Earnings call transcript Q3 2023

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Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Saratoga Investment Corp.'s Fiscal Third Quarter 2023 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.

Following management's prepared remarks, we will open the line for questions.

would Corp.'s turn Officer, Chief I to call Mr. time, Investment Saratoga Financial this like the to over At and Compliance Henri Steenkamp. ahead. Sir, go please

Henri Steenkamp

undertake Thank to conference call Saratoga forward-looking everyone statements quarter you. We to our includes materially projections. factors earnings Corp.'s SEC ask most projections. could you cause filings so not XXXX differ for Today's We to and fiscal statements important do that third update to I statements to call. from the forward-looking conference forward-looking with and results these to like refer our unless to do actual would Investment required law. by welcome recent

during we call. be a Today, will presentation our referencing

Presentations section our website. find refer our page this link to our night. Relations our IR be of to press third will A for of replay Please can last in conference release shareholder distributed fiscal call details. press and also release the presentation A earnings is XXXX Investor You Events quarter in earnings the available.

to now remarks. Christian Officer, our to and Chairman be would call over turn Executive I who a few Chief will making introductory Oberbeck, the like

Christian Oberbeck

and Thank everyone. you, welcome Henri,

due recent investment Saratoga's as the Saratoga's increase quarterly in outpaced adjusted to largely floating rate dividend rising largely company's fixed liabilities. increasing XX% per XX% margin share drive substantially net its spread interest rates sequential impact rate record increase, income positively and assets

longer" incorporating environment. long-duration two for out, covenant-free credit XX debt and us maturities rising structure interest-rate interest-only with for Saratoga's well positions to "higher years

prior remaining remain per quarter. essentially the high over portfolio as to demonstrated share Importantly, overall NAV quality flat continues by

important we critical our $XXX more two than bond million recently rating an to In third maintaining capital this access raised SBIC markets license. challenging for successfully investment-grade received offerings, growth baby and in is BBB+ capital and environment,

structure Saratoga's to In addition further debt out. XX years for its credit providing continued liquidity five these extending by improve growth, offerings to maturities

fair are development value our companies our performing close to well strong. generally and overall current business with cost pipeline existing Our portfolio

as continue investments $XX we to AUM million follow-on million to million $XX $XXX by originated Our of repayments. of grow new this quarter offset

to We new environment. of highly commitments discerning in current terms continue the be in

XX pipeline actionable in business Our well sheets companies which exclusively we portfolio existing models executed many with known strong investments to with and opportunities follow-on and remains balance robust are us.

this of QX almost per financial headwinds market to from essentially from NAV performance our the Our CLO in and a core decrease share portfolio the by dividend. exposure quarter X.X% offset $XX.XX, QX positive over-earning BDC with with of the was syndicated our broadly flat loan completely our

SBIC SBA's our This for to to economy. quarter's which third support are approval our continue to mission license of in investments to capital to the small upon businesses, growth allows so important provide us our existing expand

structure, and our benefit we us innovative provide solutions Our capital further smaller to are to to SBA cost-effective debentures great middle-market the finance. companies many guaranteed enabling and

earnings fixed perspective, we our with from XX% rates. our interest an of portfolio rate From interest-earning floating borrowings XX% benefits at of rates, and at are reaping increases

prior the of adjusted a and trends. robust with SOFR Our XX.X% income over increase X.X%, quarter's investment reflects yield net consistent XX% LIBOR

in is utilized entire was LIBOR that our average interest XX% implying accruals current for environment higher was X.XX%, for The earnings. yet base rate during not X.XX%. of fully the LIBOR reported receipts our the quarter Quarter-end rate rate rising the and and portfolio impact reflected

quarter Slide on recap X. briefly the past To

JV, of month return investments foundation rating to average trailing $XXX highest loan of retaining total of million. maintaining core unlevered our a generating level total offset syndicated on industry financial of on a unlevered $X.X depreciation our CLO in and X% continue BDC of registering non-accrual, primarily portfolio basis quarter-end and investment IRR gross appreciating unrealized portfolio market on in gross net loan by a with on credit strengthen the recognizing on a investment of $X.X broadly the our realizations we First, XX.X% still high unrealized reflecting XX quality and our XX.X% credit of by million at a million, the only XX% X.X%, by equity volatility versus and QX, one IRR

XX% time $XXX assets from since quarter, our $XXX as management XX% million increase and the last Second, under a increase quarter, million $XXX million as increased of at from year-end last to X% this year. a $XXX same from a million increase

exclusively companies our follow-on XX investments were remains existing our current in and in originations new portfolio Our pipeline robust.

and for Third, currently liquidity experiencing, sheet in paramount NAV such balance strength, economic remain we us. are volatile preservation as conditions

was equity mark-to-market structure $XXX of capital covenant-free million debt, $XX million million $XXX revolving and covenant-free debentures long-term of quarter-end Our of long-term at supporting strong, long-term SBIC $XXX of borrowings. non-SBIC million

committed to companies total commitments existing undrawn Our $XX are lending portfolio outstanding million.

new year by Further $XX shoes SAY providing after another fully Our quarter-end, debt of schedule structure years trading two rising environment. XX credit and from solid a in SAJ two signaling maturity maturities to expanding October, base, including issued years green the million followed callable liquidity a $XX the new million baby respectively. our issuance both cost, ranges bonds positioning we rate us tickers bonds maximum under to out, well subsequent in December in fixed and executed baby of demand, five at

requirement. our we new leverage XXX% in $XXX million to through regulatory million $XX support portfolio our Fund $XX over has with $XXX issued III available capacity to available bond a cushion investment newly had of approved XXX% our baby SBIC prior million million the after cash. of end companies And quarter significant Our quarter-end, and

XX% quarter dividend the was X, XX, demonstrated solid the and our per ended and key ever, quarters XXXX, XX, XXXX. November quarterly as paid XXXX, indicators performance Saratoga performance performance of overall share compared largest quarterly a or which the our third dividend quarter Board Investment's quarter within XXXX. January ended last increase of on an August XX, record from a our on to based $X.XX for $X.XX November of Directors declared liquidity, and Finally,

last this last from from XX% million NII year up Our XX% up and $X.X quarter. is quarter,

