管理層發言
Good morning, everyone. Thank you for being here. Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2026 Financial Results Conference Call. This call is being recorded. I will now hand it over to Mr. Henri Steenkamp, the Chief Financial and Chief Compliance Officer of Saratoga Investment Corp. Please proceed, sir.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's Fiscal Third 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 third 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 Q3 results reflects our November 30 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 continued NAV growth from the previous quarter and year, with stable NAV per share, an increase in NII of $0.03 per share from the previous quarter, a strong 13.5% return on equity, beating the industry, net originations of $17.2 million, including 3 new portfolio companies, and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the fourth quarter of fiscal 2026, which when annualized, represents a 12.9% yield based on the stock price of $23.19 as of January 6, 2026, offering strong current income from an investment value standpoint. Though we did see an increase in adjusted NII of $0.03 per share from the previous quarter, our third quarter NII of $0.61 per share continues to reflect the impact of the last 12 months trend in decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets as well as continued high levels of repayments. Strong originations outpaced repayments during the third quarter, which when coupled with repayment of a $12 million baby bond resulted in our cash position at quarter end decreasing to $169.6 million, though we still have significant cash available to be deployed accretively in investments or to repay existing debt. During the quarter, we began to see an increase in M&A activity despite continued competitive market dynamics. While our portfolio again saw multiple debt repayments in Q3, we had strong new originations, resulting in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in 3 new investments and 9 follow-ons as well as closing on new investments in multiple BB and BBB structured credit securities. Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create attractive investment opportunities from high-quality sponsors, which is continuing post-quarter end with 4 new portfolio company investments, either closed or closing in Q4 so far, further improving our run rate earnings. We continue to remain prudent and discerning in terms of new commitments in 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 $1.016 billion portfolio with all 4 historically challenged portfolio company situations resolved. Our current noncore CLO portfolio was marked up, including realized gains by $2.9 million this quarter, more than offsetting the CLO and JV markdown of $0.4 million, resulting in the fair value of the portfolio increasing by $2.5 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% above cost, while our core non-CLO portfolio remains 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflect strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the third quarter, our net interest margin increased from $13.1 million last quarter to $13.5 million driven primarily by a $0.5 million decrease in interest expense, reflecting the recent $12 million baby bond repayments. This quarter's interest income remained relatively unchanged, benefiting from first average non-CLO assets increasing by approximately 0.9% to $962 million. This was largely offset by 2 factors: first, the absolute yields of the core non-CLO BDC portfolio reducing from 11.3% to 10.6% due to SOFR rates resetting from earlier reductions, combined with the impact of lower yielding new originations during the quarter. And second, the timing of new originations and repayments in Q3. In addition, the full-period impact of the 0.5 million shares issued through the ATM program in Q2 and the partial impact of the additional 0.1 million shares issued in Q3 resulted in a $0.01 per share dilution to NII per share. Our overall credit quality for this quarter continued to improve to 99.8% of credits rated in our highest category. There's just one investment remaining on nonaccrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% of fair value and 0.4% of cost. With 83.9% 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 volatility in the broader underwriting, M&A, and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure, and disciplined underwriting standards to continue steadily increase the size, quality, and investment performance of our portfolio over the long term and deliver compelling 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 quarter end, we maintained a substantial $396 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $90 million from our 2 revolving credit facilities, and $169.6 million in cash. This level of cash improves our current regulatory leverage from 168.4% to 183.7% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments fiscal 2026 third quarter, key performance indicators as compared to the quarters ended November 30, 2024, and August 31, 2025. Our quarter-end NAV was $413 million, up 10.2% from $375 million last year and up 0.7% from $410.5 million last quarter. Our NAV per share was $25.59, down from $26.95 last year and $25.61 last quarter. Our adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. Our adjusted NII per share was $0.61 this quarter, down 32.2% from last year and up 5.2% from last quarter. Adjusted NII yield was 9.5% this quarter, down from 13.3% last year and up from 9% last quarter. The latest 12 months return on equity was 9.7%, up from 9.2% last year and 9.1% last quarter, and above the industry average of 6.6%. While last year saw markdowns to a small number of credits in our core BDC, Slide 3 illustrates how our recent results have delivered an ROE of 9.7% for the last 12 months, above the industry average of 6.6%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 9 in the past 12 years and consistently positive every year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 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, and we continue to expect long-term AUM growth. The quality of our credits remains strong with just 1 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 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively. Adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. This quarter's increase in adjusted NII compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with the recent repayment of certain well-performing investments. The weighted average interest rate on the core BDC portfolio of 10.6% this quarter compares to 11.8% as of last year and 11.3% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees, and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 26 through 29 in the appendix at the end of the presentation. Slide 50 is a new slide that we recently added comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.4% of cost is 8x lower than the industry average of 3.2%. This highlights the current strength and credit quality of our core BDC portfolio. Moving on to Slide 6. NAV was $413.2 million as of the fiscal quarter end, a $2.7 million increase from last quarter and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased in 23 of the past 53 quarters. Over the long term, this metric has increased since 2011 and grown by $3.62 per share or 16.5% over the past 8.5 years. On 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 $0.03 in Q3. This is due to an increase in non-CLO net interest income during the quarter of $0.02, primarily driven by accelerated OID on repayments. The increase in BB investments interest income of $0.02 from higher assets and the increase in other income of $0.03 from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of $0.03, reflecting expenses related to the recent annual meeting and increased deal expenses and dilution from the increased DRIP and ATM program share count of $0.01. On the lower half of the slide, NAV per share decreased by $0.02 with the $0.14 under earning of the dividend fully offset by net realized gains and unrealized depreciation of $0.14, including deferred tax benefit. This leaves a $0.02 net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities. This quarter-end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing, with $170 million of quarter-end cash available, fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive. In addition, all $269 million of our baby bonds, effectively all of our 6% plus debt is callable now, providing us the option to refinance them, 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. This quarter, we also repaid our $65 million in senior credit facility, refinancing it with the issuance of an upside $85 million credit facility with a group of banks led by Valley Bank. The terms of this facility are substantially the same while cutting the spread cost by approximately 150 basis points and extending the maturity to 3 years. We do have our $175 million, 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this. 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 and that most of our debt is long term in nature. 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.
Thank you, Henri. I'll give an update on the market since we last spoke in October and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in. But the biggest driver of our increased production is the success we are seeing in our own business development efforts. As seen by the fact that 5 of the 7 most recent new platform companies we have closed or are in process of closing are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. Market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms. Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control. In summary, to first stay disciplined on asset selection; second, invest in and generally 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. Now 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 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. 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, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in 7 new platform investments this calendar year, reversing the decline we experienced in the prior calendar year. 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 is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams.
Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended November 30, 2025 was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a $0.25 per share special dividend, which was paid in December. Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate and macro environment's impact on our earnings.
分析師問答
I wanted to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter. And I'm curious if you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries. And do you expect that to continue into '26 here?
We aren't fully equipped to discuss the entire M&A marketplace. However, it's clear that significant mega deals from last year have recently entered the market, indicating a substantial increase in large M&A activity. In our specific area, we're noticing more deals and that both sellers and buyers are preparing to engage. As Mike pointed out, despite the rise in M&A, we're seeing increased competition, which suggests strong interest in these transactions. We are hopeful that this marks the start of a return to more normalized levels of M&A activity, which have been lacking over the past couple of years.
Yes. Let me expound on that. So when we look at the deal flow that we're getting from our relationships that we've had for years, we view that as more of an indicator of the M&A market moving because we're already seeing deal flow from that group. If their deal flow is picking up, we view that as a good sign and probably reflective of M&A activity growing. It's a little too early to say with certainty, but certainly, we do see a pickup there, and we're seeing more change of control transactions there and getting involved in more processes, which is great. One of the things that we like so much about being at our end of the market is that we're not just beholden to the M&A market and having to just kind of wait for the tide to come in, if you will. At the lower end of the middle market, there's just thousands upon thousands of companies. And so if you put effort into getting deep into the various markets throughout the country and getting to know the different deal dealers and investors in these small ends of the market, you can drive a lot more deal flow. This deal flow doesn't necessarily move 1 to 1 with the larger M&A activity. Some of these businesses get involved in a change of control transaction because there's someone retiring and moving on and deciding to sell their business. It might be baby boomer activity, things of that nature. And so we're in a position where certainly we're affected by M&A activity, and we are seeing a pickup there. But we also feel like our destiny is in our own hands, which you see in the origination activity that we've been successful with. Recently, a lot of that has just been based on us doubling down on our outreach in the marketplace.
That's great color. And then moving to Slide 13, where you've outlaid kind of the historical trends for realized gains. It's nice to see over the past 3 quarters, you've returned to your longer-term trend of positive gains there. And I know it's hard to have too much of a forward-looking view there. But anything expected in the near term, either in the current quarter or maybe a quarter out where you might see some more realizations there?
As you can appreciate, we're not in control of that. And so it's hard for us to make a prediction. I mean there are some processes underway in some of our portfolio companies, but how they wind up is not something we're in a position to predict at this moment.
