Saratoga Investment Corp 6.00% Q3 FY2025 earnings call

• Adjusted NII, excluding onetime Knowland interest reserve reversal, had sequential quarterly increase. Latest 12 months return on equity is 9.2%.
• Experienced outsized redemptions of successful investments and continued over-earning of dividends. Evaluating use of calls to reduce debt.
• Began to see early stages of potential increase in M&A in lower middle market. Completed decisive action and resolved challenges in 4 portfolio companies.
• Originations elevated with $85 million in new and follow-on investments. Cash position grew due to repayments, improving leverage.
• Credit quality steady with 99.7% of credits in highest category. $474 million investment capacity at quarter end.

Adjusted NII this quarter is $12.4 million, down 5.3% from last year and 31.7% from last quarter. Adjusted NII per share is $0.90, down 10.9% from last year and 32.3% from last quarter. Excluding the nonrecurring Knowland interest reserve release, adjusted NII per share increased $0.01. NAV per share is 26.95, down 1.7% from last year and 0.4% from last quarter. Quarter end NAV is $374.9 million, up from last year and last quarter. Originations this quarter were elevated with $85 million in 2 new portfolio company investments and 8 follow-on investments. Cash position grew to $250 million due to $160 million repayments. Core non-CLO portfolio is 3% above cost, while total portfolio fair value is 0.7% below cost. First lien percentage is 86.8% of total investments.

• Uncertainty in predicting exact origination and redemption pace. Confident in long-term portfolio growth despite quarterly lumps. Hopeful for uptick in M&A activity as market conditions change. Will assess call options on debt based on cash and arbitrage. View equity sales as long-term strategic for building capital.

• Unpredictable pace of repayments and originations. Potential impact of interest rate changes on debt and investments. Market dynamics affecting M&A activity and deal flow. Discrete credit issues in some portfolio companies could impact performance.

Q: Eric Zwick asked about sightline on repayments and new growth.

A: Christian Oberbeck and Michael Grisius discussed that repayments and originations are hard to predict, but confident in long-term growth with origination efforts outpacing repayments.

Q: Casey Alexander asked about yield decline and future gains.

A: Henri Steenkamp and Christian Oberbeck discussed that yield decline is partially due to rate changes and repayments, and equity gains tied to company sales.

Q: Mickey Schleien asked about refinancing risk and excise tax.

A: Michael Grisius and Christian Oberbeck discussed that refinancing risk not highly vulnerable, and excise tax is a good financing source.

Q: Bryce Rowe asked about health of consumer-related businesses and leverage.

A: Michael Grisius and Christian Oberbeck discussed that consumer-related business marks reflect specific company dynamics, and leverage is structured safely with low-impact debt and solid asset base