管理層發言
Good morning, ladies and gentlemen. Thank you for joining us. Welcome to the Saratoga Investment Corp. Fiscal First Quarter 2026 Financial Results Conference Call. Please be aware that this call is being recorded. At this time, I would like to hand the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please proceed, sir.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal first 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 first quarter 2026 shareholder presentation in the Events and Presentations section of our Investor Relations 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 Q1 results reflects our May 31 quarter-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 a 17.9% increase in adjusted net investment income per share from the previous quarter, continued growth of net asset value, a strong return on equity that outperformed the industry average, two new portfolio company investments, and a solid performance from the core BDC portfolio despite a volatile macro environment. We announced a base dividend of $0.25 per share per month, totaling $0.75 per share for the second quarter of fiscal 2026, building on our strong history of dividend distributions. This annualized dividend of $0.75 per share reflects an 11.8% yield based on the stock price of $25.44 as of July 7, 2025, providing strong current income from an investment perspective. Our Q1 adjusted net investment income of $0.66 per share shows the ongoing effects of the past year's declining short-term interest rates and spreads on our largely floating-rate assets, along with recent repayments. This resulted in $224 million in cash available for new investments or to repay existing debt. During the quarter, we observed slower deal volume and M&A activity in the lower middle market due to recent tariff changes and a reduction in new debt issuances. Despite these macro challenges, our portfolio saw multiple debt repayments and an equity realization in Q1, yielding $2.9 million in realized gains and $50.1 million in investments across two new portfolio companies, six follow-ons, and additional investments in BB CLO debt securities. Our strong reputation and unique market positioning, together with our ongoing development of sponsor relationships, continue to create attractive investment opportunities from high-quality sponsors, while we remain discerning about new commitments in the current volatile environment. We believe Saratoga is well-positioned to benefit from potential future economic opportunities and challenges. At the core of our robust operating performance is the resilience of our $968.3 million portfolio, with all four challenged portfolio company situations now resolved. Our core non-CLO portfolio saw an increase of $2.6 million this quarter, while CLO and JV investments were marked down by $0.2 million. Additionally, we realized net appreciation of $0.6 million from an equity realization and various debt repayments generated $2.2 million in lifetime realized gains, along with further gains of $0.7 million from escrow payments related to our Netreo and HemaTerra investments and $0.2 million in net appreciation from new BB investments. Consequently, the total fair value of our portfolio increased by $3.8 million this quarter. As of the end of the quarter, our total portfolio fair value was 2.1% below cost, while our core non-CLO portfolio was 1.7% above cost. The strong financial performance and solid earnings potential of our current portfolio demonstrate effective underwriting of our growing portfolio companies and well-chosen industry segments. During the first quarter, our net interest margin increased significantly from $13.7 million last quarter to $15.6 million, largely due to a $1.4 million rise in non-CLO interest income as the advantages of prior quarter originations were realized and repayments mainly took place late in Q1. Average yields remained relatively stable. This improvement was also bolstered by a $0.5 million decrease in interest expenses, reflecting a full quarter’s impact from the repayment of $44 million in SBIC II debentures at the close of the year and the partial period effect of retiring the $20 million 8.75% baby bond this quarter. Furthermore, the overall impact of the 1.2 million shares issued through the ATM program in Q4 and a partial impact from an additional 0.2 million shares in Q1 accounted for a $0.04 per share dilution in net investment income per share. The overall credit quality for this quarter remained stable, with 99.7% of credits maintaining our highest rating, while two investments remained on nonaccrual status, comprising only 0.3% and 0.6% of fair value and cost, respectively. With 90% of our investments by the end of the quarter in first lien debt, supported by strong enterprise values and balance sheets in historically resilient industries during stress periods, we believe our portfolio and company leverage are well-prepared