Prepared remarks
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's First Fiscal Second 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. Following management's prepared remarks, we will open the line for questions. At this time, I would now like to turn the call over to Saratoga Investment Corp. Chief Financial and Chief Compliance Officer, Mr. Henri J. Steenkamp. Please go ahead.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal second quarter 2026 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for 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. Today, we will be referencing a presentation during our call. You can find our fiscal second quarter 2026 shareholder presentation in the Events and Presentations section of our Investor website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to results reflects our August end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. 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.
Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year, and NAV per share growth from the previous quarter. A strong return on equity beating the industry net originations of $22.4 million and, importantly, continued solid performance from the core BDC portfolio in a volatile macro environment, including the return of our Zollage to accrual status, thereby reducing our nonaccrual investments to just one representing only 0.2% of portfolio fair value.
Continuing our historical strong dividend distribution history, we announced a base dividend of $0.25 per share per month or $0.75 per share in aggregate for 2026. Our annualized third-quarter dividend of $0.75 per share represents a 12.3% yield based on the stock price of $24.41 as of October 6, 2025, offering a strong current income from an investment value standpoint. Our Q2 adjusted NII of $0.58 per share continues to reflect the impact of the past twelve-month trend of decreasing levels of short-term interest rates and spreads on Saratoga investments, largely floating rate assets, and the continued effect of the recent repayments. This has contributed to the buildup of $201 million of cash as of quarter-end available to be deployed accretively in investments or to repay existing debt. During the quarter, we continue to see very competitive market dynamics. These macro factors, our portfolio again saw multiple debt repayments in Q2 in addition to solid new originations. We originated $52.2 million including three follow-ons and new investments in multiple double B and triple B CLO debt securities. Our strong reputation and differentiated market positioning combined with our ongoing development of sponsor relationships continues to create attractive investment opportunities for high-quality sponsors. This has continued post quarter-end with three new portfolio companies that are closed or in closing in Q3 so far. We continue to remain prudent and discerning in terms of the new commitments and the current volatile environment. 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 $995.3 million portfolio in the current environment. With all four historically challenged portfolio company situations resolved. One of these restructurings, Zollage, is seeing improved financial performance and has been returned to accrual status this quarter. Our current core non-CLO portfolio was marked up by $3.9 million this quarter, and the CLO and JV were marked down by $300,000. We also had $200,000 of net appreciation in our new double B and triple B CLO debt investments and a further net realized gain of $100,000 from an escrow payment on our modern campus investment, resulting in fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter-end, our total portfolio fair value was 1.7% below cost, while our core non-CLO portfolio was 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the second quarter, our net interest margin decreased from $15.1 million last quarter to $13.1 million driven by a $2.1 million decrease in non-CLO interest income. This decrease was due first, average assets decreased $11 million or 1.1% to $954 million. Second, the timing of originations and repayment closings during the current and previous quarter with repayments more fully reflected in earnings and the full impact of new originations still having to flow through. Third, the absolute yields on the non-CLO portfolio decreased from 11.5% to 11.3% as a result of SOFR rates resetting from earlier reductions combined with the impact of lower-yielding new originations during the quarter. In addition, the full-period impact of the 200,000 shares issued to the ATM program in Q1 and the partial impact of the additional 400,000 shares issued in Q2 resulted in a $0.02 per share dilution to NII per share. Our overall credit quality for this quarter remains steady with 99.7% of credits rated in our highest category, with now just one investment remaining on nonaccrual status. Pepper Palace, which has been successfully restructured, represents only 0.2% of fair value and cost, respectively. With 84.3% of our investments at quarter-end in 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. As we continue to navigate the challenges posed by the current geopolitical tensions 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 disciplined underwriting standards to continue to steadily increase the size, quality, and investment performance of our portfolio in the long term and deliver attractive risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity, and NAV preservation remain paramount for us. At a quarter-end, we maintained a substantial $407 million of investment capacity to support our portfolio companies with $136 million available to our existing SBIC three license, $70 million from our two revolving credit facilities, and $201 million in cash. This level of cash improves our current regulatory leverage from 166.6% to 186.5% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investment's fiscal 2026 second quarter key performance indicators as compared to the quarters ended 08/31/2024, and 05/31/2025. Our quarter-end NAV was $410.5 million, up 10.3% from $372.1 million last year, and up 3.6% from $396.4 million last quarter. Our NAV per share was $25.61 down from $27.07 last year and up from $25.52 last quarter. Our adjusted NII was $9.1 million this quarter, down 50.1% from last year and down 10.5% from last quarter. Our adjusted NII per share was $0.58 this quarter, down 56.4% from last year and down 12.1% from last quarter. Adjusted NII yield was 9% this quarter, down from 19.7% last year and 10.3% last quarter. The latest twelve months return on equity was 9.1%, up from 5.8% last year and down slightly from 9.3% last quarter and above the industry average of 7.3%. While last year saw markdowns due to a small number of credits in our core BDC, this illustrates how our recent results have delivered an ROE of 9.1% for the last twelve months, above the industry average of 7.3%. Additionally, our long-term average return on equity over the past eleven years of 10.1% is well above the BDC industry average of 7%. Our long-term return on equity has remained strong over the past decade, beating the industry eight of the past eleven years and consistently positive every year. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC fifteen years ago despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter. The recent AUM decline over the past year does not detract from our expectation of long-term AUM growth. The quality of our credits remains strong, and with just one recently restructured investment remaining on nonaccrual, Pepper Palace, our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline, while at the same time being appropriately cautious in this evolving and volatile credit and 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 of our portfolio. Thank you, Chris. Slide five highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was 15.8 million, increasing from 15.3 million and 13.7 million shares for last quarter and last year's second quarter, respectively. Adjusted NII was $9.1 million this quarter, down 50.1% from last year and 10.5% from last quarter. This quarter's decrease in adjusted NII as compared to the prior quarter and prior year were both due to lower AUM and base interest rates. The decrease from the previous year's second quarter was also largely due to the non-recurrence of the $7.9 million Noland investment interest recognized last year that was previously on nonaccrual. The weighted average interest rate on the core BDC portfolio of 11.3% this quarter compares to 12.6% as of last year, 11.5% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year. Total expenses this quarter, excluding interest and debt financing expenses, base management fees, and incentive fees, as well as income and excise taxes, increased $300,000 to $2.5 million as compared to $2.2 million last year and decreased $300,000 from $2.8 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter, and up from 0.7% last year. Also, we have again added the KPI 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. Slide 30 is a new slide we added last quarter, comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.3% of cost is significantly lower than the industry average of 3.4%. This decreased from 0.6% last quarter due to our Zollage investment returning to accrual status. This highlights the current strength in credit quality of our core BDC portfolio. Moving on to Slide six. NAV was $410.5 million as of fiscal quarter-end. A $14.1 million increase from last quarter and a $38.4 million increase from the same quarter last year. During this quarter, $11.4 million of new equity was raised at or above net asset value, respectively through our ATM program. This chart also includes our historical NAV per share which highlights how this important metric has increased 23 of the past thirty-two quarters, including by $0.9 this quarter. Over the long term, our net asset value has increased since 2011 and grown by $3.64 per share or 16.6% over the past eight years. On 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 down $0.8 in Q2, primarily due to, first, the decrease in non-CLO net interest income during the quarter up $0.10 due to recent decreasing AUM and base rates, and second, dilution from the increased DRIP and ATM program share count of $0.2. This was partially offset by both the decrease in operating expense of $0.2 and increases in the CLO and BB debt investments interest income of $0.2. On the lower half of the slide, NAV per share increased by $0.9 primarily due to net realized gains and unrealized appreciation of $0.27 including deferred tax benefits, partially offset by the 17¢ under-earning of the dividend and a $0.1 net dilution from the ATM and DRIP programs. Slide eight outlines the dry powder available to us as of quarter-end, which totaled $406.8 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facility. This quarter-end level of available liquidity allows us to grow our assets by an additional 41% without the need for external financing, with $201 million of quarter-end cash available and thus fully accretive to NAV to NII when deployed, and $156 million of available SBA debentures with its low-cost pricing. This is also very accretive. In addition, all $296 million of our baby bonds effectively all our 6% plus debt is callable now, creating a natural protection against potential continued future decreasing interest rates which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity, especially taking into account the overall conservative nature of our balance sheet, in that most of our debt is long-term in nature. Additionally, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would like to move on to slides nine through twelve to review the composition and yield of our investment portfolio. Slide nine highlights that we have $995 million of AUM at fair value, and this is invested in 44 portfolio companies, one CLO fund, one joint venture, and numerous new double B and triple B CLO debt investments. Our first lien percentage is 84.3% of our total investments, of which 22% is in first lien last out positions. On Slide 10, you can see how the yield on our core BDC assets excluding our CLO investments has changed over time, especially this past year reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 11.3% from last quarter's 11.5%, reflecting further core base rate reductions. The CLO yield decreased to 11.8% from 13.7% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield in the eight to ten percent range. Slide 11 shows how our investments are diversified primarily through the U.S. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 39 distinct industries, in addition to our investments in the CLO, JV, BB, and BBB CLO debt securities, which are included as structured finance securities. Moving on to Slide 13, 7.9% of our investment portfolio consists of equity interest, which remains an important part of our overall investment strategy. This slide shows that for the past thirteen fiscal years, we had a combined $43 million of net realized gains from the sale of equity interests, or sale or early redemption of other investments. 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. That concludes my financial and portfolio review. Our chief investment officer, Michael Joseph Grisius, will now provide an overview of the investment market.
