics on that where you can see that.
Erik Zwick: While our AUM has declined due to net net.
Erik Zwick: Net origination originations being less of a redemptions the credit quality of our portfolio remains very very strong and our crew.
Erik Zwick: Performance, we think significantly outperforms the industry. So we have a period of time here where the.
Erik Zwick: The environment kind.
Erik Zwick: A significant inflow of capital into the private credit industry and at the same time.
Erik Zwick: With tariffs and other things.
Erik Zwick: The total M&A market has slowed down M&A has generally been one of the big drivers of activity and financings and so there's a lot of refinancing activity, but not as much M&A driven and so you kind of a little bit of a mismatch in supply and demand and we're trying to manage that very very.
Fully because credit quality.
Erik Zwick: Putting some more assets to work that are not going to be great assets is certainly not in our interest or our shareholders' interest and so we had to have to be cautious I mean, we've had a lot of opportunities, but we haven't executed on as many of them.
Erik Zwick: The quality and in some instances pricing, but mostly its credit quality, so with all that said.
Erik Zwick: We've got a very.
Erik Zwick: We've got a.
Erik Zwick: Reinvigorated and invigorated new business effort I think Mike mentioned, we've got we've been hiring more new people.
Erik Zwick: And we've got a very robust pipeline and we think thats going to going to come through for us over time, but one of the things we have learned is.
Erik Zwick: You just got to be very careful and pick your spots and pick your markets and being aggressive for.
Erik Zwick: For the sake of AUM growth as opposed to sticking to our real knitting, which is quality.
Erik Zwick: Credits.
Erik Zwick: Is going to be the most important thing in the long run.
Mike: Mike I don't know if you want to add to that.
Mike: Yes, let me add a little bit of additional color and I'll also just address.
Speaker Change: One of the things that you had brought up to directly which is debt on the redemption side as Chris mentioned, that's very unpredictable.
Speaker Change: But I would say that the best that we know we don't see anything that's looming. If you will so we would expect that that redemption.
Speaker Change: <unk> experienced that we would have would be sort of consistent with what we've experienced in the past generally.
Speaker Change: Also our pipeline is growing and not only with non sponsor deals, but there are a number of lower middle market sponsors and investor groups that we're forming relationships with that we haven't historically and thats just due to the fact that the lower end of the middle market that we operate.
Speaker Change: And is so fragmented that.
Speaker Change: It's amazing I mean, we'll go to.
Speaker Change: To a new city and make the rounds with four or five of the groups that we know and we'll come back with new new groups that we didn't know up almost every time, we visit the countryside looking for deal opportunities.
Speaker Change: I'll step back a little I mean, there is one.
Speaker Change: This is probably just healthy to think about it in general.
Speaker Change: Just in terms of our business.
Speaker Change: As we mentioned, we very much like being at the lower end of the middle market.
Speaker Change: One of the reasons, we believe that we've produced such outsized returns to get 15% returns over time with very low volatility in very low loss experience in mostly senior debt is to us just very very attractive place to be being.
Speaker Change: Being at the lower end of middle market allows us to do much better underwriting we can be far more value add with our borrowers and our ownership group much less commoditized than what you see at the upper end of the middle market, where there just kind of responding to a grid and it's largely who's going to get the lowest price the most leverage.
Speaker Change: And the easiest terms who.
Speaker Change: Who is going to be most borrower friendly.
Speaker Change: <unk> case, we actually have a chance to create real relationships with our management teams and our ownership groups. We typically have board observation rights are very active interaction with.
Speaker Change: The management teams that were lending to <unk>.
Speaker Change: And that interaction allows us to build a really healthy.
Speaker Change: Pipeline, a follow on to and I think as I mentioned in the prepared remarks. If you went back over the last five years, our our follow on activity actually exceeds our.
Speaker Change: Our new origination platform activity in dollars.
Speaker Change: Reflective of sort of what I just described in terms of the type of relationship that we have with our borrowers now what comes with that and this is kind of where I'm going is that it does require a lot more hands on work not only in asset selection and underwriting and we have been doing.
Speaker Change: This for a long time, so we know how important it is to remain very disciplined on asset selection, but also on portfolio monitoring.
Speaker Change: Staying close to the businesses that we lend to does allow us to feed the growth in follow on activity, but it requires a lot more time in a normal market.
Speaker Change: Where you have kind of the historical normal levels of deal activity, we can grow at a healthy clip as we have historically in our in our origination pace.
Speaker Change: Generally with outpace our repayments in this market, especially in the lower end of the middle market, where you see such a low amount of deal activity, it's really below.
Speaker Change: Almost any historical level that we've seen for quite some time.
Speaker Change: We've decided that.
Speaker Change: Given all of what I described in the lower end of the middle market and what it requires that it was important for us to invest in people and the investments that I highlighted in the prepared remarks.