for future economic conditions and uncertainties. As we navigate the challenges posed by the current geopolitical climate and broader underwriting volatility, we remain confident in our experienced management team, strong pipeline, solid leverage structure, and rigorous underwriting standards to enhance the size, quality, and investment performance of our portfolio over the long term and deliver exceptional risk-adjusted returns to our shareholders. As always, particularly in this uncertain environment, we prioritize balance sheet strength, liquidity, and net asset value preservation. At quarter end, we retained a significant $430 million in investment capacity to support our portfolio companies, with $136 million from our existing SBIC III license, $70 million from our two revolving credit facilities, and $224 million in cash. This cash level improves our current regulatory leverage from 163.8% to 188.1% net leverage, netting available cash against outstanding debt. Moving on to our fiscal '26 first quarter key performance indicators, our quarter end net asset value was $396.4 million, up 7.8% from $367.9 million last year and 0.9% from $392.7 million last quarter. Our adjusted net investment income was $10.1 million this quarter, down 29.3% from last year but up 26.2% from last quarter. Adjusted net investment income per share stood at $0.66 this quarter, down 37.1% from $1.05 last year and up 17.9% from $0.56 last quarter. The adjusted net investment income yield was 10.3% this quarter, down from 15.5% last year but up from 8.4% last quarter. The return on equity for the latest 12 months was 9.3%, increasing from 4.4% last year and 7.5% last quarter, which exceeds the industry average of 7%. Our net asset value per share was $25.52, down from $26.85 last year and $25.86 last quarter. Notably, the recent shift to monthly dividend distributions caused the March and April dividend record dates to fall within this first quarter, leading to a one-time dividend reduction of $0.50 in net asset value per share. Excluding this one-time event, net asset value per share would have risen to $26.02, indicating a $0.16 or 0.6% increase. Although last year saw markdowns in a small number of credits within our core BDC, our recent strong results have yielded a return on equity of 9.3% for the last 12 months, above the industry average of 7%. Furthermore, our long-term average return on equity over the past 11 years is 10.2%, significantly surpassing the BDC industry average of 6.9%. Our long-term return on equity has consistently remained strong for over a decade, outperforming the industry in 8 out of the past 11 years with positive results every year. The weighted average number of common shares outstanding in Q1 was 15.3 million, an increase from 14.5 million last quarter and 13.7 million in last year's first quarter. The adjusted net investment income this quarter was $10.1 million, a decrease of 29.3% from last year but an increase of 26.2% from last quarter. The increase in adjusted net investment income compared to the prior quarter was mainly due to the absence of the $2.4 million annual excise tax recognized in the previous quarter. The decrease from the first quarter of last year was primarily attributed to lower assets under management from recent significant repayments and reduced base interest rates. The weighted average interest rate on the core BDC portfolio was 11.5% this quarter, compared to 12.6% during the previous year's first quarter and 11.5% last quarter. The yield reduction from last year largely reflects decreases in the SOFR base rate over the past year. Total expenses for this first quarter 2026, excluding interest, debt financing expenses, management fees, incentive fees, and taxes, decreased by $0.1 million to $2.8 million compared to $2.9 million last year, but increased by $1.4 million from $1.4 million last quarter. This expense level constitutes 0.8% of average total assets on an annualized basis, remaining unchanged from last quarter and down from 1% last year. Our assets under management have consistently risen since we took over the BDC 14 years ago, despite a recent slight decline due to significant repayments. This quarter also saw significant repayments that offset solid originations. This recent decline does not diminish our long-term growth expectation for assets under management. The quality of our credits remains strong, with only the two recently restructured Pepper Palace and Zollege credits on nonaccrual status, consistent with last quarter. Our management team is working diligently to sustain this positive long-term trend as we deploy our significant available capital into our pipeline, while remaining cautiously aware of the evolving credit market and volatile economic environment. With that, I would like to now turn the call over to Henri to review our financial results and the composition and performance of our portfolio.