Thank you, Henri. Today, I will give an update on the market since we last spoke in July, and then comment on our current portfolio performance and investment strategy. Year to date, deal volumes in our market have been down significantly as compared to 2024 and are down further still as compared to 2021 through 2023. 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. Although the commencement of decreasing rates might help with that, 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. Market dynamics are at their most competitive level since the pandemic. We've also experienced repayment activity with some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing have made it more difficult to find quality new platform investments than in prior periods. With some viable concerns about the longevity of the current issuer-friendly environment, due to both market-driven and macroeconomic factors, we remain vigilant in our underwriting. As we noted on last quarter's call, this may naturally prompt the question of what is our approach to operating in this difficult deployment environment? In summary, first, we will stay disciplined on asset selection. Second, we will invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us. Third, we will continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace combined with our 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. Before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing with management and ownership is greater. 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. Additionally, during this past quarter, we continued to invest in multiple different CLO BB and BBB securities across eight different CLO managers for a total notional amount of $26.3 million. 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. We anticipate third-party managed CLO BBs, and to a lesser extent, CLO junior BBBs will play an increased 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. Now our underwriting bar remains high as usual. In a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies, as demonstrated with 13 follow-ons in calendar year 2025 thus far, and we have invested in three new platform investments this calendar year as well. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams. During the quarter, our Zollage investment returned to accrual status, reflecting its improved financial performance, leaving just Pepper Palace on nonaccrual, although we are still actively managing both, as discussed in previous quarters. This is a significantly positive development as now only 0.2% of the portfolio at fair value and cost, respectively, are on nonaccrual status. In general, our portfolio companies are healthy, and the fair value of our core portfolio, our core BDC portfolio, is 2.1% above cost. 84% of our portfolio is in first lien debt, generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Looking at average leverage on this slide, you can see that industry debt multiples move closer to six times with unitranche in the mid-fives. Total leverage for our overall portfolio is 5.34 times, excluding Pepper Palace. Now Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of the calendar year 2024 despite the current M&A activity in the lower middle market remaining low. This recent increase of deal sourced is a result of our recent business development initiatives, with 20 of our 51 term sheets issued over the last twelve months being from deals that came from new relationships. 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 the best investments. Our originations this quarter totaled $52.2 million consisting of three follow-on investments totaling $25.9 million and double B and triple B CLO debt investments of $26.3 million. Subsequent to quarter-end, we closed or currently have in closing in our core BDC portfolio approximately $42.7 million of new originations in three new portfolio companies and two follow-ons, including delayed draws. Two of the three new portfolio companies are with new relationships. As you can see on slide 16, our overall portfolio credit quality remains solid, as demonstrated by the actions taken and outcomes achieved on the nonaccrual and 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. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together fifteen years ago, we've invested $2.34 billion in 122 portfolio companies, and have had just three realized economic losses on these investments. Over that same time frame, we've successfully exited 84 of those investments, achieving gross unlevered realized returns of 14.9% on $1.29 billion of realizations. The weighted average return on our exits this quarter were consistent with our track record at around 14%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains year to date were $3 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. As mentioned, we have only one investment on nonaccrual, although Pepper Palace has been restructured, we're still in it as red with a fair value of $1.8 million. Pepper Palace continues to be managed actively with several initiatives underway. Additionally, during the quarter, our overall core non-CLO portfolio was marked up by $3.9 million of net appreciation including Zollage and Pepper Palace, reflecting the strength of the overall portfolio. 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. Now, moving on to slide 17, you can see our second SBIC 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 SBIC three license with a $136 million of lower cost, undrawn debentures available allowing us to continue to support US small businesses, both new and existing. This concludes my review of the market. And I'd like to turn the call back over to our CEO, Chris?