Speaker Change: Really aimed at giving our deal professionals.
Speaker Change: An opportunity to shift some of.
Speaker Change: The allocation of their time much more toward our outward facing origination activity.
And enabling them to leverage themselves much better and we're already seeing.
Speaker Change: The benefits of that where that's starting to bear fruit in our pipeline and over the long term, we're very confident that it will it will allow us to get back on a path of growth, while continuing to be very disciplined in our asset selection.
Speaker Change: I appreciate the very detailed commentary there kind of take.
Speaker Change: Taking some of that and realizing that the near term growth is likely to continue to still be challenged kind of given all of the factors that you've mentioned there.
Speaker Change: It seems that the run rate of NII could continue to come in below that kind of declared dividend here.
Speaker Change: For the near term so could you just remind us I don't think I have it for the most recent quarter kind of where the spillover.
Speaker Change: Level is either dollar terms or per share basis.
Henri Steenkamp: Yes sure Eric.
Henri Steenkamp: If you recall, we had about $3 of just over $3 as of year end and we pay it now.
Henri Steenkamp: 24 in this quarter. So we're just under $2 at the moment from the February spillover.
Henri Steenkamp: And then of course, we will.
Henri Steenkamp: Earnings.
Henri Steenkamp: Since Gen. Since since March one so it's probably closer to the $2 50 level at the moment.
Henry: Thanks Henry.
Henry: Okay, and then just kind of continuing on the theme of growth being challenged in the near term you have quite a bit of liquidity.
Henry: On the balance sheet and capacity to win further.
Henry: Have some notes coming due later this year and some in early calendar 'twenty six as well, but just kind of thoughts on how you would look to kind of replace those today with new notes versus maybe you think that revolver and I guess, there's also the.
Henry: Unknown where rates may be.
Henry: I think the market over the next year.
Henry: Forecasting.
Henry: About another 100 basis points.
Henry: Fed funds cuts, but whether or not we get those I think.
Speaker Change: It remains to be seen but just curious on your thoughts on kind of the liability and funding side of the balance sheet.
Henry: Well I think.
Speaker Change: We tend to.
Speaker Change: Across all of those bridges, when we come to them because theres. So many variables and what we're looking at in and so by that by the time, we have to face that we certainly are in a good position with all the liquidity that we have so we don't we don't have we.
Speaker Change: We have a lot of flexibility as to how to address those upcoming maturities.
Speaker Change: Maturities, we have plenty of credit.
Speaker Change: Facilities and cash.
Speaker Change: But I think a lot of it is going to be driven by the next six months or so of originations.
Speaker Change: The net the net picture on asset deployment, and so when we come to that moment things.
Speaker Change: How much things have changed the last three months and we think in the next three to six months, we could have a very very different economic picture it could be much better and it could be somewhat worse or it could be stable and we're not we're not economists are predictors of that we structure ourselves to be most flexible and and.
Speaker Change: And conservative we don't think Thats, the time to take excess risks and so as we come up to that moment, we will have to decide and I apologize for not giving you a hard answer because we don't we don't.
Speaker Change: That's not how we are managing the situation right now we just have a lot of flexibility and as things change whether it be fed cuts, whether or not be fed cuts with the economy.
Speaker Change: Step up and grow after the build back better bill with the tariffs have a negative or positive impact.
Speaker Change: There's just so many.
Speaker Change: Many variables at work right now and again, we just feel like were extremely well positioned with a lot of liquidity in our portfolio Thats performing extremely well and so we've got a lot of options and we're going to keep those options open as we as we come to these situations.
Speaker Change: Yes that makes sense optionality is.
Speaker Change: Very positive to have so that's great and last topic for me and then I'll step aside in terms of the.
Speaker Change: New CLO that Doug will be investments kind of maybe two questions one where those new primary issues are those purchased in the secondary market and secondarily, just kind of thinking maybe longer term. It sounds like you're attracted to that asset class how large could you potentially see that portfolio come relative to the total investment portfolio.
Speaker Change: Sure well I think the origins of our investment there we've been managing the CLO.
Speaker Change: Cielo has for many many many many years and so we're very familiar with that marketplace.
Speaker Change: <unk>.
Speaker Change: Our.
Speaker Change: Our objective is risk adjust strong risk adjusted.
Speaker Change: Returns in credit.
Speaker Change: Largely credit Securities and what we have found through our research over time is that the <unk>.
Speaker Change: B asset classes.
Speaker Change: Generally delivers very close to the type of yields we're looking for in some of our regular way.
Speaker Change: Private credit investments.
Speaker Change: And.
Speaker Change: With a very very good historic.
Speaker Change: <unk>.
Speaker Change: Credit performance and also liquidity. So you can get in and you can get out of these.
