SARATOGA INVESTMENT CORP. Q2 FY2025 earnings call

• Successfully fully repaid and resolved the Noland investment, with the last of four non-accrual or watchlist investments resolved. - Return to increasing NAV per share and substantial over earning of dividends. Annualized second quarter dividend of $0.74 per share implies a 12.7% yield. - Earnings benefit from elevated rates and spreads on floating rate assets, while long-term liabilities are fixed but callable. - Ongoing development of sponsor relationships creates attractive opportunities despite constrained M&A volume. - Completed Zollege and Pepper Palace restructurings, with both investments held at combined remaining fair value of $3.6 million. - Knowland and Netreo investments repaid in full. - Core non-CLO portfolio relatively unchanged, CLO and JV marked down by $2.7 million. - Originated no new portfolio company investments this quarter, but had five smaller follow-on investments. - Quarter-end cash position grew to $162 million, improving leverage. - Subsequent to quarter end, executed $56.7 million of new originations. - Credit quality increased to 99.7% of credits in highest category, with two non-accrual investments representing a small portion of fair value.

In the fiscal second quarter ended August 31, 2024, adjusted NII was $18.2 million, up 38.3% from last year and 26.9% from the previous quarter. Adjusted NII per share was $1.33, up 23.2% from last year and 26.7% from the previous quarter. Adjusted NII yield was 19.7% this quarter. NAV per share was $27.07, down 4.8% from last year but up 0.8% from the previous quarter. NAV at quarter-end was $372.1 million, up from $362.1 million last year and $367.9 million the previous quarter. The portfolio has $1.04 billion in fair value, with 85.2% in first lien debt. The core non-CLO portfolio is 3.3% above cost.

• Approach the market with prudence and discernment in new commitments due to dynamic interest rates. - Board will evaluate dividend level on a quarterly basis considering company and economic factors, including interest rate impact. - Confident in being favorably situated for future economic opportunities and challenges. - No specific forward-looking guidance on Zollege and Pepper Palace recovery beyond ongoing efforts.

• Impact of short-term interest rate decreases on NII, with every 25 basis points affecting NII by approximately $0.03 quarterly. - Potential challenges in finding quality new platform investments due to lower market activity. - Credit risks associated with individual portfolio companies, though most are in strong industries. - Uncertainty in the timing and extent of M&A recovery in the lower middle market affecting investment originations.

Q: What were the common characteristics of the investments reviewed that did not meet high-quality credit standards?

A: There were more unique to individual credits, like customer concentration above comfortable levels or other unique elements making them unsuitable for the investment bar.

Q: How to quantify the impact to NII from a 25 basis point reduction in short-term rates?

A: Every 25 basis points is about $0.03 on a quarterly basis, but doesn't factor in refinancing ability and other variables.

Q: What is the level of optimism on Zollege and Pepper Palace recovery and time frame?

A: Early stages, took a lot of resources and effort to restructure, management is working to recapture value but it's a project with no specific time frame.