Thank you, Mike. As outlined on slide 18, our latest dividend of $0.75 per share in aggregate for the first quarter ended 08/31/2025 was paid in three monthly increments of $0.25. Recently, we declared that same level of 75¢ for the quarter ending 11/30/2025, marking the third quarter of our new dividend payment structure. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors including the current interest rate macro environment's impact on our earnings. Moving to slide 19. Our total return for the last twelve months, which includes both capital appreciation and dividend, has generated total returns of 22%, beating the BDC index's 4% for the same period by over five times. Our longer-term performance is outlined on the next slide, 20. Our five-year and three-year returns both place us above the BDC index. Since Saratoga took over management of the BDC in 02/2010, our total return has been almost three times the industry's at 862% versus the industry's 291%. On slide 21, you can further see our last twelve 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, NAV per share, NII yield, and dividend growth and coverage, all of which reflect the value of our shareholders are receiving. While NAV per share growth and dividend coverage are lagging this past year, this is largely due to last year's two discrete nonaccrual investments previously discussed. In addition, we've had significant recent repayments of successful investments that have reduced this year's fiscal year NII thus far, resulting in healthy levels of cash available for deployment. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We will also continue to be one of the few BDCs who have grown NAV accretively over the long term, with our long-term return on equity at 1.5 times the industry average and the latest twelve-month return on equity also beating the industry by 180 basis points. Moving on to slide 22. All of our initiatives discussed on this call 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 on 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 highest levels of management ownership in the industry at 10.8%, ensuring we are strongly aligned with our shareholders. Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we are encouraged by the health and resilience of our portfolio and the continued strength of our pipeline. Backed by our experienced management team, disciplined underwriting, and solid balance sheet, we are well positioned to further expand the size and quality of our portfolio, drive consistent investment performance, and deliver attractive risk-adjusted returns for our shareholders over the long term. Recognizing the challenges posed by the ongoing tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure, and liquidity place us in a strong position to successfully address these types of uncertainties. In closing, I would again like to thank all of our shareholders for their ongoing support. And I would now like to open the call for questions.
Questions and answers
Thank you. As a reminder, to ask a question, please press 11 on your telephone. And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Erik Edward Zwick from Lucid Capital Markets.
Thanks. Good morning, everyone. Wanted to first say, I appreciate the slides 19 through 21 where you showed some comparisons between your performance and peers. In looking at slide 21, you know, one metric that stands out or maybe you're currently, you know, a little bit below the peer mean is just on the dividend coverage. And I know, Chris, you kind of addressed some of the commentary there about, you know, some of the factors that have impacted that. So just kind of curious from your perspective, given the outlook for some additional headwinds from the outlook for lower short-term rates, what levers and strategies do you feel are, you know, the easiest for you to pull at this point to potentially improve the dividend coverage and then how much of a priority is that at this time?
Well, I think that's a, you know, very important question, something that we're evaluating at all times here. I think, you know, there's a longer-term and a shorter-term perspective on everything in life and this in particular. And I think if you look at the dynamics of our portfolio, I think one thing that we've done, you know, we're proud of doing well is the solidity of our portfolio performance. Now we're back on an increasing NAV trajectory. I think that contrasts with a lot of what's going on in private credit generally. There's a lot of deterioration. And I think if you look at macro discussions of private credit these days, there's lots of concern. There's sort of like a grinding, you know, different numbers are out there, four or 5% losses grinding through the system. You know, higher interest rates, all that type of thing. So we've been able to construct a portfolio that's kind of, you know, avoided those major problems. So that has been project number one for us was making sure we have a super strong portfolio, consistently strong credit underwriting. I think in terms of other macro factors, I think everyone's quite aware that the M&A environment has been quite muted for the last few years. The supply of private credit opportunities is just not as large as it has been. Now the backlog of future M&A has increased a lot, but it just hasn't happened. And so a lot of refinancing activity has taken place recently.