Speaker Change: Obviously, if there is a big market dislocation.
Speaker Change: Pets are off for that period of time, but as a general rule what are the differences in this asset classes that is that you have a general.
Speaker Change: Much more liquidity than you would have in another and another class and we started this for a long time, we have a very elaborate.
Speaker Change: Process and in research.
Speaker Change: In terms of which of the double BS we invest in which are the managers, we invest in we have our own tearing mechanism tiers 1234, and top tier and then even within the top tier the different vintages and and so we've been able to assemble a tremendous research base and experience in watching this market.
Speaker Change: For a long time and so we're now starting to enter it in.
Speaker Change: In terms of asset size I think it's a.
Speaker Change: Very substantial industry and the various financial asset class.
But not massive but they are.
Speaker Change: I mean, it would be the ability to applaud voice.
Speaker Change: Significantly more than we are deploying whether we do that or not is going to be a function of.
Speaker Change: The opportunities in this double B class and be the also the opportunities in our traditional private credit.
Speaker Change: Exposure area and then as to your question on the.
Speaker Change: On the mix Henry do what do we have.
Speaker Change: Our mix between the secondary idea that at the top of the top of your tongue.
Speaker Change: Is there sort of a little bit of both.
Speaker Change: At certain times like right now there is this kind of a big cycle of issuance.
Speaker Change: Somewhat of a seasonality or.
Speaker Change: Certain times of the year more of these are issued on a primary basis and at other times of the year of having to do with payment dates and things like that there's a lot of peculiarities to this market and so just recently has been weighted more heavily to the primary and at other times the secondary and we just watch both and we're looking for the best Alpha and putting that.
Henry: Assets to work Henry.
Henri Steenkamp: Yes, no exactly we do both Eric and both primary and secondary is we obviously focus on where the opportunity is at that point in time. So it will I think it will always be a combination of both.
Speaker Change: Great well, Chris Henry Mike I appreciate all the answers today. Thank you.
Thank you.
Henri Steenkamp: Yes.
Henri Steenkamp: And one moment for our next question.
Speaker Change: Our next question will be coming from Robert Dodd Raymond James Your line is open Robert.
Robert Dodd: Hi, guys.
Robert Dodd: Kind of following up on one of the questions about the balance sheet.
Robert Dodd: And you do have a lot of liquidity and you have plenty of trying to address some of the larger maturities, but I mean look at this quarter. You did did have a $20 million bond that you paid off but you clearly made the decision to utilize.
Robert Dodd: Or to adjust them evolve so by increasing the size of the <unk> facility.
Robert Dodd: Et cetera, rather than using the cash so would it be fair to read into that the bias is.
Robert Dodd: Kind of retain the cash for deployment.
Robert Dodd: And manage.
Robert Dodd: The refinancings in terms of.
Robert Dodd: Drawing on our the.
Robert Dodd: That kind of liabilities either refinancing of the revolver et cetera, I mean, just trying to get is the bias to use the cash.
Robert Dodd: But deployments to grow AUM or how how much.
Robert Dodd: How likely is that cash to be used to actually just pay down debt.
Robert Dodd: Well I think that's a very good question and obviously something that we.
Speaker Change: We are constantly considering.
Speaker Change: I guess, we would take issue with your you said several times the word bias.
Speaker Change: Try not to have a bias.
Speaker Change: Trying to do is optimize inclination.
Speaker Change: Okay inclination.
Speaker Change: We don't even have an inclination we try not to have an inclination we try to basically assess the situations as they arise from a from a relatively neutral position with a lot of optionality and I think that it's kind of axiomatic that.
You raised capital when you can and you raise.
Speaker Change: And you generate.
Speaker Change: Lending relationships when you can and that's often in good times.
Speaker Change: Everybody knows on this call.
Speaker Change: It's very difficult to increase your credit facility.
In an adverse market environment.
Speaker Change: <unk>.
Speaker Change: And so I think Henry.
Speaker Change: The team has worked very hard to create sort of an optimal.
Speaker Change: Flexible revolver position for the company.
Speaker Change: And these are good times and then the Valley Bank has a very good relationship that's being developed and so putting that that's a facility that.
Speaker Change: You can't predict these things but.
Speaker Change: We've had very long relationships with our creditors and this could be this could be something in place for five years 10 years I mean this is this.
Speaker Change: Our strong relationship and all that and so so that is kind of market independent events right.
Speaker Change: Like let's let's create the most flexibility we have.
Speaker Change: For our balance sheet, and we have a lot of fixed rate debt is variable rate. This is revolver. So we can draw and pay it back and that type of thing. So that's like a super flexible thing and then.
Speaker Change: And then I think as we said earlier.
Speaker Change: How we deploy the cash and when.
Speaker Change: Right now the cash is earning around 4%. So it's better than it was a few years ago when it was zero.
