Saratoga Investment Q4 2025 Earnings Report

Saratoga Investment EPS Results

• Actual EPS: $0.56
• Consensus EPS: $0.77
• Beat/Miss: Missed by -$0.21
• One Year Ago EPS: N/A

Saratoga Investment Revenue Results

• Actual Revenue: $31.30 million
• Expected Revenue: $32.86 million
• Beat/Miss: Missed by -$1.56 million
• YoY Revenue Growth: N/A

Saratoga Investment Announcement Details

• Quarter: Q4 2025
• Date: 5/7/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 8, 2025
• Conference Call Time: 1:00PM ET

Saratoga Investment (NYSE:SAR). is a closed-end, externally managed investment company that seeks to generate current income and total return through a diversified portfolio of private U.S. companies. Trading on the New York Stock Exchange under the ticker SAR, the firm primarily targets middle-market businesses across a broad range of industries, including industrials, healthcare, consumer products, financial services and technology. Its investment approach combines debt and equity instruments, providing flexible capital solutions such as first-lien and second-lien secured loans, mezzanine debt, preferred equity and common equity positions.

As an actively managed vehicle, Saratoga Investment works closely with portfolio companies’ management teams to support growth initiatives, operational improvements, and strategic transactions. Typical investments range from $10 million to $40 million per company, allowing the firm to take meaningful positions and influence value creation. The company’s underwriting process emphasizes rigorous due diligence, conservative leverage levels and alignment of interests through co-investment by its advisory affiliate.

Organized in March 2013, Saratoga Investment has steadily built a diversified portfolio of private U.S. enterprises. Over the years, the company has completed numerous transactions spanning buyouts, recapitalizations, growth financings and industry consolidations. Its track record reflects a commitment to disciplined risk management and a focus on resilient business models capable of delivering stable cash flows.

Headquartered in Dallas, Texas, Saratoga Investment is managed by Saratoga Investment Advisors, LLC, an SEC-registered investment adviser. The firm’s portfolio management team comprises seasoned professionals with extensive experience in private capital investing, credit analysis and operational oversight. This depth of expertise supports Saratoga Investment’s ongoing efforts to identify attractive opportunities in the North American middle-market segment.

Saratoga Investment Q4 2025 Earnings Call Transcript

Key Takeaways

• Expanded pipeline with net positive originations of $41.8 million in Q4, plus $45.5 million in originations since quarter-end, including three new portfolio companies.
• Transitioned to a monthly dividend of $0.25 per share, boosting the quarterly base dividend to $0.75 and implying a 12.1% dividend yield.
• Q4 adjusted net investment income per share was $0.56 ($0.69 after excise tax), down over 40% YoY and 38% QoQ, reflecting lower short-term rates and outsized repayments.
• Maintained robust liquidity with $428 million of investment capacity—cash $205 million, undrawn SBIC debentures $136 million, and $87.5 million undrawn credit facility—keeping net leverage at 162.9%.
• Portfolio fair value stands at $978 million, 2.2% below cost (1.6% above cost for core non-CLO assets), with 99.7% of credits in the highest rating category and only two small nonaccruals.

Presentation

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Saratoga Investment Corporation's Fiscal Year End and Fourth Quarter 2025 Financial Results Conference call. Please note that today's call is being recorded. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corporation's Chief Financial Officer and Chief Compliance Officer, Mr. Henry Steenkamp. Sir, please go ahead.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Thank you. I would like to welcome everyone to Saratoga Investment Corp's 2025 fiscal full year and fourth quarter 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 full year and fourth quarter 2025 Shelter 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. A replay of this conference call will also be available. Please refer to our earnings press release for details.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

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.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Thank you, Henry, and welcome everyone. Saratoga Investment Corp highlights this quarter include net positive originations generated from our pipeline, including one new portfolio company originated in the quarter and two new companies since quarter end, an increase in AUM on a fair value basis following significant repayments, lower statutory and absolute leverage from an increase in NAV, and importantly, the core BDC portfolio demonstrating solid performance in a volatile macro environment. Building on our strong dividend distribution history with a base quarterly dividend of $0.74 per share declared and distributed for the fiscal fourth quarter, we announced the transition to a monthly dividend structure, increasing our quarterly base dividend by $0.01 per share to $0.25 per share per month, or $0.75 per share in aggregate for the first quarter of fiscal 2026.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