And so we have found that putting money to work at our credit standards and underwriting standards has been, you know, a little more challenging than it has been, in other years. But that doesn't deter us from maintaining our standards. We've got an enormous pipeline, and we're looking at lots and lots of deals. Our ability to deploy capital could turn very quickly. I mean, we have a slightly higher hit rate and we could deploy a fair amount of capital, given all the things that we see right now. As Mike had mentioned, we are seeing an increase in deal flow and an increase in M&A, all those types of things. So we may be coming out of this sort of, you know, highly muted M&A environment. We feel confident that we will be able to deploy our capital, and we do have, you know, over $400 million available.
That's fantastic color. Thank you. Both of you. Maybe a quick follow-up Michael, one of your comments about some of the larger competitors moving down market. Do you feel like that's likely a kind of shorter-term trend and once M&A comes back and there's more activity and, you know, not everyone's chasing all of the smaller deals? That they kind of go back up to where they're historically have operated?
I would expect that. I can't say that with certainty. But it doesn't make sense for some of the platforms that we see, you know, chasing $20 million deals or even $30 million deals when you look at their size. It'd be like us running around chasing 2 or $3 million deals. It's just the math doesn't work. But when a dearth of deals is in the marketplace, you'll see people sort of reach down into a lower end of the market. I've seen that historically. So I wouldn't expect at least my judgment would be, I wouldn't expect to see them permanently residing in our end of the market.
Got it. And one last one for me, and then I'll step away. You know, I think slide 13 is a very powerful slide that shows kind of the cumulative gains that you guys have been able to record over time. I guess looking over the near term with the 8% common equity portfolio now, any near-term opportunities that you guys potentially see for additional gains? Or I would think, you know, M&A coming back would potentially help that prospect as well?
I think the valuations that we have take into account what we think the appropriate valuation is. So I think what you see in our valuation, which we're very proud of, I don't know how many BDCs actually have their core portfolio above their cost basis. Ours is above its cost basis, but I wouldn't say, you know, that I would say the valuations we have now are the appropriate reflection of fair value.
The other covers, so any other comment I just make on that. Excuse me, is the yeah. This has been sort of a feature of being in the small or middle market. And what we've been able to do, which is we often take equity co-investments when we do a loan, and we do it as systematically as we can. Not every deal allows us in and not every deal do we want to be in a very large scale. But, in general, systematically, we're taking equity positions in many of the companies that we're underwriting. Over time, obviously, number one is not losing money on the basic loan. But over time, those equity gains have contributed quite a bit to our NAV and NAV per share growth, and we're just going to continue that. It's hard to say, you know, we’ve had a couple of mega gains in the past, but in general, it's more of a consistent across the portfolio, you know, steady kind of realization of these positions that basically add to the portfolio performance.
Thank you. Thanks for taking all my questions.
Thank you. One moment for our next question. Our next question comes from the line of Casey Alexander from Compass Point Research and Trading.
Hi. Good morning. And thanks for taking my questions. Mike, I'm actually fascinated by slide 15, which you alluded to. You know, term sheets up 143% but deals executed down 36%. I almost feel a level of frustration related to those two statistics in that you're finding deals to bid and the old story used to be that given lack of small differences in deal terms, people would go ahead and go with you guys because of the certainty of close, reputation, knowing what you would do in distressed situations. But I guess the difference between deal terms is large enough now that that's kind of been put off to the side, and people are just taking deals away from you because the price differential is just too much. Am I reading that wrong?