Our quarter. X%, return last Latest XX% and per quarter, year last from down up down share equity XX% from X.X% from months year adjusted and last is Henri $X.XX share and last last XX.X% X.X% quarter, $X.XX from XX provide NII $X.XX down is more this is NAV to $XX.XX, from up $XX.XX and will X.XX% later. last quarter. X.X% our year $XX.XX detail per on

consistently steadily years As remains took same management BDC our you on credit since can we and the currently our and under quarter. X, non-accrual, credits see XX the ago high the only quality assets as on of with one Slide have over risen last

our positive pipeline, growing we same evolving in to into deploy appropriately diligently at our trend cautious as this available this capital working is team credit management Our while the and being continue volatile environment. time

turn call back review financial now Henri to results, like would our I our over portfolio. as well as that, of to performance the to and the With composition

Henri Steenkamp

Thank you, Chris.

quarter performance million highlights QX. NII from metrics gains, from for fiscal third ended was up fee last to the incentive net the for November X quarter When of capital our XXXX. Slide year's last key and adjusting XX.X% $X.X XX.X% adjusted XX, accrual related up

due common for share $X.XX year's $X.XX Across Adjusted quarter. up three and for plans NII weighted year. XX.X million to QX, repurchases shares from last million XX.X XX.X million $X.XX, average were this was DRIP last outstanding share $X.XX per There last for share $X.XX and year's QX. quarter the share last per from or zero quarter quarters, this per was and dilution accretion up

and current significantly NII on base rates increase increased not the AUM interest year-over-year. increased to interest fully investment year changes offset on the SBA non-CLO AUM the with same benefit is in from Notes resulting yet a year factors and expense XX.X% partially XX.X% reflected by issued and debentures coupon compared fees Adjusted in in higher as new the past The in Sequential as primarily the last quarter. Payable a of increase investments with from X.X% BDC from full resulting income. various quarter management income increase and reflect XX.X%, during

However, the X.X% in increase from greater is coupon XX.X%. to current being

XX.X%, last quarter was is up and this last yield X.X% yield NII from X.X% year. Adjusted

share, quarter, per on in weighted or average third net million or a $X.X net the of experienced For $X.XX $X.X share. we from total of in operations $X.XX investments loss assets a increase resulting million per

million net depreciation company's the $X.X on a of company, in legacy Medical investments, deferred on sale million realized million investment equity $X.X was offset investments on which income investment million the offset investment. originated tax on unrealized company's in of $X.X sale blockers. million $X.X Targus depreciation taking the realized is loss million on realized of on $X.X $X.X gains benefit expense held realized on and our $X.X investments. net was net loss the realized gain $X.X net investments, equity Saratoga prior to loss management represents that This investments tax on million investments The on Holdings of was The comprised on a from of million tax this by in unrealized loss the Ohio by

million reflects, company and primarily unrealized $X.X loan Pepper syndicated $X.X depreciation depreciation as net reflecting quarter-end, company's $X.X depreciation equity The million on the and two, unrealized CLO unrealized the investments JV broadly the the volatility one, the the market performance. on in Palace reflecting primarily investments, company's of million

portfolio. appreciation approximately a net unrealized then both were company's $X.X remainder company's Hematerra investment, across approximately Modern three, million Campus of appreciation two, the Vector by, and on and Controls decreases one, the million on offset These the unrealized million appreciation the $X.X unrealized investments, $X.X

above of company the primarily appreciations reflecting All performance.

Return indicator important gains. realized performance on remains for us, and includes both unrealized equity an which

CLO XX equity for X.X% despite our from industry Our syndicated discussed average and return the investments last previously. X.X% months, loan depreciations JV broadly the of was the on beating

and X.X% for excluding excise for $X.X year fees expenses, quarter. $X.X X.X% QX financing for and This and and management year average expenses assets last million from and and total on as unchanged represented Total quarter. was million last of to million last compared income an basis, fees from up interest debt annualized last incentive taxes $X.X base

the balance to of the and Slides added the since of XX% the our have and continued environment. XX, the last run end over months, our highlighting the putting Of by still income the receiving work currently full the XX past period for the at of presentation Also, nine BDC also we metrics yet nor quarters not benefit increase how remains have note and shows and significant to XX quadrupled in of that is upward has Slide the QX particular appendix rate increased of interest statement more rising net the Saratoga through margin impact amount management the cash KPI than maintained. while we full rate sheet XX took trends again

and quarter Moving quarter same unrealized the depreciation were Slide last on net $X.X from losses this $X.X dividends million were as of drivers declared a of partially last million of In and decrease $X.X a offset year. decrease million to that main from million of by and million $XXX.X net investment NAV quarter-end, X, was million $X.X realized QX, income. $X.X

million were $XX.XX, price during and by quarter-end, of months of at offset distributions down company's addition, $XX.XX an the $XX.XX NAV $XX.XX. from $X.X per was plan last made quarter. of through DRIP In shares share dividend QX, average repurchased $X.X stock as million ago of XX

This NAV chart highlights per per past increased share has our XX our which includes also historical the NAV share, of quarters. XX

the Over since per accretive in value our increased share. been this asset net by growth the has demonstrated and consistent as XXXX increase has long-term, steadily NAV

from unrealized our and gains. benefit consistent history to continue realized of We

Starting NII interest simple at $X.XX from increase you adjusted higher $X.XX by share X, a the offset increase NII Slide share, $X.XX $X.XX and income On AUM non-CLO income and per see in and expenses. major on operating in basis. NAV of in net other increased management in a higher $X.XX $X.XX in changes a to per a net and income, in fees impact decrease CLO was increase of share the sequential interest a a the per increase partial top, base reconciliation rates quarterly will

depreciation Moving per DRIP accretion the offset and net lower half was unrealized realized dividend reconciles the the $X.XX quarter. for of net repurchases and of on the from this share in QX. NII $X.XX losses by to paid and $X.XX share and $X.XX $X.XX NAV decrease slide, of the GAAP

undrawn dry as us facility. which and to available was outlines available credit million. $XXX.X cash, secured our powder quarter-end, the debentures totaled undrawn This spread X between Slide of SBA

debentures receipt SBA million also with and deployed, quarter. of is $XXX for available when $XXX XX% as This quarter-end pricing pro-forma that's assets fully of cash quarter-end to and financing million very The allows additional SBIC to our available low-cost of of result external the third license available us an a of available $XX liquidity with need grow NII accretive its million by our without level this approved accretive. the