Speaker Change: But so it's not like the cash isn't producing something and obviously its risk free the way we're investing it.
Speaker Change: So so we feel like.
Speaker Change: We want to be prepared for a lot of different eventualities, and I think again not to overly.
Speaker Change: Pete the things we've said before.
Speaker Change: <unk> had a period of very significant redemptions and these redemptions on the one hand, you say Oh.
Speaker Change: But these redemptions a lot of them were very significantly sized investments that we made five years ago six years ago. They started out small investments they became very large over time and then now they've just been sold and realized and so this is this is this is the way it goes in our business and we don't think that's anything different.
Speaker Change: Or should cause us to change our approach to the market right. That's just something that has happened and this happened in a concentrated period of time and we have and so sometimes you cant match everything up so.
Speaker Change: <unk> again, we just want to be.
Speaker Change: We want to maximize our flexibility and have the best credit structure, we can put that in place in good times. So that if there are bad times, we're ready and if there aren't bad times, we've got a lot of flexibility to grow.
Robert Dodd: Yes got it right Robert.
Speaker Change: Robert just to clarify one thing on the credit facility. So we actually didn't choose to draw that.
Robert Dodd: What we chose to do was to upsize, it which for us.
Robert Dodd: Strategic long term and there is a 50% utilization. So thats why there was that drove the more important thing is it's upsize, the upsize and creating more liquidity for us that's available.
Robert Dodd: Understood understood. Thank you.
Robert Dodd: The next one.
Robert Dodd: I think to your point.
Robert Dodd: A repayment is.
Robert Dodd: <unk> high quality assets getting repaid as a good outcome and you'll focus is doing on quality in those high quality assets, but that Colorado coffee.
Robert Dodd: All of that right now right.
Robert Dodd: And final question.
Robert Dodd: What does it take in the market.
Robert Dodd: Is it just the stability.
Robert Dodd: Are we too late in the year there even if.
Robert Dodd: Tariffs et cetera, et cetera stabilized now.
Robert Dodd: Is M&A activity in 2026 event or give us any any any color on like when things could ramp for quality deals. So theres always.
Robert Dodd: Lower quality deals, but you don't want to do like a sofa quantity.
Robert Dodd: Do you think.
Robert Dodd: Sure.
Mike: Turning it over to Mike After I say, a couple of things, but I mean, we have we have a we have a lot.
Mike: Very interesting deals in our pipeline now.
Mike: The competitive environment, but I mean.
Mike: If we if we have a bit of a winning streak here.
Mike: Could be some very significant additions over the next three to six months.
Mike: But there also could not be.
Mike: Then there is a competitive environment.
Mike: Our sponsors are.
Mike: Some of them are at the LOI stage some of them are still looking stage, but we have some very nice quality deals. We're looking at in our pipeline. It's just predicting.
Mike: We're going to land those.
Mike: On our balance sheet.
Mike: It's just something first of all that we're not going to do on a call like this and secondly, it's not something we can actually predict that we can only work very hard.
Mike: To get in a position to win these deals but.
Mike: The competitive market right now and so.
Mike: The part of the reason we are.
Mike: We're not.
Mike: Worried about our cash as we feel like there's a lot of opportunity out there and we're in the process of getting to it but.
Mike: The timing is not something that we can control on a quarter to quarter basis.
Mike: Nick.
Mike: So let me add to that so.
Mike: Just addressing your question directly in terms of where we are and what we're seeing in the marketplace.
Mike: We're continuing to see deal activity down and we aren't seeing any signs of that recovering.
Mike: Having done this for a long time.
Mike: Usually you don't you just really don't have visibility on that and so it's not something that we predict or try to time like what inning are we in or any of those things.
Mike: What we do have confidence in.
Mike: In addition to what we're seeing in our pipeline right now, but we do have confidence in is that the initiatives that we're undertaking in terms of investing in more resources and really getting out there and doubling our efforts too.
Mike: Be on the <unk>.
Mike: Origination kind.
Mike: Kind of focus.
Mike: Will do.
Mike: We think yield results, where we can get back on a growth path even if.
Mike: The deal activity doesn't recover.
Mike: So we're optimistic of that I mean time will tell but we do have confidence that we can operate.
Mike: <unk> successfully and continue to grow our balance sheet, even if the deal market doesn't recover and if it if it.
Mike: If it does all the better.
Mike: Yes.
Mike: Thank you.
Mike: And I would now like to hand, the call back to Christian Oberbeck for closing remarks.
Speaker Change: Okay well.
Speaker Change: Again, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Speaker Change: Okay.
Speaker Change: Thank you everyone for joining us today, we look forward to speaking to everyone next quarter. This concludes today's conference call.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: So.
Speaker Change:
Speaker Change: [music].
Speaker Change: Okay.
[music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.