Well, I think there are two things. I think it still is very much the case that we win many opportunities because of our reputation in the marketplace. People are impressed with the quality of the work that we do to understand their businesses so they get confident that we're going to be very good financial partners to them. That wins us a lot of deals. It also gets us a lot of repeat business. We still have confidence in that core feature to our business model, which is reflective of really the team that we have here, which we think is best in class in the industry. Having said that, when the market gets really competitive and you start seeing at some level competitors offering much cheaper pricing, really relaxed covenant levels, things of that nature. You know, those things aren't going to win the tie any longer. You do see certainly see some deals go away from us. I would add that the work we’ve been doing, especially more recently over the last six to nine months, doubling down our business development efforts and really investing significantly in growing our presence in the lower middle market, we are seeing a lot more quality opportunities. Our objective is to stay away generally from more commoditized scenarios where it’s just somebody gets a pricing grid out and a terms grid, and they just choose the person that’s offering the best terms. Where we really shine is when we’re getting a chance to interact with the ownership and the management team, and do a lot of things that I just mentioned. We feel confident that we’ll continue to find plenty of opportunities in our market to differentiate ourselves in the way that we described. We, of course, need to be competitive. Pricing has come down, and we need to be able to respond to that, but we’re not going to take the one place that we’re not going to lower our bar is on credit quality. That’s reflective of how our portfolio has performed historically as well as where it’s sitting today.
Alright. Thank you. Chris, this is for you. I have been doing this for a long time, and I’ve never had an investor come to me and say, 'Gee, I wish my BDC owned a bunch of structured CLO securities.' In fact, the history of them in BDCs is not that great. I really want to understand the thought process that makes you believe that this is what your investors want?
I guess I'd be interested in understanding maybe at another time, if you could share with us the the bad experience in CLO structured securities you're aware of? Are you talking about equity investments in CLOs? When you say that?
There have been several BDCs that have had multiple different tranches of CLO securities. And over time, it has not improved their valuation. It hasn't necessarily been that great for their returns, and again, I don't know that that's what the mandate is that investors give you as a BDC.
I think it's fair to say that most of those CLOs are equity investments in CLOs, and we would agree that the record there is not very good. The securities that we're investing in are very different. They're way up the scale. We're investing in double B rated and even triple B minus rated securities. Because we've been in the business, we happen to know a lot about it, and we have significant research. We're happy to spend time with you on how we do the research. We see this as a niche investment area that has potential for outsized returns. That being said, we’re just going to continue to make wise decisions on credit and will be open to adjustments as warranted by the market conditions. We’ll always communicate any substantive changes to our structure and strategy and consider feedback from our investors during this process.
I appreciate the clarification between equity tranches and the tranches that you're investing in. My last question and I think this has been addressed, but I think it's worth approaching again. I mean, NII this quarter was 17¢ below the dividend. You look at the stock, it's down a buck and a half over the last two days. What's that telling you?
I think the question of the dividend and earnings is something that we evaluate at all times, and I think your question is a very good one. We want to balance short-term considerations with a long-term perspective. We feel that yes, rates may come down and deal volumes may be going up. We've had quarters where we've deployed over $100 million. So we feel like we're not that far off of being able to close that gap. For a variety of reasons, we think we're in a strong position to maintain our dividend.
Thank you for taking my questions.
Thank you. One moment for our next question. Our next question comes from the line of Robert James Dodd from Raymond James.
Hi guys. Following up from some of Casey's questions. The comment I think that Mike made was you expect these CLO debt tranches to be a more significant part of the investment strategy going forward. How much of the overall portfolio should we contemplate that strategy reaching over the next twelve months, give or take?
I think that, you know, again, we're very cautious about predicting, you know, in calls like this. I think when I said that, I think I was referring to the fact that we find it a very attractive investment category. Right now, Henri, we're around 5%. We would be comfortable being larger, maybe twice that much. We haven't made those determinations. As with everything, we make our investments credit by credit at a time. There's some seasonality with this marketplace.
Got it. Just one additional thing. I don't think I double B CLO tranche necessarily classified as a first lien on scheduled investment. That's neither here nor there. The other question.
Rob, we obviously disclose it as part of our structured finance products category. We do clearly separate it in all of the disclosures.
The other question and I can't help but add this one thing because we don't want to get into too much of a sales pitch around it. But just as we've evaluated, as you can imagine, one of the things that makes us really attracted to those securities is that they've held up historically very well even in stressed environments. That particular tranche of securities where it resides has really held up well over time. I totally get that. I agree it usually leads to stubbed toes, but that can take a while for people to realize that.