In in December, available we is bond ticker to baby the proceeds also baby is liquidity. This under trading issued the of a million, addition new generating bond, new above net $XX.X X.XXX% XXXX SAY. which

available almost public We our access to sheet, account taking the remain especially leverage pleased and the with balance sources nature this our into fact our and within And environment. debt all nature no liquidity that with in rising conservative our private long non-SBIC position, rate overall almost the next years. diverse all including fixed liquidity rate maturing that is and importantly, in debt is of of term both our X.X debt

two very available We will the and in later. on such covenants next that Also, with years such have way debt volatile which during talk coupons, times. is with that this structured options be stressed we BDC higher more important our is about a can the no debt in call

to composition now through cost on our X portfolio. highlights, companies, CLO of million of XX venture. $XXX invested have fund X move yield in value investment at to or fair $XXX Slides review like would and joint and and I portfolio AUM at one we the million XX Slide Now one

percentage our first in is first last lien of which lien is XX% positions. XX% total Our investments, out of

time, see spreads, X, an Slide core has we After period both and CLO, yield excluding over assets, seeing low BDC quarter. of On can are our our rates tightening how reverse. the these the extended past on trends changed you especially

from some last today quarter total core of earnings. yield X.X% still the the benefit from XX.X% with seen increasing rising to portfolio QX, BDC impact quarter X.X% already to last QX reflected through have We XX.X% but and in quarter not our and yet rate yield this in environment last X.X% full year increasing in our is

as seeing of rate. portfolio XX% have we addition, well started widening In being interest-earning spreads with our variable

impact we CLO their going rates the market rising significantly, is our decreased The X.X% being rates The of All yield expect of rise to forward continuing and see and to on from NII, current investments as next reflecting benefit X.X% from floors slide. performing to earnings our can current. quarter-on-quarter, to above the CLO performance. you

at at when month end With Slide three three basis XXX portfolio versus of QX, points XXX how quarter LIBOR in XX at today points approximately shows end our XXX. XX% average month was and basis the used at the versus closed LIBOR this be is QX million of impacted of increases year, additional our interest-earning in assets QX benefit not but and will using while increase will variable by and all rates from rate $XX rates. in next these debt fixed earnings our base

could base The rates similar. are And rates increases in are than SOFR all indications this. rising further be that

to As a our That said, has the timing earnings will rise. to dynamic effect result, resets this of lag rates we rate be invoicing on a and in to there stand as continue gain terms. significantly due

represents. industry U.S. our investments you Slide diversified our And that XX throughout how diversity XX, on the portfolio see shows can the are Slide and breadth

and addition estate, and included sales education, in consumer investments finance HVAC and Our investments healthcare over in focus are a industries to IT, spread CLO structured and the services, our healthcare are services and distinct JV, software, securities. which on large XX education as with real

important total remain portfolio, interest, our our Of investment of X.X% equity investment which part strategy. of consists overall an

over healthy of is that loss the in realized took when BDC. the For accretive the grow NAV had due our were unused to portfolio of the realized a of XX credit management fully reflected of fiscal to past performance combined helped carryforwards our gains million has total long-term interest. Saratoga carried gains historical years, $XX.X And consistent were these from highlights ROE. This quality equity NAV our from gain two-thirds over we and net sale capital

to investment the an of call Investment over for review. That portfolio concludes overview Chief I financial Grisius, our Officer, the will market. now my Michael turn and

Michael Grisius

Thank Henri. you,

off our remaining for to year, being I'll of take Liquidity market and high-quality a our large-scale sectors the open minutes are volatile and after in we've these fundraisings historically perspective portfolio harder capital. for few state opportunities. but the Since current observed last aggressive update for risk-sensitive market competing describe of remains on last persistence and abundant the our stance backing the taking with and on use the performance credits lenders investment comment of on more conditions then strategy. heavily lenders premium October, of a current business

elevated seeing slightly a fiscal remain side, they mentioned yields levels XXX quarter, Henri as have SOFR we is moderated movement past couple on and where but as slides December. Leverage this rate are basis Absolute ago. significantly growing points in although almost the of are LIBOR increased

addition, In continuing up widen and where markets. syndicated loan are had it mainly been spreads the recently, the until capital in lower to happening broader market, middle

half first year reasonably M&A our calendar slightly In deal the activity, in of macro the calendar high despite XXXX. market than the and saw albeit of in we volumes volumes lower half In XXXX, remained healthy lower transaction year volumes. second XXXX,

result, actionable we an deal a As continue to enjoy pipeline.

staying part, covenants, to In continue aggregate and market in ways, of base a themselves and timing most requiring the wary lenders particularly given close are That some levels thinly and of accelerated XXXX. terms time our equity differentiate the forecasted as investors potential recession said, capitalized remain in covenant competitive for of economic in for market, minimum other concerns reasonable around looser to restriction. such deals disciplined in a

issues, made and management slowing cycles and us watchful The affect costs, number companies. proactive being portfolio. through pressures second, eye and prospective labor decisions; successfully investment and that supply managed could our in when a of a how both managing making aware being on disciplined team chain portfolio and rising continued existing growth We're very inflationary keeping rates of particularly the importance has experience Saratoga credit of has first

companies as this focus quarter. is existing on follow-ons through was portfolio seen currently natural A our supporting

and strong different entering a We credit position have rate environment. in our confidence

to we usual, as capital to find yet discuss remains continue opportunities Our high will as we deploy underwriting bar shortly.

was investments XX deployment very last sheets the to XXXX XX capital months and year with us environment continue be the alone, December including Follow-on strong Calendar deployment with business strong and models XX of draws. in originations. in avenue XX existing a a quarter ending follow-ons balance for strong last of important with borrowers as delayed pace demonstrated an in calendar

In our this new XX actively continues nine in in a we contact the year total especially in volatile important during us, platform management close companies Portfolio management year. environment. remain past new invested be to for calendar engaged critically addition, our investments and with teams with these investments this have we and in aspect portfolio market companies with

All in loans of investment as portfolio according Nolan company interest only our period our us except payment paying Nolan will time. for on our our nonaccrual have that we are a our to we the work their investment on our this terms, that for nonaccrual an agreement is put with across of pick likely quarter, portfolio.

