Saratoga Investment Corp 8.50% Q3 FY2025 earnings call

• Adjusted NII excluding onetime Knowland interest reserve reversal saw sequential increase. Latest 12 months return on equity is 9.2%, above industry average. Experienced healthy originations in new and existing portfolio companies, outsized redemptions of successful investments and continued over-earning of dividends. Evaluating use of calls on long-term balance sheet liabilities 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 four portfolio companies through two sales and two restructurings. Originations elevated with $85 million in new investments and follow-on investments. Quarter end cash position grew to $250 million due to outsized repayments. Overall credit quality steady with 99.7% of credits in highest category. Maintained substantial investment capacity to support portfolio companies.

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 reversal, adjusted NII per share increased $0.01 per share. 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. AUM is $960.1 million at fair value, invested in 48 portfolio companies, 1 CLO fund and 1 joint venture. First lien percentage is 86.8% of total investments. Core BDC yield decreased to 11.8% from 12.6% this quarter, CLO yield increased to 24.6% from 13.0% last quarter. 9.0% of investment portfolio consists of equity interest.

• Difficult to predict precise origination and redemption pace. Expectation of long-term AUM growth despite quarterly lumps. Confidence in ability to capitalize on potential uptick in M&A activity and deploy capital. Will assess using cash in SBIC II to repay debentures come mid-February. View sale of equity as long-term strategic decision for permanent capital.

• Uncertainty in M&A volume and interest rate levels affecting investment opportunities. Potential for continued challenges in portfolio companies, although four challenges resolved in past year. Impact of outsized repayments not fully reflected in current quarter's results yet. Market dynamics such as disconnect between buyer and seller transaction willingness, elevated interest rates affecting debt financing, and PE firms holding assets longer impacting deal activity.

Q: Eric Zwick asked about expectations for new growth vs repayments and mechanics of calling SBIC debentures.

A: Christian Oberbeck and Michael Grisius discussed that origination and redemption are hard to predict, with confidence in long-term deployment outpacing repayments. Henri Steenkamp explained mechanics of SBIC debenture calls.

Q: Casey Alexander asked about yield decline and rationality of selling equity.

A: Henri Steenkamp and Christian Oberbeck discussed yield decline reflection and viewed equity sale as long-term strategic.

Q: Mickey Schleien asked about refinancing risk and spillover taxable income.

A: Michael Grisius and Henri Steenkamp discussed refinancing risk and spillover taxable income status.

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

A: Michael Grisius and Christian Oberbeck discussed health of consumer-related businesses and leverage management structure