Thank you, Chris. Moving on to Slide 6. NAV was $396.4 million as of fiscal quarter end, a $3.7 million increase from last quarter and a $28.5 million increase from the same quarter last year. During this quarter, $6.4 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 22 of the past 31 quarters, seeing a decrease this quarter solely due to the transition to monthly dividends in March, resulting in the March and April dividend record dates both falling into the first fiscal quarter, reducing NAV per share by an additional $0.50. Excluding this one-time reduction, NAV per share would have risen to $26.02, reflecting a 0.6% increase. Over the long term, our net asset value has steadily increased since 2011 and grown by $3.55 per share or 16% over the past 8 years. 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 2 years. Slide 30 is a new slide comparing our nonaccruals to the BDC Industry. You will see that our nonaccrual rate of 0.6% of cost is significantly lower than the industry average of 3.7%, and that the broader industry has experienced an increase in nonaccruals of 0.3% since the previous quarter, while ours have remained steady and low. This highlights the strength in credit quality of our core BDC portfolio. Moving on to Slide 7. 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 up $0.10 in Q1 primarily due to: first, the nonrecurrence of the annual excise tax, which was $0.13 in the previous quarter related to unpaid spillover; and second, an increase of $0.09 in non-CLO net interest income, reflecting the full period impact of Q4 originations. This was offset by an increase in operating expenses, excluding excise taxes and dilution from the increased net ATM and DRIP share count, reducing NII by $0.06 and $0.04, respectively. On the lower half of the slide, NAV per share decreased by $0.34, primarily due to the $0.50 reduction from the change to a monthly dividend payment structure discussed earlier. Net realized gains and unrealized depreciation added $0.25 to NAV per share. There was no dilution from the ATM and DRIP program. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $430.3 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 44% without the need for external financing, with $224 million of quarter end cash available, and that's fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing also very accretive. In addition, all $301 million of our baby bonds, effectively all our 6% plus debt is callable now, creating a natural protection against potential continuing 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 and especially taking into account the overall conservative nature of our balance sheet. Also, 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 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $968 million of AUM at fair value, and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and various new BB investments. Our first lien percentage is 86.9% 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 remained unchanged from last quarter at 11.5%, despite the 10 basis points reduction in average SOFR. The CLO yield decreased to 13.7% from 16.4% last quarter, reflecting the inclusion of the new BB CLO debt investments to this category that have a yield of approximately 10%. Slide 11 shows how our investments are diversified through primarily the U.S., and on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 40 distinct industries in addition to our investments in the CLO JV and BB CLO debt securities, which are all included as structured finance securities. Moving on to Slide 13. 7.9% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13 fiscal years, we had a combined $42.5 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This includes $2.2 million of realized gains on the sale of our identity equity investment this quarter. 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 Grisius, will now provide an overview of the investment market.
Thank you, Henri. Today, I will give an update on the market since we recently spoke with everyone in May and then comment on our current portfolio performance and investment strategy. Year-to-date deal volumes in our market have been down significantly every month 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. 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. We've also experienced repayment activity from some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing has made it more difficult to find quality new platform investments than in prior periods. As we noted on last quarter's call, this may naturally prompt the question of, what is our approach to operating in this difficult asset deployment climate. First, the Saratoga management team has successfully managed through a number of credit cycles over many years, and that experience has made us particularly aware of being disciplined when making investment decisions and being proactive in managing our portfolio. Taking this approach has allowed us to produce unlevered realized returns in our core non-CLO portfolio of 15%. The weighted average return on our exits this quarter were consistent with our track record at 14.9%. We'll continue to invest in high-quality assets and will not lower our investment standards and take on more risk than we feel is prudent, just because the market is presently difficult. We believe our shareholders will appreciate this approach in the long run. Second, we're greatly expanding our business development efforts and are investing in resources to provide greater bandwidth for our professionals to dedicate themselves to this effort. We have a new Managing Director joining us this summer, who has a strong origination and investment track record in our markets. We've also recently hired a VP of Portfolio Management and a business development analyst, and we have 2 new investment associates joining us this summer. All of these investments will allow our professionals to better leverage