quarter, of the lien certain unrealized this believe industries first values We generally our supported just that are basis. performance durability. portfolio and overall our well in enterprise strong recognizing Saratoga's our cost spread To historically this performance in overall strong bolster attributes by of widening assets from performed that depreciation debt have portfolio portfolio is its XX% now X.X% on stressed overall below reflects and situations. in

have exposure. energy We or direct no commodities

degree recurring businesses majority revenue that of comprised and our In addition, revenue the of demonstrated retention. is strong of a have historically produce portfolio high

quality focused has of Our the our to underwriting. stay always been on approach

of Slide XX, space portfolio as this at in resulted at with percentage respect the net see our the of can as being has to cost. realized you top gains BDC on portfolio a approach And performance

had the ownership paramount three investment the remains BDC's list number only strong with to each and business Saratoga. and on over past model. positive culture approach two long-term This a We have of at the are XX assess strength its We company years. working thoroughly a directly management that number of underwriting

a We the order durable best shareholders always the into endeavor characteristics. our risk-adjusted term. with peer returns of understand as over underlying to sought capital objective businesses, and deeply business have long strengths accurately the producing to for as possible and accretive in invest its We

protection that XX% shows of as co-invest our of impact our we're in to returns market of previous believe meaningfully Our and when we not current potential. when continue quarter volatility our rating only on Part credit and co-investment yield one, to rating quality demonstrated credit portfolio as internal as companies upside end. that the equity the strategy also of in given selectively reflects at equity strategy augmented the and has intend strategy. for slide our served opportunity portfolio of the highest but and this our equity our is portfolio, portfolio This we overall

see the was Nolan calendar high historically leverage QX Looking Slide for unchanged above remained industry while Total and X.XXx multiples can at leverage. to is portfolio debt our on levels. Palace, now you that XX, leverage excluding Pepper QX for relatively overall at well Xx industry

able we volatility, profile to throughout. been maintain have a Through relatively risk past modest

strong in the risk Although we where enterprise we with focusing in will sustainably the investment. profiles consider our leverage of value rather never models, exceed credits businesses return investing on attractive business the exceptionally last isolation, dollar and confident of are

deal slide dynamics. flow despite investments competitive over of strength our new and In term, market addition, illustrates our long this the consistent increasingly to ability generate and ever-changing the

the During made versus production same year. the for but no investments quarter, quarter XX time new fourth XX fourth increasing XX portfolio we last our XX-month period companies investments, calendar new total follow-on to added --

environment, having emphasize keenly as on important inflationary growing we're always, portfolio, pressures. for our we're exposure we're not to and with success to face In focused in businesses of the limited this cyclical investing grow Despite and investing uncertain it durable attractive aiming sake. businesses in macro growth's highly simply the that, is to

Our each our capital upon is confidence healthy is bar conditioned incremental high accretive and that be deployment investment will shareholders. to always

for to relationships become have has relationships and business sources strategic multiple new deals. to continue significant mature, to our Moving skill on led new focus development on set, our XX, and Slide experience team's that

a of markedly reflecting two focus number of strategy Our source months Most executed the years, more recently sourcing deal number last this demonstrating past pace, more has the higher XX focused but notably, from but robust, efforts in the top our dropped last year's percentage is attracting initially due deals results. on remains up COVID, is line to that yielding of quality opportunities. during to

us that to formed progress months pleasing the relationships, over past the from four our business new we is portfolio are expand especially is of development reflecting nine companies notable What XX efforts. newly as

see overall XX, quality The team our XX.X% gross remains IRR $XXX Investment investments solid. on management the Slide portfolio on million As credit realizations. unleveraged made unrealized is by can you of Saratoga

chart the unrealized took XX.X% on On see the you over total the management. combined right, million is unlevered of on $XXX IRR our gross Saratoga can BDC weighted SBIC investments and since

business unrealized the of does current our was business. to current The the reflects interaction also the quarter, while still change rated As being depreciation status of company, this more Pepper but being view continue nonaccrual and for in-person two investments. now Nolan a been this our dependent earlier to since yellow long-term has COVID performance we of not yellow have investments and prospects on added only year. Nolan the for Palace Group fundamental

another yellow Pepper our unrealized first $X.X the recognized preferred on other is equity depreciation $XX of since investments. million total to term Palace. million The depreciation increasing lien investment quarter, investment this In we investment, and loan this on

Now company, interest. continue they but markdown current of pay the reflects the performance this to

closely they working sponsor to and are the work with We improve company the performance. as

invested capital. realized recovery investment approach exceptional overall of and Our returns our yielded has

Moving on Slide to XX.

distribution can are to SBIC the fully $XX BDC funded II. and our available You second and for million first deployed cash SBIC in see licenses of with

which million approval we third pleased low-cost to SBIC practically quarter, We this our of are means businesses. allowing to SBIC have to license received to support also currently debentures another U.S. us continue for $XXX small have access

To adjustments and procedures. subsequent impact has against summarize due market overall team, resilient really of to strength underwriting portfolio volatility portfolio and and this and COVID-XX both proven be our and XXXX the of quarter, our durable the diligence the way the itself and calendar underscores platform the

is and our remains we new the with while And higher and asset the value as premium now. such flux, primary have activity we for Saratoga. seeing continuous a world investments remain and at bar, quality confident intensely future preserving increased our remain credits focused times Credit focus in levels are in for on team especially

review CEO. This like call Chris? our to of market. the I'd turn over concludes my to the back

Christian Oberbeck

you, Mike. Thank

XX. Turning to Slide

on outlined, XXXX, largest January per XX% As XX, ended history. our dividend increase company impact on dividend X, of this paid basis, XXXX. the including spreads both quarterly at general share our near-term in considering economic and A was dividend The to on a latest Directors of quarter November will continue increase, least earnings. base quarterly the rising is Board rates of evaluate for $X.XX level factors, increased our the the and

XX. Moving to Slide

market Our both period. includes us dividends, generated performance current for months, returns for reflects capital BDC which the and the XX total of has negative last return index negative X% appreciation total same of impacting the outperforming volatility X%, the This the both and industry.