From an overall investment value and current yield perspective, our annualized first quarter dividend of $0.75 per share implies a 12.1% dividend yield based on the stock price of $24.86 per share on May 6, 2025. Our Q4 adjusted NII of $0.56 per share, further adjusted for a $0.13 per share annual excise tax expense, is $0.69 per share and reflects the impact of the past nine months' trend of decreasing levels of short-term interest rates and spreads on Saratoga's investments, largely floating rate assets, and the full period impact of the recent outsized repayments. This has resulted in $205 million of cash available at year-end to be deployed accretively in investments or to repay existing debt.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

During the quarter, we continue to see the early stages of a potential increase in M&A in the lower middle market, reflected in multiple equity realizations in Q4, in addition to significant new originations. The three equity realizations generated $7.2 million of realized gains, while we originated $41.8 million from a combination of one new portfolio company and six follow-ons. 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. These trends have continued since quarter end, with $45.5 million of originations, including two new portfolio companies and six follow-ons, and $24.5 million of partial or full repayments of investments. 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.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

At the foundation of our strong operating performance is the high-quality nature, resilience, and balance of our $978 million portfolio in the current environment. Where we have encountered significant challenges in four of our portfolio companies over the past year, we have completed decisive action and resolved all four of these companies' challenges through two sales and two restructurings. Our current core non-CLO portfolio was marked down by $3.4 million this quarter. The CLO and JV were marked down by $2.7 million, and an unrealized depreciation charge of $1.5 million resulted in an overall reduction of $7.6 million in portfolio value. We had three equity realizations generating overall realized gains of $7.2 million. The $1.5 million unrealized depreciation charge resulted from late changes in the pricing of one of the realizations. Our total portfolio fair value is now 2.2% below cost, while our core non-CLO portfolio is 1.6% above cost.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

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. Our overall credit quality for this quarter remains steady at 99.7% of credits rated in our highest category, with two investments remaining on non-accrual status being Zollege and Pepper Palace, both of which have been restructured, representing only 0.3% and 0.5% of fair value and cost, respectively. With 88.7% 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.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Recognizing the challenges posed by the current tariff discussions and the volatility seen in the broader macro environment, we remain confident in our experienced management team, solid pipeline, strong leverage structure, and high underwriting standards to continue to steadily increase our portfolio size, quality, and investment performance over the long term to deliver exceptional risk-adjusted returns to shareholders. Mike will touch more on the impact of tariffs on our portfolio companies. 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 $428 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $87.5 million from our two revolving credit facilities, and $205 million in cash.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

This level of cash improves our current regulatory leverage of 162.9% to 186.2% net leverage, netting available cash against outstanding debt. Saratoga Investment's fourth quarter of fiscal 2025 key performance indicators, as compared to the quarters ended February 29, 2024, and November 30, 2024, are as follows. Our quarter-end NAV was $329.7 million, up 6.1% from $370.2 million last year and up 4.7% from $374.9 million last quarter. The $17.8 million increase in NAV sequentially resulted from ATM sales of $1.2 million shares at NAV for net proceeds of $32.4 million, partially offset by net realized gains and unrealized depreciation. Our adjusted NII is $8 million this quarter, down 37.2% from last year and 35.4% from last quarter.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Our adjusted NII per share is $0.56 this quarter, down 40.4% from $0.94 last year and down 37.8% from $0.90 last quarter. Netting the annual excise tax of $2.4 million, or $0.13, results in an adjusted NII of $0.69 in Q4. Adjusted NII yield is 8.4% this quarter, down from 14% last year and from 13.3% last quarter. Latest 12 months' return on equity is 7.5%, up from 2.5% last year and down from 9.2% last quarter, slightly below the industry average of 8.9%. Our NAV per share is $25.86, down from $27.12 last year and down from $26.95 last quarter.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

While these past 12 months have seen markdowns to a small number of credits in our core BDC portfolio, resulting in a latest 12 months' return on equity of 7.5%, which is below the industry average of 8.9%, Slide 3 illustrates how our long-term average return on equity over the last 11 years is well above the BDC industry average of 10.3% versus the industry's 7%. Our long-term return on equity has remained strong over the past decade plus, beating the industry eight of the past 11 years and consistently positive every year. As you can see on Slide four, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago. Outsized repayments offset healthy originations this year, resulting in our AUM declining, yet a solid Q4 originations quarter put us back on the AUM growth trajectory.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