Yes, Erik, timing is difficult to determine, but we are pleased that our core non-CLO BDC business has a fair value approximately 2% above our costs. Overall, we are happy with this outcome.
Got it. And last one for me. Just thinking about the impact of lower short-term interest rates. You noted that several times during your comments, you've got a slide addressing that. I think that November cut probably has not been fully realized in the portfolio and not the December cut as well, and the futures market is looking at another 50 as well as spreads remaining tight. Henri, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from the current level that you just reported, is holding the line there, would you consider that success kind of given the headwinds there? Or is the opportunity to put some of that liquidity to work that you've mentioned, providing you the opportunity to potentially grow NII dollars over the next few quarters?
I believe you've outlined many of our considerations. One additional point to mention is capital deployment. We have significant capital that remains unallocated, and our pipeline is expanding. Therefore, the combination of these factors, including additional deployment, is what we are examining and addressing. We view our progress this quarter as very positive across the board and are optimistic it will continue. Although we cannot predict outcomes, we have faced headwinds throughout the year and have still managed to make progress. We believe capital deployment is an area to focus on. Additionally, as the M&A market grows, we are hopeful that spread compression might reverse. There's a lot happening in the M&A landscape, including developments in AI and major deals. The private credit sector seems to be experiencing some challenges and perhaps a decline in inflow compared to previous levels. We anticipate a return to a more normalized environment. In our view, the current spreads are tighter than they should be given the circumstances, which we believe is a temporary situation. Historically, as interest rates decline, spreads have widened. Overall, we feel well-equipped and positioned to seize the opportunities ahead.
Our next question comes from Casey Alexander with Compass Point Research & Trading.
Mike, I wanted to ask about the tighter spreads on new investments that were mentioned several times during the prepared remarks. What is the trade-off to ensure that you are achieving an adequate risk-adjusted return? Are these spreads still allowing you to capture the covenants? Is there a competitive element to this? Are these spreads helping you form new relationships, or do they enable you to secure a bit more equity on the deal? How can we be assured that you are still earning an adequate risk-adjusted return when spreads are this tight?
Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is do we feel like the fundamental risks of the investment that we're making are level set? That is, are we getting a return where we feel like it's appropriate from a risk-adjusted standpoint? Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time? Is that going to be accretive to our shareholders relative to our cost of capital? So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being accretive to our shareholders, for sure. I would also point out one of the things that's really nice about being in our end of the market, which you don't see in the middle market so much is we referenced the 7 deals that we closed or have in closing right now, 6 of the 7 of those deals, we have an equity co-investment. You also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys.
Okay. My last question is, it seems like over the last 2 or 3 years that the majority of the new portfolio companies have come from new relationships. And while I understand that you want to broaden the platform, at the same point in time, there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong, and so I want to get a feel for how you feel about that effort?
That's a very valid question and something we consider carefully. It's important to note that our business model and investment strategy allow us to often engage in follow-on activities more than in new platform activities each quarter. We usually start with smaller investments and then closely monitor the asset's performance, providing support for growth over time, which adds value to our options. Historically, most of these investments have been with established relationships, but we've seen progress with new partnerships due to our team's focused business development efforts over the past year and a half. The process of securing a deal with a new partner takes time, which can be frustrating as shorter timelines would be preferable. This lengthy process contributes to the strong barriers to entry when forming new partnerships. When we build a new relationship, we thoroughly assess the sponsor's market reputation, the performance and construction of their portfolio, and the key team members involved. Our extensive market experience helps us ensure that the ownership group is appropriate for the asset they're investing in. We take all these factors into consideration. As you noted, the standards are higher when we are familiar with a group and understand their strengths and weaknesses, making investment decisions easier. In contrast, without that history, we must conduct more in-depth analysis, which is something we are committed to continuing.
Additionally, I want to emphasize the opportunities this presents, as these are new relationships for potential deals. We have been building connections with these individuals for quite some time and have been keeping track of their activities. Therefore, they are not entirely new to us. When we consider our growth and market potential within the smaller middle market, each of these new relationships could lead to a series of investments, as Mike mentioned, with follow-ons that create a compounding growth effect in terms of opportunity. This flow of opportunities feels somewhat more favorable to us, allowing us greater control over our involvement in follow-on deals and new projects.
So obviously, in the same tune as Erik and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus nonsponsor, incumbent versus new borrowers or LTVs?
Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we are seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have been closing are non-software deals that are kind of core lower middle-market businesses generally. Outside of that, I think the flavor is what it typically is, a mix of mostly sponsored deals, but also some deals where they're an independent sponsor or we're backing a management team directly. And that's been a core part of our business as well and has been an area where we've invested very successfully.
That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market.
Well, I would like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter.
This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.