Our longer-term performance is outlined on slide. our next

for returns both top of quartile time year the place three horizons. five in and all BDCs Our us

XX% past return average of the the XX%. of return our three years, exceeded index Over

turn XX%. been total of past over versus XXX%. industries years, the the than BDC the of the XX% our index has our five average XXX%, the management When Saratoga of more took XXXX, Over double in return

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

value metrics our We value long-term on growing focus net such which NII reflects continue to as on are per and dividend our return shareholders equity, the receiving. asset yield growth, share,

quarter, be by have share, of the and the have to NAV it accretively the this of long continue slight we BDCs NAV last XX over NAV growing one quarters. per to term, we done Notwithstanding also in grown XX the X.X% few of decline

Moving Slide on to XX.

differentiated leading help on initiatives and drive attractive quality that the believe performance BDC, markets size of our to discussed of our Investment will investor to slide adding including capital on base, is our All this Saratoga this institutions. call are make the community. We more characteristics designed outlined and a

investment of highest and at industry III Access demonstrated our XX%. to one this Our SBIC liquidity accretive of investments long-term cost-effective to characteristics license levels the portfolio recently the and and in ownership approval new with include which differentiating maintaining quarter our management baby make with historic support is NII BBB+ bond floating yield rating of rising AUM XX% a rate. our and rate per benefiting in December, fixed of the raised grade bond active credit share solid in debt from private earnings XX% and environment, issuances, while rate, our with public

Strong the profile. long-term us over long an and term, NAV and AUM on putting reward attractive by the risk the per of growing high-quality expansion NAV industry of and top industry-leading accompanied share, to return equity

In addition, a industries, credit gas the conventionally to and portfolio contains quality minimum our historically oil including exposure high industry. cyclical

Henri environment, In was to rising X.XX%. higher at of not average would was similar today rate rate QX, the rates. at rate refer In and like beneficiary used XXX the LIBOR end, November three-month Saratoga closing, In LIBOR that this this At short-term to walked XX% the interest quarter's quarter Slide interest through basis X.XX%, today's SOFR level, increased Saratoga's reflected is fully impact purposes presentation. income implying of in with a in entire for XX I a spot the you LIBOR that is or earnings. reported points rate rate closing earlier levels

in in the investment capital sheet, historically that future and and reputation, navigating confident environment. And shareholders that our near and management experienced We time Saratoga's liquidity through and our and underwriting balance term. strategy serve benefit and will will uncovering standards us challenges opportunities current tested the in structure strong team, long remain market well the

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

Operator

come from will of question Riley. Bryce Rowe first Our Instructions] [Operator B. you. Thank

is Your line open.

Bryce Rowe

you're it to about the thinking increase you're to approach, speak morning. I Thank variable the Maybe taking kind and BDCs we've much. the approach of kind dividend. the very you supplemental of where question to a paying and the see increased a appreciate Obviously, Chris earnings. can seen a dividend wanted I a other earnings. you Mike, here. how Henri, that dividend see on take great to excess good followed Good constructs nice an on and in certainly ask base base top of about based then you

and the point. of back with that eventually context the rates potential and -- So some to at down go rate for environment the

plus base consideration and Thanks. all any how understand to trying construct? are a dividend dividend supplemental just construct about and So that you the giving thinking to

Christian Oberbeck

Sure. a have something that's Well, about. lot I that very a we thought question mean, good and

recent at rate quarter. market is, then far our go LIBOR our XXXX. they're up rate substantially in actually right based time. how I projected where at forward is down is the who not knows, kind think next up, and most substantially recent on but quarter, you you that of at in down and the in lower projected rate earnings come the base to But curves if the the look this level than come back average while look rates if back this And market in to that off they're then year is XXXX of this of they're

our dividend the run. So we in long certainly time that that rate core over we point are this we with well positioned sustain feel at can this

position good don't higher a in I -- from by rates do how our substantial spillover. they very continue know now, said, amount. dividend that With much are currently a that. over-earning to exactly where We're they We we relative may to go are our may

something room, made too that have the sense be for we shareholders. over-earned So should that

so And bifurcated like others If that more it can kind core sort rates how got plays our to out. are mode the some be looks we have done. see relatively we that while, to of could our quite dividend. for temporary, move, to going If we going of interest obviously, this stay a consider think we've it's up then of

uncertainty but seen just all of exactly because how be it this -- rate out. So amount is as determined sort a of of and environment, to to there's this to be tremendous plays

current think becomes as rate for run. the I important And as that and more the sustainable our clear. the is level consideration feel most at earnings look increase upon is we will the long to we're environment build that we But that

Bryce Rowe

a around And service. like it reaction are follow-up from curious Great. be service reacting color, Can to rates. looks Maybe good floating are That's higher borrowers around rate borrowers borrowers performing borrowers of all borrowers. fair for color how most the but impact expecting value how would a same the great. debt the question Obviously, Chris. it's kind speak any higher just reacting to you are to debt rates your to the really mark well. and with Thanks. on But debt, perspective, and the

Michael Grisius

interest really We That's feel coverage. Mike. terms good good portfolio is rate question. construction about in our of this Bryce, a

to of cash reasonably at lot businesses strong trying out flow seek most margins. that are we only but have time leveraged, cash dependable flow looking While these of deals and spent really really not a solid

generally businesses which So flow they're and our still increase that can in with service comfortably debt. rates withstand some produce of cash plenty to excess

there have but that see we coverage react environment. the of to how Yes, to of the when there's they up, healthy interest to it. support kind coverage in people room we So like our rates across at don't it's market the terms portfolio, look interest

thing. they're So talking borrowing same else that they're of it's anybody about to facing the kind money,

I the is increase rates sufficient our flow little it's well experienced. So think, it handle companies are of that a and what is that they excess thing, but continue producing we've it that demonstrating are to portfolio is, perform the important to in cash bit

Bryce Rowe

Great. I appreciate that.