themselves and shift more emphasis on investment origination. While we have developed a strong presence in the lower end of the middle market, the number of companies in our marketplace is vast compared to the traditional middle market and is occupied with hundreds of thousands of businesses. We believe the number of deal sources in our market that we have yet to build relationships with far exceeds the number that we have. Further, our market benefits from a natural underpinning of deal flow, driven by business owners seeking to transition ownership as they age. We're in the early stages of our expanded business development initiatives, but have already seen some positive results in our current pipeline and in the most recent portfolio company we closed in April. Third, our existing portfolio serves as a healthy source of deal flow. Our payoffs, as again seen this quarter, tend to be lumpy as our portfolio investments reached scale and maturity, while our new portfolio companies tend to be small initially and provide an embedded resource for asset deployment as we support their growth. Because of the nature of the way we invest our capital in this manner, follow-on activity has exceeded our new portfolio company deployment in each of our past 5 fiscal years. In summary, the way we're approaching the currently challenging environment is to first stay disciplined on asset selection; second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us; and third, 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. In the midst of these market conditions, we had $50 million of gross originations in the lower end of the middle market this quarter. Now before leaving this topic, I'll also point out that we continue to believe that the lower end of the 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 interaction 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. A new initiative I'd like to highlight is that we have recently seen a new opportunity to invest in BB and BBB CLO debt securities. 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. Further, our underwriting process driven by quantitative metrics that measure individual manager and deal-level performance allows us to identify those managers and deals we believe will outperform over the long term and provide attractive risk adjusted returns for our shareholders. During this past quarter, we invested in 9 different CLO BB securities across 7 different CLO managers for a total notional amount of $13 million. We anticipate third-party managed CLO BBs and, to a lesser extent, CLO BBBs will play a 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. 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 8 follow-ons in calendar year 2025 thus far, and we have invested in 3 new platform investments this calendar year as well. More recently, during calendar Q2, we closed 1 new portfolio company. 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. They remain the same 2 portfolio companies that we are actively managing as discussed in previous quarters. But in general, our portfolio companies are healthy, and the fair value of our core BDC portfolio is 1.7% above its cost. 86.9% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed 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. At quarter end, we have the same 2 investments on nonaccrual, namely Pepper Palace and Zollege, consistent with last quarter. We continue to hold them on nonaccrual following their restructurings, with Zollege particularly demonstrating notable improvement in company performance. Looking at leverage on the same slide, you can see that industry debt multiples increased north of 5x with unitranche loans in the mid-5s. Total leverage for our overall portfolio decreased slightly to 5.22x, excluding Pepper Palace and Zollege, reflecting lower leverage across several portfolio companies. 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 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 18 of the term sheets issued over the last 12 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 on the best investments. As you can see on Slide 16, our overall portfolio credit quality and returns remain 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 investments. Our approach and underwriting strategy has always been focused on being thorough and cautious at the same time. Since our management team began working together almost 15 years ago, we've invested $2.36 billion in 122 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 82 of those investments, achieving gross unlevered realized returns of 15% on $1.26 billion of realizations. Even taking into account the recent credit write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.4%. Total realized gains for the quarter were $2.9 million, of which this quarter's identity realization produced a gross IRR of 22.6% with a $2.2 million realized gain, continuing our track record of successful capital deployment. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien debt. Consistent with previous couple of quarters, we have only 2 investments on nonaccrual. Although both Pepper Palace and Zollege have been restructured, we are still classifying Pepper Palace as red and Zollege as yellow, with a combined fair value of $6.9 million, including equity. Pepper Palace continues to be managed actively with several initiatives underway. Zollege has demonstrated notable improvements in company performance that resulted in a $1.1 million appreciation in its value this quarter. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.6 million of net appreciation, including Pepper Palace and Zollege, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital, and our long-term performance remained strong as seen by our track record on this slide. 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 III license with $136 million of lower cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back to our CEO. Chris?
Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended May 31, 2025, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended August 31, 2025, marking the second 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 and macro environment's impact on our earnings. Moving to Slide 19. Our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 22%, beating the BDC index's 3% for the same period by over 7x. Our longer-term performance is outlined on the next Slide 20. Also, our 5-year and 3-year returns both place us above the BDC index. And since Saratoga took over management of the BDC in 2010, our total return has been 826% versus the industry's 294%. On Slide 21, you can further see our last 12 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 our shareholders are receiving. While NAV per share growth and dividend coverage are lagging in this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed as well as the aforementioned impact of the shift to a new dividend structure impacting this quarter's NAV per share growth. In addition, we had significant recent repayments that have reduced Q1's NII as AUM has recently shrunk, resulting in us having healthy levels of cash to deploy. 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. We 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 1.5x the industry average. 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 in 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 11.1%, ensuring that we are strongly aligned with our shareholders. Looking ahead on Slide 23, as we navigate through a reshaped yield curve environment with decreasing short term and increasing long-term rates and an uncertain economic outlook in the face of an ever-evolving geopolitical landscape, we remain confident that our reputation, experienced management team, robust pipeline and historically strong underwriting standards and time and market tested investment strategy will serve us well to continue to steadily increase our portfolio size, quality and investment performance over the long term. This will allow us to deliver exceptional risk adjusted returns to shareholders and to navigate through the current challenges in the market and uncover opportunities in the current and future environment. Recognizing the challenges posed by the current tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure and liquidity places 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. I would like to now open the call for questions.
分析師問答
And our first question will be coming from Erik Zwick of Lucid Capital Markets.
I wanted to kind of just start on your commitment to kind of getting back to AUM expansion, and I realize there's some variables outside of your control that have kind of driven the declines over the past couple of quarters. But as you kind of frame up the opportunities now, it sounds like the efforts you've made on kind of the nonsponsored origination side are showing some positive trends. I think the things that are harder to predict now are just the level of prepayments going forward. And I guess, to some extent, you may have some visibility into potential relatively large maturities that could be coming due over the next quarter or 2. But as you kind of frame those all together, what is your expectation for your ability to return growing the portfolio over the next quarter or 2?
I’ll begin and then let Mike take over. You articulated the situation well. Redemptions, like originations, are challenging to forecast. A key focus for us has been on ensuring the quality of our portfolio. As Henri highlighted in his slides, although our assets under management have decreased because net originations are less than redemptions, the credit quality of our portfolio remains very strong. We believe our credit performance significantly outshines the industry standard. Currently, there is a notable influx of capital in the private credit sector, while at the same time, the overall mergers and acquisitions market has slowed down due to tariffs and other factors. M&A has typically been a major activity driver, resulting in extensive financing. There's considerable refinancing activity, but not much activity driven by M&A. This creates a mismatch between supply and demand, and we need to handle that with care. Adding subpar assets is not in our best interest or that of our shareholders, so we've had to be cautious. We have encountered many opportunities but haven't acted on as many due to concerns over quality, particularly regarding credit risk and pricing. Nevertheless, we have revitalized our new business initiatives. As Mike mentioned, we’ve been bringing in new talent, and our pipeline looks promising. We expect this to yield positive results over time. Importantly, we have learned to be selective about our choices and markets, prioritizing quality credits over aggressive AUM growth for sustainable success. Mike, would you like to add anything?
Yes, let me provide some additional insights and address one of your points directly. Regarding redemptions, as Chris mentioned, they can be quite unpredictable. However, based on our current knowledge, we don’t anticipate any significant changes, so we expect the redemption experience to align with what we've seen historically. Our pipeline is expanding, not just with non-sponsored deals but also with various lower middle market sponsors and investor groups that we're building new relationships with, which we haven't done in the past. The lower end of the middle market we operate in is highly fragmented, and it's remarkable how we discover new groups every time we visit different cities looking for deal opportunities. Taking a step back, being at the lower end of the middle market is beneficial for our business. It’s a key reason why we've been able to achieve significant returns—around 15% over time—with low volatility and loss rates, primarily in senior debt, which we find very appealing. This segment allows for more effective underwriting and greater value addition with our borrowers and ownership groups. Unlike the upper end of the market, where transactions often focus on obtaining the best price and terms, we can forge genuine relationships with management teams and ownership groups. We typically have Board observation rights and maintain active interactions with the teams we lend to, which helps us establish a solid pipeline for follow-on opportunities. As noted in my previous remarks, over the last five years, our follow-on activity has actually surpassed our new origination activity in terms of dollars, reflecting the strong relationships we've established with our borrowers. However, this approach requires substantial hands-on work, not only in asset selection and underwriting but also in portfolio monitoring. Staying closely connected with the businesses we support enables us to foster growth in follow-on activity, but it demands more time. In a typical market with normal levels of deal activity, we could maintain a healthy growth rate, and our origination pace would generally exceed our repayments. Currently, in the lower middle market, where deal activity is at an all-time low, we've recognized the need to invest in our people. The investments I mentioned earlier are designed to allow our deal professionals to devote more time to outward-facing origination activities and to work more effectively. We are already beginning to see the positive impact of this on our pipeline, and we believe it will enable us to return to a growth trajectory while remaining disciplined in our asset selection.