Yeah. We're going to hold the line. I think the more important thing that we think about is just that as I mentioned before, it's such a massive market. Every time you go to a second-tier city and meet some of the accountants there or some of the brokers or business investment bankers that are living there, there are new sources of deals. We're doubling down our efforts there. We feel confident that we will find plenty of opportunities to do what we do best, and we are starting to see that in our pipeline.
Got it. Thank you.
One moment for our next question. Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann and Company.
Hi. Thanks for taking my questions. Henri, what's the spillover income for the quarter?
The remaining amount is around about sort of mid-2s, around $2.02 $32.50 a share at the moment.
Great. And then on the deck, it said the portfolio yields for the CLOs were 12.2%. Is that the GAAP yield? Or is the cash yield materially different?
That is the yield on all of what we call our CLO and CLO related instruments, Chris. So that includes, for example, the F note that we have in our existing CLO. It also includes the e note in our joint venture CLO. And then it includes all of these double B's and triple B's. So it's the blended weighted effective yield currently on all of that.
Great. Final question. I appreciate the market commentary talking about the M&A market, and that's quite helpful. But I couldn't help to notice that you guys have a large exposure to various software companies. My question really is, is AI reading starting to eat the lunch for a lot of these smaller software providers? And is that one of those sectors which could be under stress because of the encroachment of artificial intelligence?
It's a very good question. It's something that we're very focused on with all of our underwriting. So yes, indeed, AI can affect a software company. It can disrupt a software company. In that it can, in some cases, allow a competitor to enter the marketplace a little easier with fewer barriers to entry. In other cases, AI can be a really powerful enhancement to the value proposition of the software company. That's something that we look at very carefully in our underwriting. So when we're looking at the software companies that we underwrite, we're focused on and talking to industry experts about what the exposure is, what the barriers to entry are, and what the switching costs for a product would be. We look at companies that generally have high retention rates. Where the workflow is such an important part of daily use in the customer base. The product itself, if it's an enterprise software product, is attached to the system of record for the entire industry. Things of that nature are what we look at, and those are the types of deals we underwrite. While we do have a lot of businesses operating in a SaaS environment, we're incredibly selective around the businesses that we choose.
Great. Final question. Thank you for the detail. Final question. Given the upcoming debt maturities, and given the uncertain outlook for short-term rates, should we expect you guys to be utilizing the credit facilities to refinance that?
One of the things we've worked very hard, Chris, is around flexibility on our balance sheet and capital structure over the last years. That is an option. Generally, we look at the current capital structure that we have. We still have a little bit time. We've got a lot of capital available as well, so we’re going to assess it over the coming months on how best to either repay or refinance some of the maturities that we have coming up next year.
Everyone on the call should know that we don't need to go outside to refinance anything coming out. We have paths available to us already that don't depend on capital markets.
That's it for me. Thank you very much.
Thank you.
One moment for our next question. Our next question comes from the line of Mickey Schleien from Clear Street LLC.
Yes. Good afternoon, everybody. Actually, good morning. Few more questions from me. I appreciate your time. Henri, what strategies are you considering to perhaps get some of that cash out of the SBICs? For example, could they pay the BDC a dividend?
Yes, there are options that we have. Again, flexibility that we have around our capital structure. Firstly, we have not taken out any of our undistributable reserves for quite a period of time, probably a couple of years now, about eighteen months. That’s something that’s immediately available for us to take that cash out. Additionally, in our SBIC three, we've only got $59 million of debentures drawn. We’ve prefunded over $200 million of assets, which means we can take out the capital. So we have quite a number of different levers to pull there to get that cash out of the SBIC.
Thanks, Henri. To follow-up, one of the three follow-ons that you made last quarter was Comfort Care, which was already a large position. Now it's even larger which always gives me indigestion. So I’m curious what's attracting you to that portfolio company.
That is a good question. It's one that we love to talk about because it's such a great example of what we do and the types of businesses that we find. So we did that deal in February 2017 in support of one of our strongest sponsor relationships. Did a $10 million investment in a business that had a couple million dollars of EBITDA in an end-market that has terrific tailwinds serving the senior community for nonmedical home health. A lot of seniors are aging in place, so they've got terrific tailwinds there. It's a branded product with great franchisor economics. Since we’ve been in that business, not only has the core business grown incredibly successfully, but we’ve also supported them with additional debt to undertake successful acquisitions, augmenting the platform.