Christian Oberbeck

have new sponsor. for borrowers market, moving depends balance in few other on relatively think leverage structure that that, the And the the have lenders, the of add If I new what it leverage. seeing in debt in like terms will, they the happy of looking of I have, depends and pricing lot of -- part everybody -- seeing and and we're I seeing a have. last and overall you borrowers deals, pipeline how who's new have we're are But a is, quite seems they it accepted to rate as is at is new But of -- think negotiating balance robust dynamic negotiations. the just think kind happy to sponsors could for there's on deals. improvement the the power, on we're it, the that that what being seem in between which deal, to opportunities, level it if are more we're far years, they we I got of the a And way, are competitive if companies depends and

Michael Grisius

good I that. Chris. point, it's No, should have mean I emphasized a

are quarter certainly development this now we're seeing, widening So Bryce, as we're in one in especially spreads well. the that that in is last and is environment that

are we terms not seeing receptivity ago. were environment, get few higher to only to in pricing new borrowers able just of but indexes even rate than months higher So now we're a a wider

finally as we're that starting well. So in to our market see

there's if indication So an rates. of sort of to reaction the

general. Now environment the in I higher rate is M&A think affecting do activity

they're seeing, high-quality kind rates, So market at be micro that plenty are kind the the that the lower seeing, getting and for deals we of we're the the of that deals there we for and market because which broader But end deals seeing macro middle occupy of of deals in them. may we're general just fewer in And environment. expecting of higher market, are the activity. we're those

Bryce Rowe

great. guys. commentary the That's Appreciate

Operator

Casey [Operator next you. Point Thank Our Instructions] Research will of Compass Alexander question come & Trading. from

Your line is open.

Casey Alexander

Hi, good morning.

highlights this been actually market - widening, have your think if that I think don't spread it. a up NAV really really quarter exhibiting would you many underappreciated earnings BDCs now, right have And appreciating guys for share. it the power power I are and weren't $X.XX the is

idea. in couple my One to a the and job or think those the on deal I and earnings Can -- the a allow calculate against those why trying places With ratios is speak extent high? deal. comfortable and find right it's is the a bond of that comfortably positives, a excess to hold ratio is December, new a potential looking at mean, commentary factor really to quite absolute NAV great and I baby Can pick build leverage I leverage those X.Xx baby you're close ratio regulatory going the you carry appreciate to that do to the you all can and because dividend to So to I issues bond good, you to you regulatory new ratio which credit to here. I'm those to think out high. leverage holding to when now to leverage did in around ratios leverage very you speak I

Christian Oberbeck

I come start the Sure. you sort very, we very make very to all, character important. our work debt, is components fill And then things anyone's think years the Well, the of and we've rate, leverage interest-only long-term in structure first right? fixed carried around XX of now. of to to in. got right the maturity several always leverage, out. schedule have a Henri, Maybe that one and our covenant-free and there's is of Casey, And And market two leverage what can our well I'll and we've is

off widening, time we And and are in marketplace our both long of with the of repay with leverage new before base our have to of from a now and spreads absolutely it's the deals coming to spreads So the any rates leverage. on. terms our

margins So are very our expanding, our profit leverage and structure is solid.

the on of is other And of it, course, then side portfolio.

think very portfolio our stability earnings. quarter. And our at really so when think for and look we the demonstrated at positioned look character the we've And past I this well all we of and that just and substantial we're together, portfolio, we

in of have things, -- liabilities through of little asset up LIBOR earlier year, than adjustments base where and CLO through system that might the quarters was lags I and think earlier types higher our period gone gone the and now. those might kind there the all up rates we're of working a the a lot things but and our have

And to so are through line. the incremental bottom of our improvements kind flowing directly

So amount in that years. a come And we three whether see extremely rates come and up, rates what A earnings years generating the a on further we're that back two as down. they as going same there's to Bryce picking a tremendous or said is then earlier, structure possibility this we're up leverage point question have favorable. of there's against to the

less. I callable our in is -- what's really almost correct Henri structure or leverage two-thirds of but about But our debt me important think the years is on also and I two think number,

do reconfigure rate to we decline. should this structure the have rates so fixed ability And ours of

within are I so that think give elements operating those comfort us the And structure.

have before. received all said we of earlier, of little the have part result things have ability a that been been a is, we between a as sellers, that there's dynamic of and experiencing Another one might And come as about. as the to repayments that gaps those is slowdown had benefits we've buyers in than M&A slower finance, Mike leverage

we is off are get with only The high-quality transaction of our transactions And generally of down. M&A loans refinanced, M&A lot right? getting have so an a paid this phenomenon slowed time have we not and

it new investments us then is is of portfolio in. coming getting and our longer improving core our more as sticking our So thing, before. we're that than a and type had scale are lot broadening with And relationships

add investments. now high-quality kind there's new with see, did we as at I high-quality those of follow-on So very mean, relationships. quarter, last us through asset two to assets can And improving XX right forces allowing very work of each you are portfolio -- those our

So demand have extraordinarily in well. a very solid good with portfolio credits we know that we

shorter other long The have thing assets. basis leverage, too, and a is would I duration the on we have historic duration say, very about we essentially leverage

reflective of And so that. earnings we're well very flow think we're positioned, way the that we the set think is seeing we're And up. I that

Casey Alexander

for is Mike. which the have important investments you you economically follow-ons. environment that new make with call you it companies, for you a with? higher would that your than sure history don't as new see Mike, supportive All question new more And follow-ons? do coming for you at what you more of that in issuance to you. you're Thank what of to have existing all have fact companies right. this My portfolio this at next opposed quarter was I'm curious, is in bar looking

Michael Grisius

call is the succinctly than want to performing a in sure certainly, who And a first we've answer, a support can from companies. existing Really We call get well. you good available not that portfolio question. industry capital very is There's make better our yes. borrower really and got our foremost, to

them know really well. You

platform got to capital their they've and put You and they're grow to additional for ownership to continue the opportunity an group, work. looking like to

institutionally, and that and investment very of have know almost of sort you we of So bit have become past It's what smaller just that very playbook our certainly been deals we And much if this our do most all company. then did best portfolio we off of small we're ones as at that big the to successfully deals under have often, we're started look a part a sizable. operate a making getting quarter. more

are didn't underwriting that seeing just opportunities. get met didn't so any our we any that, that find Now that quarter, good happens it or bar. really -- said past this having still really actionable And we

an about Some of -- a were even even our due just certainly, outlook at high really that yes, what And have businesses thinking affecting a that to a the that begin that's we probably if to harder bar through we be we the was the go now standard to with. fact difficult Are could we business are. economic for time, margin.

think high But to fewer most this past with. the have have I a And generally, that begin we being bar down. of we M&A activity just sort quarter portfolio fact reflective companies is of of

of doesn't said interesting. quite seeing Right of these -- our It to like lot a operate how think our is portfolio new predict things work. hard now, that, are just really things really full. Now a switch. opportunities We're that we it's sort pipeline business having of

doing In for fact, long while I'd Casey, it, we've to I'm been add this a time. topic, that on