I appreciate the very detailed commentary there. Kind of taking some of that and realizing that the near-term growth is likely to continue to still be challenged kind of given all of the factors that you've mentioned there, it seems that the run rate of NII could continue to come in below the kind of declared dividend here for the near term. So could you just remind us, I don't think I have it for the most recent quarter, kind of where the spillover level is, either dollar terms or on a per share basis?
Yes, Erik. As you may recall, we had just over $3 at year-end, and we paid $1.24 in this quarter. Currently, we're just under $2 from the February spillover. Additionally, we've also earned since March 1, so we're likely closer to the $2.50 level right now.
Henri, okay. And then just kind of continuing on the theme of growth being challenged in the near term, you have quite a bit of liquidity on the balance sheet and capacity to lend further. You do have some notes coming due later this year and some in early calendar '26 as well. So just kind of thoughts on how you would look to kind of replace those today with new notes versus maybe using the revolver. And I guess, there's also the unknown of where rates may be. I think the market over the next year is forecasting about another 100 basis points in Fed funds cut. But whether or not we get those, I think still remains to be seen. But just curious on your thoughts on kind of the liability and funding side of the balance sheet.
I believe we tend to address those challenges as they arise because there are many factors involved in our considerations. By the time we need to tackle those issues, we're in a strong position thanks to our ample liquidity. We have considerable flexibility in managing upcoming maturities with plenty of credit facilities and cash available. However, much will be influenced by our originations and asset deployment over the next six months. Just look at how much has changed in the last three months. In the next three to six months, we expect the economic landscape to look quite different, which could be significantly better, slightly worse, or stable. We are not economists so we won't predict these outcomes; instead, we ensure that our approach is flexible and conservative. We don’t believe this is the right time for risky decisions. As we approach these moments, we'll need to make informed choices. I apologize for not providing a definitive answer, but our current management strategy does not lend itself to that. We have significant flexibility, and as circumstances evolve—like potential Fed cuts, economic growth after the Build Back Better bill, or the effects of tariffs—we recognize there are many variables in play. Ultimately, we feel very well-positioned with substantial liquidity and a strong-performing portfolio. We have numerous options, and we will keep them open as we navigate these situations.
Yes. No, that makes sense. Optionality is very positive to have. So that's great. And last topic for me, then I'll step aside, in terms of the new CLO, the BB investments kind of maybe 2 questions. One, were those new primary issues? Or were those purchased in the secondary market? And secondarily, just kind of thinking maybe longer term, it sounds like you're attracted to that asset class. How large could you potentially see that portfolio come relative to the total investment portfolio?
Sure. Our investment in this area is rooted in our extensive experience managing CLOs over many years, which has given us a strong understanding of the marketplace. Our goal is to achieve strong risk-adjusted returns primarily through credit securities. Our research shows that the BB asset classes typically deliver yields that align closely with what we're seeking in our private credit investments, while also demonstrating good historical credit performance and liquidity. This allows us to enter and exit investments more easily, although major market disruptions can affect this. Generally, this asset class offers greater liquidity than others. We've established a comprehensive process for researching which BBs and managers to invest in, using our own tiering system to evaluate them. Our experience in this market has allowed us to build a solid research base, and while we have recently started engaging with it, the asset class is substantial but not overwhelmingly large. We see the potential to deploy much more capital than we currently are, contingent on the opportunities available in the BB sector and our traditional private credit investments. Regarding your question about the investment mix, it's a combination of both primary and secondary markets. Currently, there is a significant cycle of issuance, with primary market activity being more prominent recently, but there are fluctuations throughout the year based on various factors. We closely monitor both markets to identify the best opportunities for our portfolio.
