Saratoga Investment Corp 6.00% Q1 FY2025 earnings call

• Adjusted net investment income per share increased 12% due to stable interest rates and elevated recurring net interest margins. - Recurring net interest margin increased 19% with 9% increase in average assets under management. - Took decisive action with Pepper Palace and Zollege restructurings, assuming full control and working on recovery. - Originated no new portfolio company investments but had 16 follow-on investments, with quarter-end cash position at $93.3 million. - Credit quality remained high at 98.3% in highest category, with three investments in non-accrual. - NAV per share decreased $0.27 primarily due to net realized loss and unrealized depreciation, but long-term ROE remains above industry average. - Dry powder available totaled $299 million, including cash, undrawn SBA debentures, and undrawn secured credit facilities.

Saratoga's adjusted net investment income per share for the quarter increased by 12%. Net investment income was $1.05 per share, exceeding the $0.74 dividend by 42%. Assets under management were approximately $1.096 billion at fair value, with 86% of investments in first-lien debt. The core BDC portfolio fair value, excluding CLO and JV, and restructured investments, exceeded cost by 3.3%. Adjusted NII was $14.3 million this quarter, up 12% from last year and last quarter. NAV per share was $26.85, down 6% from last year, and quarter-end NAV was $368 million, up from last year but slightly down from last quarter.

• Board of directors will evaluate dividend level quarterly considering company and economic factors. - Confidence in navigating challenges and uncovering opportunities with strong reputation, management team, and investment strategy. - Balance sheet, capital structure, and liquidity expected to benefit shareholders in near and long-term.

• Market volatility and economic uncertainty could impact portfolio performance. - Potential payoffs due to aggressive pricing by lenders in some credits could affect income. - Continued monitoring of non-accrual investments and potential markdowns in certain credits.

Q: How is the investing environment and repayment activity?

A: Deal volume for new portfolio companies is low due to M&A slowdown, but there's activity in supporting existing portfolio companies. Some aggressive pricing by lenders may lead to payoffs.

Q: Has competition from larger private credit platforms crept into your market?

A: Seen some, but not much, as they don't typically underwrite in the same way and our deals are in smaller size ranges.

Q: How does the cost of the Live Oak facility compare to Encina?

A: Live Oak facility has tiering, rate similar to Encina, and adding new banks broadens relationships.

Q: What's the texture of other income?

A: Primarily amendment fees, prepayment fees, and some monitoring fees, mostly transactional and somewhat recurring.

Q: On non-accruals, any changes?

A: Restructurings of Zollege and Pepper Palace are ongoing, continuation of previous issues with work to recover capital.

Q: Why no new investment commitments and what's the driver?

A: Low deal volume, selective approach, and pricing changes; not specifically due to leverage or economy but overall market deal volume.

Q: Thoughts on new management teams for restructured companies?

A: Zollege's original founder involved, Pepper Palace's turnaround specialist with track record, both investing capital for improvement.