Now is companies. time to investing in a new portfolio great be

some with of growing to and it's of a chance pressure in facing first of that right that well in in standpoint kind now, you it's all, it doing means really If despite a solid flow performing producing is cost well, front performing from growing, company a market you market get and you. it's of see that's a the and deal right underwrite cash where that

You competition months what it just we've ago. seen six a to and less pricing chance than and with also better lend get underwrite capital

So to time nice be a capital. is investing really it

meet deals are slightly already the higher that are probably -- high than those standards and For they're what standards to begin already with. those usually that are, they really

Casey Alexander

All you. taking questions. Thanks my you Mike. thank right, Appreciate

Michael Grisius

Casey. Thanks

Operator

from come Instructions] Our [Operator Raymond James. you. Thank next Robert will question Dodd of

Your open. is line

Robert Dodd

follow-up a borrower Casey credit On investments being actually. congratulations portion follow-on greater the of I And the the guys. I understand. all Hi, One the and mix. a knowing of quarter. on mean sort to

is I opportunity realized a put it of historically trying where on though you've Or just the got to is So your cetera. X, investment? so get other the has an follow-ons been the gains equity you doing only? investment already when performance equity in do are goes the get into much follow-on, of a an question debt to generating incremental equity et day feel mean, equity,

you a If of on the want follow-ons, opportunity that at shift target? you portion of the margin you to bit little at to equity some losing are keep to portfolio

Michael Grisius

question. interesting it's an Yes,

answer it. about So how And depends. the here's that we it is think

owner. capital equity. that some need looking sense step typically equity. for we we rights So additional also capital to always fund debt, cases co-invest with and almost a to equity, makes There's control alongside the and more but debt existing portion co-investment the up they and to when in our that for we In both borrower cases, requires is have need grow, those with participate an

So when happens, way. co-investing the we're along that

Now cases, forma may acquisition, that looking so whatever it performing be it growth just in other is, the be at in business may structure to is follow-on they're EBITDA. when for for well capital capital and the growth initiative fuel an you pro look the growth

the equity very structure, the equity. that to an at capital you're existing accretive When look already you investor, not if it But have. it's need existing you equity may

as news well. that's good still So

benefits position extent typically our our time. initial or that's on way initial that in and the equity over out position have current portfolio significantly existing to very co-investing the company, an So we we're investment or equity, investment along it an whether sitting well of equity proven our

Robert Dodd

appreciate I color, is the always of I case. Got the it. opening which Got and it appreciate classic depends, that Yes. it.

to rules that forward future on curve we words middle mean, grow retaining distribution from potential kind -- but quarter per right? earnings where NAV, as but per here you just of can't putting are on the quarters. dividend comment an increased share but dividend, go power could understand what earnings I requirements. So to in by not BDC like get your mouth, the keep the the et they are, given On And of $X understand your in up is, cetera, the materially based the power I the I into to is going some get year

to income lot in generate a hurry. of going You're spillover a

bucket rates spillover, becomes but So on do problem that it you have, if that how if thoughts on missed. you to too point, earnings dividend a handle for big what stay longer, problem a up large would there's if a your at a higher it's build some are good

So you give thoughts can there? your us

Christian Oberbeck

Sure.

you on. problems we I are the mean to as Absolutely, out, like I think point I you're of rules. think are hard type these right. I work mean, there

right two-year to kind You -- got a have a of it. a of room period which and your -- the high you've -- now, to spillover have certain of out in we've pay lot equation all is got percentage not income fortunately we pay from,

-- that do as spillover ultimately, all be increase. you And to of if paid to And outlined, has out this but increase, earnings amount shareholders. will our ultimately, then

the dividends to other, would way. They're get build to through and right, either meantime, so So going one in along the shareholders it are or NAV or through get it NAV way going right? the the

environment, issue, sort right, an to going in higher to for biggest what's I happen inflation, a inflection of the type longer economy. think I We're mean of unprecedented rate an right? we're rising point things. in these is next of in all everybody our environment, knows kind

very years, XX for that market. aggressive experienced seen Fed, than more got which has one systematically, that is from you've position a No consistently, the hawkish the

to going stimulative a environment, hyper just So one this scenario. to of there's we of by sort rising back that's rate massive is environment, to what's which followed this have look If like. all -- cuts a down lot questions

that odds I don't of know the are. scenario what

too be to economy. that could prepared out get want you and have to have difficult We on for a that. don't We then far

up And XX% as those and are questions. so XX% see, now, on on earnings. we're Right all can you dividend still

goes. right not see problem now. that's quarter, too In another big for So a how that we'll us

As built rates the interest of you the know, the where quarter embedded some doing during the from were increased base increase average the in end our there's rates, at right, just interest versus math quarter.

is the I but between like hard going going I to that. Larry Or it hold say? thinks building. relatively is says. to with come this he recently, And at the to very curves, they is all going like them, the saw you said market Summers towards And forward an said off the market. and it's he towards And more there's look to it -- Fed battle the a it's be than Fed tell So interview

going we're decisions have to make just time. to over so And these

do We've mean Bryce, to spillover these we're think that I earnings. increased can make and dividend there's and fortunately, very decisions, earlier there's we aren't these permanent. ways to ability I in see. of right? permanent and And position a in mean, lots good I we it do question to got from payouts have an And that an watch are room,

a to from to this and want to that into I is it of you on one do Henri, that. but attempting be going depend a say, to we've to they think been to do or dividend can that to on. benefit going the period depend working we're confidence And look, add NAV way shareholders is it going to time, what you're dividend the in And that's something our excess other. give can you do for level

Henri Steenkamp

it nice is, term of spillover. longer they more to plan manage well allows you manage the to Robert. and Yes, sort know just And about and you the rules think really RIC constructed ahead payment how the the thing and to I looking

So our of to quickly. on out will based But pay earnings, the increase go up, need yes, you rates the quickly mean we rules distribute income rig i.e., doesn't taxable it have that as mentioned, payment that structure. our will we that as to

how that out, spillover want especially we allows have. if manage think term pay you to which really it It well, an environment. long us more in So sort we to your you economic allows you to -- plan of

Chris is uncertain. As was about, more that talking

is So sort the happens of planning doesn't rules. nice thing the although of which about payment mechanism RIC maybe happen the the necessarily accretion the the quickly, quickly,