Yes, we indeed focus on both primary and secondary opportunities, and we adapt based on where the best opportunities are at any given time. It will always be a mix of both.
Our next question will be coming from Robert Dodd of Raymond James.
Following up on a question about the balance sheet, you have significant liquidity and ample time to manage larger maturities. In this quarter, you paid off a $20 million bond. However, it seems you decided to adjust the revolvers by expanding the Live Oak facility instead of using cash. Can we interpret this as a preference to retain cash for investments rather than to pay down debt? Is the focus on using cash to grow your assets under management, or is there a likelihood that this cash will be used to reduce debt?
That's a very good question, and it's something we constantly consider. We take issue with your repeated use of the word bias. We try to avoid having a bias. Our goal is to optimize...
Inclination.
We try not to have a bias when it comes to our strategies. Our approach is to evaluate situations objectively and maintain a lot of flexibility. It is generally accepted that capital should be raised when opportunities arise, especially during favorable conditions. As many on this call are aware, increasing your credit capacity in a challenging market is quite tough. Henri and the team have diligently worked to establish a flexible revolving credit line for the company. Currently, we are in a strong position, and we are building a solid relationship with Valley Bank, which is promising for the long term, potentially lasting 5 to 10 years. This strong relationship will provide us with market-independent flexibility for our balance sheet. We are also managing a mix of fixed-rate and variable-rate debt, allowing us significant flexibility in how we access and repay funds. Presently, our cash is earning around 4%, a notable improvement from previous years when returns were negligible. Our investment approach is risk-free, ensuring that we are prepared for various scenarios. Recently, we have experienced significant redemptions, but many of these stem from sizable investments made several years ago, which have now been realized. This pattern is common in our industry and does not prompt us to alter our market strategy. While it can be challenging to predict certain outcomes, our focus remains on maximizing flexibility and establishing a robust credit structure during favorable conditions, so we are ready for any downturns and have the opportunity to grow when times are good.
Yes. Robert, just to clarify one thing on the credit facility. So we actually didn't choose to draw that. What we chose to do was to upsize it, which for us is much more strategic, long term, and there's a 50% utilization. So that's why there was the draw. The more important thing is it's upsize and creating more liquidity for us that's available.
Understood. To your point, if you have high-quality assets, getting repaid is a positive outcome. Your focus is on maintaining quality in those assets. However, there seems to be a decrease in availability at the moment. Is the market's current stability a factor? Are we too late in the year for activity related to mergers and acquisitions to be realistic? Can you provide any insight into when we might see an increase in high-quality deals? While there are always lower quality options, those are not what you're seeking. When do you think quality deals could emerge?
Sure. I'll pass this to Mike after I share a few thoughts. We have many interesting deals in our pipeline. It's a competitive environment, and while we might have a winning streak in the next 3 to 6 months, it's also possible that we won't. Some of our sponsors are at the letter of intent stage, while others are still exploring options. We're evaluating some high-quality deals, but we cannot predict if or when they will be added to our balance sheet. It's not something we can discuss in this call, and it's ultimately unpredictable. We're putting in the effort to secure these deals, but the market remains competitive. Part of the reason we're not concerned about our cash position is that we see ample opportunities available to us, though we cannot control the timing from quarter to quarter. Mike?
Let me add to that. Addressing your question directly regarding our current status and what we're observing in the marketplace, we continue to notice a decline in deal activity with no signs of recovery. From my experience, it's difficult to gain visibility on this situation, so we don't attempt to predict or time it. However, we are confident in the initiatives we are implementing, which include investing in additional resources and intensifying our efforts to focus on origination. We believe these efforts will lead to results that can put us back on a growth path, regardless of whether deal activity rebounds. We remain optimistic, and while time will reveal the outcome, we are confident that we can operate successfully and grow our balance sheet even if the deal market does not recover. If the market does improve, that would be an added advantage.
And I would now like to hand the call back to Christian Oberbeck for closing remarks.
Okay. Well, again, we'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.
Thank you, everyone, for joining us today. We look forward to speaking to everyone next quarter. This concludes today's conference call.