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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corp. Fiscal First Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.
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 NII per share from the previous quarter, continued growth of NAV, a strong return on equity beating the industry average, 2 new portfolio company investments and, most importantly, a continued solid performance from the core BDC portfolio in a volatile macro environment. Building on 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 the second quarter of fiscal 2026. Our annualized second quarter dividend of $0.75 per share represents an 11.8% yield based on the stock price of $25.44 as of July 7, 2025, offering strong current income from an investment value standpoint. Our Q1 adjusted NII of $0.66 per share continues to reflect the impact of the past 12-month trend of decreasing levels of short-term interest rates and spreads on Saratoga Investment's largely floating rate assets and the continued effect of the recent repayments. This has resulted in $224 million of cash as of quarter end, available to be deployed accretively in investments or to repay existing debt. During the quarter, we continued to see a slower level of deal volume and M&A activity in the lower middle market following the recent tariff developments and a slowdown in new debt issuances. Despite these macro factors, our portfolio had multiple debt repayments and an equity realization in Q1, in addition to healthy new originations generating $2.9 million of realized gains and $50.1 million invested in 2 new portfolio companies, 6 follow-ons and new investments in multiple BB CLO debt 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, while we 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 $968.3 million portfolio in the current environment with all 4 challenged portfolio company situations resolved. Our current core non-CLO portfolio was marked up by $2.6 million this quarter, and the CLO and JV were marked down by $0.2 million. We also had $0.6 million net realized appreciation on an equity realization and numerous debt repayments that generated $2.2 million of life-to-date realized gains, further net realized gains of $0.7 million from escrow payments on the Netreo and HemaTerra investments and $0.2 million of net appreciation in our new BB investments, resulting in the fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter end, our total portfolio fair value was 2.1% below cost, while our core non-CLO portfolio was 1.7% 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 first quarter, our net interest margin expanded meaningfully from $13.7 million last quarter to $15.6 million, driven by a $1.4 million increase in non-CLO interest income as the full benefit of Q4 originations was realized and repayments largely occurred late in Q1. Average yields were relatively unchanged. This was further supported by a $0.5 million decrease in interest expense, reflecting the full quarter benefit of repaying $44 million in SBIC II debentures at year-end and the partial period impact of retiring the $20 million 8.75% baby bond this quarter. In addition, the full period impact of the 1.2 million shares issued through the ATM program in Q4 and a partial impact of the additional 0.2 million shares issued in Q1 resulted in a $0.04 per share dilution to NII per share. Our overall credit quality for this quarter remained steady at 99.7% of credits rated in our highest category, with the 2 investments remaining on nonaccrual status being Zollege and Pepper Palace, both of which have been successfully restructured, representing only 0.3% and 0.6% of fair value and cost, respectively. With 90% 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 landscape 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 high underwriting standards to continue to steadily increase the size, quality and investment performance of our portfolio over the long term and deliver exceptional risk-adjusted returns to our 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 $430 million of investment capacity to support our portfolio companies with $136 million available through our existing SBIC III license, $70 million from our 2 revolving credit facilities and $224 million in cash. This level of cash improves our current regulatory leverage of 163.8% to 188.1% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments fiscal '26 first quarter key performance indicators as compared to the quarters ended May 31, 2024, and February 28, 2025. Our quarter end NAV was $396.4 million, up 7.8% from $367.9 million last year and up 0.9% from $392.7 million last quarter. Our adjusted NII was $10.1 million this quarter, down 29.3% from last year and up 26.2% from last quarter. Our adjusted NII per share was $0.66 this quarter, down 37.1% from $1.05 last year and up 17.9% from $0.56 last quarter. Adjusted NII yield was 10.3% this quarter, down from 15.5% last year and up from 8.4% last quarter. Latest 12 months return on equity was 9.3%, up from 4.4% last year and up from 7.5% last quarter and above the industry average of 7%. And our NAV per share was $25.52, down from $26.85 last year and down from $25.86 last quarter. Of note, the recently implemented change to monthly dividend distributions resulted in the March and April dividend record dates falling into this first quarter for an additional one-time dividend, reducing NAV per share by $0.50. Excluding this one-time occurrence, NAV per share would have risen to $26.02, reflecting a $0.16 or a 0.6% increase. While last year saw markdowns to a small number of credits in our core BDC, our recent strong results have delivered a return on equity of 9.3% for the last 12 months, above the industry average of 7%. Additionally, our long-term average return on equity over the past 11 years of 10.2% 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 8 in the past 11 years and consistently positive every year. Of note, the weighted average common shares outstanding in Q1 was 15.3 million, increasing from 14.5 million and 13.7 million shares for the last quarter and last year's first quarter, respectively. Adjusted NII was $10.1 million this quarter, down from 29.3% from last year and up 26.2% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was primarily due to the non-reoccurrence this quarter of the $2.4 million annual excise tax recognized in the prior quarter. The decrease from the previous year's first quarter was largely due to the lower AUM from recent significant repayments and lower base interest rates. The weighted average interest rate on the core BDC portfolio of 11.5% this quarter compared to 12.6% as of the previous year's first quarter and 11.5% as of last quarter. Total expenses for this first quarter 2026, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes, decreased $0.1 million to $2.8 million as compared to $2.9 million last year and increased $1.4 million from $1.4 million last quarter. This represents 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 1% last year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago, despite a slight pullback recently reflecting significant repayments. This quarter saw significant repayments again, offsetting solid originations. This recent AUM decline does not detract from our expectation of long-term AUM growth. The quality of our credits remains strong, with only the 2 recently restructured Pepper Palace and Zollege credits on nonaccrual, consistent with last quarter. 