Christian Oberbeck

we like you point one our spillover. One we've as as further have our careful in And XXXX, April used -- we've I'm rainy from been And if of very you recall think call on that. day conference just this. sort spillover long something very been will, or very I for think of And point a with careful. very, like may the our sorry, that I fund,

source And as some They of spillover. of perhaps. on max a BDCs other are it their kind view capital,

don't have so lot of And a they room. really

temporary out have flexibility dividends approach permanent sort to they if created of of this versus for an consider ourselves an utilizable the optimal to it kind we've pay And immediately. time increase, give dividends. to they this But have to in environment us

come the balance dependable than shareholders our in we available what expect to increase as quarters our next quarter before, with levels and to quarters I think up dividend thinking, and behind And trying have a dividend this and then to said we is are question sustainable, going right, there rate we're all can has obviously, quarters, and that the of the relatively near the look than certainly And sequential in more and the term going consideration been be that? that's is after in very past. of

Robert Dodd

by cap. it's really hand such to going Understood. managed the force to appreciate a you've being not spillover your near point and that your I color

be good as in So that's to spot a well.

So, thank for the you color.

Operator

of Our from [Operator Instructions] Group. come Zwick next you. Thank question will Erik Hovde

is line Your open.

Erik Zwick

Most answered of a is at one bit of follow-up morning. terms. in asked guess I a And been and point. questions Good still the Thanks. my this I have have some

and about LIBOR severe. mild moderate dip similar the There's the trajectory concern So them current more a to we that a would follow economy impact based whether the points, likely of on I would guess here borrowers certainly funds XX about maybe recession also basis portfolio? what in or beginning outlook there's at thinking curve, the higher into something another your a the XX Fed suit or of happened year the in of the could health magnitude. the And for

you and of the credit potential about health the your for As think borrowers.

be if the what of further this burden risk companies. beyond companies to which current those had continue a in material larger Fed that or would and point, slowdown EBITDA economy would debt flow cash hiking impact would on your expectations, higher materially the put At the a

think you risk that how today? factors weigh those Just curious about and

Christian Oberbeck

and Mike portfolio. then specifically very high to can it let our a first answer Well, and try speak me level, from

of high have fortune middle good a the in we at investing the level, So smaller market.

kind its its just don't there's broader we -- have macro companies, the economy earning they And in so And of us ways like of of decreasing economy. money, so a of our we no, has marketplace, a and they broader its companies our their about portfolio I because mean were each these affect destiny, lot the considerations, own cyclicality own lot investment of in own universe. in that. want back, last our pay rate meetings, of talking one they're to we're sort actually do much

having increase I surging mean revenues. they're in

so products. place, invest creating and that Service and all there's as and efficiencies opportunities they're a the so we Software U.S. in market is such huge companies And huge, a efficiencies to their many the -- of

going a -- there's a mild recession, And And even do companies it still to recession. a can of in mean if bunch have continue to well, that a negative so do may in have our our well. if at continue a recession, that's I a not to persist we all. companies lot there's really dynamic of severe growth affect will much a we

of would say a is they're basis overly companies. smaller picture But to on I and portfolio So partly it macro necessarily of nature is these as everything not paint the to also don't trends current the of affected has companies with mean do by that an what for everybody. our our I and each rosy then

if you if broader & you're companies niches you're them economy. Gamble, specific specific I necessarily they McDonald's, mean add they're I But much opportunities. and aren't on very exposed going the you're mean as all economy. have to Walmart, our to up, Procter very in markets When more if correlated broad big what's market very gauge the the in

Michael Grisius

Yes.

about. the lot they're many when a work Chris, at of the almost there's and circumstances they're where make. that to think that to because add get at first so do to we're question be We me we good that under business the flow a end that interesting a minimum feel going front lending comfortable that of we're doing the end little looking level going we to And about to that underwriting level. it's foremost, centered that spend at you trying and by of a sustain position bit, and reasonable But Let an we're around day, observation comfort markets a things that is in time the a thinking is in. their all at deals, we all cash the end

at for the an offer look think that offer able proposition about whether reach all in they them. a to the have to the customers. be in way their they're may that value they try to proposition going We to continue and very to assessment the to that's value customer We future vulnerabilities profitable as

we because It are that makes that have services. cash have therefore, their that they companies most in to capital It why And strong want see the wide have underwriting the draws do they draws the less draws them level most to And underwriting cash and see can us of that our products products, It to to to certain wide at is value tends the persistency us structure, be component flow. us them. to the the flow, important cyclical. price a us what margins of margins margins thing industries -- the do. allows in produce their because industries. people that it they lots They important

underwrite, rate when your but I say we flow underwrite cash most that move we're should all of persistency cash -- important as when I question, Now and said, the thing. is of about is into before part scenarios, the I interest flow the and we the the thinking downside

is as we reasonable capital is of well. As the how all in I in think terms that the the you look the component which about business much things another that relative discussed get what at, for that structure, to we leverage fundamentals business is factors into

were flow to rates And interest to generally, credit their up. just down more be if look true affected businesses cash go in more and their if our than general, are we at the is as this much go in portfolio, going

and we to we grow, to to that considerably. going grow and our said, comfortable way that is capital it's we foremost, and quite going it's construct the comfortable in businesses structures we, first a that cash get So the persistent I flow feel as usually lend where

there's at things itself. we cetera. of that free while the interest business scenarios But has than that fundamentals some And in that impact run, rate that, the of et the we're much business, a the marginal downside sensitivity, like more cash looking effect on flow can have

them We this we comfortable. to good proposition are that that companies will same end be continue to value mentioned customers our businesses that way portfolio construction really positioned point I we in allow well markets I really make look to at in solidly feel are want in continue offer to to now profitable. in good that right that a their that when to

Erik Zwick

color. commentary all of today. so from That's the I you. Thanks appreciate I great That's had much. both

Michael Grisius

Thank you.

Christian Oberbeck

Thank you, Erik.

Operator

in to Oberbeck see I queue. I you. closing conference like Mr. questions further remarks. would now Thank no the back turn the to for Christian

Christian Oberbeck

would with next and to I speaking thank joining like you quarter. look for we to forward all us you today, of

Operator

participating. all today's call. for concludes Thank conference you This

now and day. have may disconnect, You pleasant a

Saratoga Investment (SAR) 11 Jan 232023 Q3 Earnings call transcript