Saratoga Investment Corp. (SAR) Earnings

Management highlights

- Portfolio and AUM Performance * AUM grew 1.6% quarter-over-quarter to an almost record $1.126 billion, with net positive originations of $31 million (from $79 million total new originations: two new platform investments, 10 follow-on investments, and $11 million in structured debt investments) * Latest 12-month return on equity is 4%, more than double the BDC industry average of 2.4%; 12-year long-term average ROE is 10.1%, 1.5x the industry average of 6.7% and positive every year * 98.3% of credits are rated in the firm's highest credit quality category; only two investments hold non-accrual status, representing 0.0% of fair value and 1.2% of cost, well below the industry average of 3.7% * 81.7% of total investments are first lien debt, 19.0% of which are first lien last out positions; the portfolio is diversified across 44 distinct US industries with no direct energy or commodities exposure * Net asset value (NAV) per share was $23.23, down from $24.42 last quarter, with 24% of the sequential decline driven by dividends exceeding current adjusted NII (using undistributed profits from prior years) * Adjusted net investment income (NII) was $7.6 million ($0.47 per share), down 11% quarter-over-quarter and 25.1% year-over-year, primarily due to lower short-term interest rates, tighter origination spreads, and increased interest expense from new debt issued last quarter - Balance Sheet and Liquidity * Total available dry powder (investment capacity) is $197 million, consisting of $61 million in cash, $90 million in undrawn revolving credit facilities, and $46 million in undrawn capacity under the SBI III SBIC license, enough to grow assets by 17% without new external financing * The firm's debt structure has no material at-risk covenants during market volatility, and $269.4 million of callable baby bonds provide optionality to refinance if interest rates continue to fall - Investment Strategy and Market Dynamics * Market conditions remain extremely competitive with tight spreads, though early signs of spread widening are emerging; the firm's deal pipeline has grown substantially due to expanded business development efforts, with 21 of the last 12 months' 107 term sheets coming from new sponsor relationships * The firm is shifting substantially away from software-related investments, as very few new opportunities meet its strict underwriting standards; the two new platform investments closed in Q1 were non-software * The firm maintains a disciplined underwriting approach focused on lower middle market investments, which offer more robust due diligence, more conservative capital structures, stronger covenants, and better risk-adjusted returns than larger middle market opportunities * Over 16 years, the management team has invested $2.6 billion across 132 portfolio companies, with only 3 realized economic losses and a gross unlevered realized return of 14.9% on exited investments

Guidance

Management did not issue formal numeric guidance, but provided the following forward-looking statements: * Management maintains that dividend sustainability is supported by existing accumulated undistributed profits from prior years over a 4-5 quarter horizon, with any adjustment to the current $0.75 per quarter dividend level evaluated quarterly by the Board of Directors based on market and portfolio conditions * Management expects origination spreads to continue improving (widening) from the compressed levels seen in recent quarters, supported by early market trends * The firm will continue to grow AUM gradually by deploying available dry powder into high-quality opportunities that meet its strict underwriting standards, with no fixed target for first lien last out allocation (all decisions are made on a deal-by-deal basis) * Management expects the firm's disciplined underwriting, conservative balance sheet, and strong existing credit quality will allow it to navigate ongoing market volatility and continue delivering long-term risk-adjusted returns to shareholders

Segment performance

Saratoga Investment Corp's total portfolio fair value at quarter end (May 31, 2026) was $1.126 billion, 3.6% below cost. The core non-CLO BDC portfolio made up ~90% of total investments, with fair value 0.2% below cost, contributing a net interest margin of $13.4 million (up from $13 million last quarter) and a weighted average yield of 10.5% (stable quarter-over-quarter). The BBB and BBB-CLO debt segment accounted for ~1% of total AUM, saw a $0.3 million fair value write-up this quarter, and had a yield of 11.0% (down from 11.6% last quarter). The joint venture segment contributed a $2.9 million fair value write-up this quarter. Equity interests make up 7.2% of the total investment portfolio, generating $0.2 million in net realized gains during the quarter.

Risks & headwinds

- Ongoing macroeconomic and market volatility driven by geopolitical uncertainty, shifting US tariff policy, unsettled interest rates, and negative public market sentiment toward BDCs has compressed credit spreads and put downward pressure on portfolio valuations and NII * Three portfolio credits have driven a majority of Q1 markdowns: Pepper Palace was written down to zero due to ongoing retail traffic declines and profitability challenges; Exego was moved to red watch list status (still accruing interest) due to end market weakness, with principal at risk; Cronus (Kronos) was written down due to slowing customer growth, with near-term maturity creating additional uncertainty * Current adjusted NII per share ($0.47) is below the quarterly dividend per share ($0.75), leading to gradual NAV decline as the firm draws on accumulated prior profits to cover the distribution * Growing the portfolio to increase NII would lead to higher leverage, though management believes this is mitigated by high asset credit quality and the conservative structure of the firm's long-term fixed-rate debt * Intense competition for high-quality deals has kept leverage levels high and spreads tight across the private credit market

Analyst Q&A

• Q: With origination spreads still 50 bps lower than maturing repaid assets, have recent spread widening trends closed this gap, and how does this impact portfolio yield? /

  A: New originations now have higher spreads than recent quarters, with most true first lien deals coming in between 550-600 bps. Spreads are still catching up to the higher margins on assets rolling off. Capital protection remains management's top priority, with yield as a secondary consideration for new investments.

• Q: With current NII below the dividend level, what is the path to align NII and the dividend over the near to medium term, and what supports keeping the dividend at its current level? /

  A: Credit quality of the existing portfolio and all new investments remains very strong. While multiple factors (higher cost of capital, spread compression, lower base rates) have pressured NII recently, spreads are starting to improve and the firm has a robust pipeline of high-quality opportunities. Management expects current market conditions will improve over the next 4-5 quarters, and existing accumulated undistributed prior profits are sufficient to support the current dividend through this horizon, so no immediate adjustment is needed.

• Q: How does management balance growing AUM (which increases leverage, given current declining NAV) with maintaining a conservative leverage profile, especially since current leverage is already above industry average? /

  A: While growing the portfolio does increase leverage, this risk is mitigated by the very high credit quality of new investments and the high 81.7% share of first lien debt in the portfolio. Management also maintains significant liquidity flexibility, with half of the $197 million available dry powder able to be used for either growth or deleveraging if needed. Management expects improving spreads will lift NII over time, addressing the NAV decline trend.

• Q: How is share repurchase prioritized versus other uses of liquidity, given that the stock trades at a discount to NAV? /

  A: Share repurchases are actively considered when the stock trades at a meaningful discount to NAV, and the firm has repurchased shares regularly in the past. The decision is made dynamically based on the current discount level. The firm has sufficient liquidity (including $61 million in cash plus additional liquid securities and undrawn credit) to pursue repurchases if prices reach an attractive level, alongside deploying capital for portfolio growth.