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 credit and volatile 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. 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 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 date 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 non-recurrence 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 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
Operator Instructions. 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 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 will start and then pass it to Mike. You've articulated it well. Redemptions are challenging to forecast, just like our originations. One important focus has been on portfolio quality. While our assets under management have decreased because of net originations falling short of redemptions, the credit quality of our portfolio remains very strong. We believe our credit performance greatly exceeds the industry's. Currently, there is a notable influx of capital into the private credit market, yet the total M&A market has slowed due to tariffs and other factors. M&A activity has typically been a major driver for financing. While there's a lot of refinancing going on, there isn't as much M&A activity, resulting in a mismatch between supply and demand. We are cautiously managing this situation because it's not in our best interest, or our shareholders’ interest, to put more assets to work that aren’t strong. We've encountered numerous opportunities but have not pursued many due to concerns about quality and, in some cases, pricing; credit quality remains our primary focus. That said, we have revitalized our business efforts. We've been hiring more staff and have a robust pipeline, which we anticipate will yield results over time. We've learned the importance of being selective and targeting the right markets; pursuing growth for the sake of increasing assets under management, rather than focusing on high-quality credits, will not serve us well in the long run. Mike, feel free to add anything.
Yes. Let me add a little bit of additional color. And I'll also just address one of the things that you had brought up directly, which is that on the redemption side, as Chris mentioned, that's very unpredictable. But I would say that best that we know, we don't see anything that's looming, if you will. So we would expect that the redemption experience that we'd have would be sort of consistent with what we've experienced in the past generally. Also, our pipeline is growing and not only with non-sponsored deals, but there are a number of lower middle market sponsors and investor groups that we're forming relationships with that we haven't historically. And it's just due to the fact that the lower end of the middle market that we operate in is so fragmented that it's amazing. I mean, we'll go to a new city and make the rounds with 4 or 5 of the groups that we know, and we'll come back with new groups that we didn't know of almost every time we visit the countryside looking for deal opportunities. I'll take a step back. It's important to consider this in relation to our business. We appreciate being positioned at the lower end of the middle market. This strategy has contributed to our ability to achieve 15% returns over time with minimal volatility and very low loss rates primarily in senior debt, which we find extremely appealing. Operating at the lower end of the middle market enhances our underwriting capabilities. We can add more value to our borrowers and collaborate closely with our ownership group, contrasting with the upper end of the middle market where transactions are often driven by price competition and easy terms. In our situation, we are able to foster genuine relationships with the management teams and ownership groups we work with. We usually have observation rights on boards and engage actively with the management teams to whom we lend. This engagement helps us maintain a robust pipeline for follow-on opportunities. As I noted earlier, over the past five years, our follow-on activities have surpassed our new origination activities in terms of dollar volume, reflecting the quality of our relationships with our borrowers. Now what comes with that, and this is kind of where I'm going, is that it does require a lot more hands-on work, not only in asset selection and underwriting, and we've been doing this for a long time, so we know how important it is to remain very disciplined on asset selection, but also on portfolio monitoring. Staying close to the businesses that we lend to does allow us to feed the growth in follow-on activity, but it requires a lot more time. In a normal market, where you have kind of historical normal levels of deal activity, we can grow at a healthy clip as we have historically, and our origination pace generally would outpace our repayments. In this market, especially in the lower end of the middle market where you see such a low amount of deal activity, it's really below almost any historical level that we've seen for quite some time. We've decided that given all of what I described in the lower end of the middle market and what it requires, that it is important for us to invest in people. The investments that I highlighted in the prepared remarks are really aimed at giving our deal professionals an opportunity to shift some of the allocation of their time much more toward outward-facing origination activity and enabling them to leverage themselves much better. And we're already seeing the benefits of that where that's starting to bear fruit in our pipeline. And over the long term, we're very confident that it will allow us to get back on a path of growth, while continuing to be very 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. Sure, Erik. If you recall, we had about $3 of just over $3 as of year-end, and we paid now $1.24 in this quarter. So we're just under $2 at the moment from the February spillover. And then, of course, we've also earned earnings since March 1. So we're probably closer to the $2.50 level at the moment.
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.
We generally address issues as they arise due to the many variables we face. By the time we need to tackle these matters, we will be in a strong position with our liquidity. We have ample flexibility to manage upcoming maturities, supported by various credit facilities and cash reserves. However, our decisions will largely depend on the next six months of originations and how we deploy assets. The situation can change rapidly, as we've seen in the last three months, and we anticipate a very different economic landscape in the coming months. It might improve, worsen, or remain stable, but we do not consider ourselves experts in predicting such outcomes. Therefore, we are focusing on being flexible and conservative, avoiding undue risks. As we approach these moments, we will make informed decisions without definitive answers at this stage. The situation is fluid, influenced by potential changes in Fed policies, economic growth post-Build Back Better, and the impact of tariffs. Despite these uncertainties, we believe we are in an excellent position with our liquidity and a well-performing portfolio, keeping our options open as circumstances evolve.
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?
Certainly. Our investment origins in this area stem from years of managing CLOs, which has given us a strong familiarity with the market. Our goal focuses on achieving solid risk-adjusted returns primarily through credit securities. Over time, our research has shown that BB asset classes tend to provide yields comparable to what we seek in our regular private credit investments, accompanied by a strong historical credit performance and good liquidity. This liquidity enables us to enter and exit these investments more easily. While major market disruptions can pose challenges, generally, this asset class offers better liquidity compared to others. We have a detailed process in place regarding which BBs and managers we invest in, utilizing our own tiering system to classify them. Our extensive research and experience in this market have allowed us to carefully select our investments. The BB asset class is significant but not overwhelmingly large, and there's potential for us to deploy more capital than we currently are. Whether we choose to do so will depend on the opportunities within the BB class and those in our traditional private credit investments. Regarding your question about the mix, we have a combination between the primary and secondary markets. Currently, there is a significant cycle of issuance, which reflects some seasonality; at certain times of the year, more assets are issued on a primary basis, while at other times, factors like payment dates influence the issuance. This market has many unique characteristics. Recently, primary offerings have been more prominent, though secondary offerings occur at different times. We monitor both markets closely, seeking the best opportunities to optimize our asset allocation.
Our next question will be coming from Robert Dodd of Raymond James.
On the topic of the balance sheet, you have substantial liquidity and ample time to manage larger maturities. This quarter saw a $20 million bond payoff. However, you opted to adjust the revolvers by increasing the size of the Live Oak facility rather than using cash. Should we interpret this as a preference to retain cash for investments while managing refinancing through other debt liabilities, such as refinancing or using the revolver? Is the intention to use cash for growth in assets under management, or how likely is it that cash will be used to pay down debt?
That's a great question, and it's something we are always considering. We take issue with the term bias; our goal is to optimize our position for the best outcomes. Raising capital and establishing lending relationships typically occur during favorable times, as increasing your credit facility is challenging in a tough market. Henri and the team have worked diligently to secure an optimal flexible revolver position for the company during these good times. The Live Oak facility represents a positive relationship we've developed, which could last for many years due to our longstanding connections with our creditors. This relationship creates flexibility for our balance sheet, and since we have significant fixed-rate debt, this variable rate revolver allows us to draw and repay as needed. Currently, our cash is earning around 4%, which is an improvement from previous years. While the cash is generating returns and is considered risk-free, we want to remain prepared for various scenarios. Recently, we have experienced a significant number of redemptions, many of which stemmed from substantial investments made five or six years ago that grew over time. These redemptions are part of the business and shouldn't lead us to alter our market approach. Our focus remains on maximizing flexibility and establishing a strong credit structure during favorable times so that we are equipped for any downturns, while also allowing for growth in positive conditions.
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. Moving on to the next point, getting repaid is favorable when you focus on high-quality assets. However, there seems to be less opportunity in that area at the moment. Is it simply a matter of market stability, or are we too late in the year for conditions like tariffs to stabilize? Is mergers and acquisitions activity more likely a 2026 prospect, or can you provide any insight on when we might see an increase in quality deals? While there will always be lower quality options, you're aiming for high-quality opportunities. When do you anticipate those to emerge?
Sure. I'll pass this to Mike after a few comments. We have many interesting deals in our pipeline. It's a competitive environment, but if we experience a winning streak, there could be significant additions in the next 3 to 6 months, though that is not guaranteed. Our sponsors are at various stages; some are in the letter of intent phase while others are still exploring options. We are looking at some high-quality deals, but it's difficult to predict if they will make it to our balance sheet. It's not something we can discuss in detail on this call, and forecasting those outcomes is challenging. We can only strive to position ourselves favorably for these opportunities in this competitive market. The reason we are not concerned about our cash is that we see numerous opportunities ahead and are working towards them, although we can't control the timing on a quarterly basis. Mike?
Let me add to that. So just addressing your question directly in terms of where we are and what we're seeing in the marketplace, we are continuing to observe a decline in deal activity, and there are no indications of recovery. Based on my experience, visibility on such trends is limited, and we do not attempt to predict or gauge the timing of recovery. However, we are confident in the initiatives we are implementing, such as increasing our resources and intensifying our efforts on origination, which we believe will lead to results that will enable us to return to a growth trajectory, even if deal activity remains stagnant. We remain optimistic about this. Only time will tell, but we have confidence in our ability to operate effectively and continue to strengthen our balance sheet, regardless of the deal market's performance. If the market does recover, it would be an added benefit.
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.