One quarter of AUM decline in Q3 does not detract from our expectation of long-term AUM growth. The quality of our credits remains strong, with only two recently restructured Pepper Palace and Zollege credits on non-accrual, consistent with last quarter. Our management team is working diligently to continue this positive 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 turn the call over to Henry to review our financial results as well as the composition and performance of our portfolio.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Thank you, Chris. Slide five highlights our key performance metrics for the fiscal fourth quarter ended February 28, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q4 was 14.5 million, increasing from 13.8 million and 13.6 million shares for last quarter and last year's fourth quarter, respectively. Adjusted NII decreased this quarter, down 37.2% from last year and 35.4% from last quarter. This quarter's adjusted investment income decreases were primarily due to two reasons. First, this quarter included $2.4 million of an annual excise tax expense due to the spillover amount as of end of December 2024 versus $1.8 million last year. The impact to NII per share from this excise tax is $0.13, which means that adjusted NII per share is $0.69 for Q4 when adding this annual expense back.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Second, there was lower total investment income resulting from both lower base interest rates this year and lower AUM levels these past two quarters. The weighted average interest rate on the core BDC portfolio of 11.5% this quarter compares to 12.6% as of the previous year and 11.8% in Q3. The yield reduction primarily reflects the SAR base rate decreases over the past year. AUM is down primarily due to the impact of the significant repayments experienced in Q3, with part of that offset by this quarter's net positive originations not yet fully reflected. Total expenses for this fourth fiscal quarter, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, decreased $0.5 million to $1.4 million as compared to $1.9 million last year and decreased $1.4 million from $2.8 million last quarter.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

This represented 0.8% of average total assets for fiscal 2025, up from 0.7% last year. Also, we have again added the KPIs Slides 28 through 31 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past two years. Slide six highlights the same key performance metrics for the full fiscal year as compared to the previous two years. Of note is that the adjusted NII per share for fiscal 2025 is $3.81 per share, which is net of $0.37 of dilution resulting from increased net share count from the DRIP and ATM during the year. Moving on to Slide seven, NAV was $392.7 million as of fiscal year-end, a $17.8 million increase from last quarter and a $22.5 million increase from the same quarter last year.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

During this year, $35.4 million of new equity was raised at or above net asset value through our ATM program, of which $32.4 million was this quarter. This chart also includes our historical NAV per share, which highlights how this metric has increased 22 of the past three quarters, seeing a recent decrease due to the special dividend declared in the third quarter and write-downs this year in discrete assets being Pepper Palace, Zollege, and our CLO and JV investments. Over the long term, our net asset value has steadily increased since 2011 and grown by $2.90, or 12% over the past seven years. Our history of consistent realized gains also continues this quarter, with $7.2 million of realized gains recognized on the three equity realizations this quarter.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

On Slide eight, 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 down $0.34 in Q4, primarily due to, first, the annual excise tax, which was $0.13 this quarter related to unpaid spillover, as previously mentioned, and second, a decrease of $0.22 in non-CLO net interest income due to both lower base rates and AUM. Lower other income from lower originations and repayments and dilution from the increased net ATM and DRIP share count reduced earnings by an additional $0.03 each. This was offset by a $0.06 increase from lower operating expenses.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

On the lower half of the slide, NAV per share decreased by $1.09, primarily due to the Q3 and special dividends declared in the fourth quarter outweighing net investment income, as well as net realized gains and unrealized depreciation on investments of $0.53 per share. On Slide nine, you will see the same reconciliation, but now on a sequential annual basis. Starting at the top, adjusted NII per share decreased from $4.10 per share last year to $3.81 per share, mainly due to the increased net share count from the DRIP and ATM programs, resulting in a $0.37 per share decrease and a $0.10 decrease from increased operating expenses and excise taxes. On the lower half of the slide, this reconciles the $1.26 NAV per share decrease for the year.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

$3.81 of GAAP NII was more than offset by $1.66 of net realized losses and unrealized depreciation and $3.31 of dividends paid during the year. There was a $0.04 net accretion from the ATM and DRIP plan issuances during the year. Slide 10 outlines the dry powder available to us as of quarter end, which totaled $428.2 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 $204.7 million of quarter-end cash available and thus fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing also very accretive.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

In addition, all $321 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 and the fact that almost all 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.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Now I would like to move on to Slides 11 through 14 and review the composition and yield of our investment portfolio. Slide 11 highlights that we have $978 million of AUM at fair value, and this is invested in 48 portfolio companies, one CLO fund, and one JV. Our first-lien percentage is 88.7% of our total investments, of which 25% is in first-lien last-out positions. On Slide 12, you can see how the yield on our core BDC assets, excluding our CLO, has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 11.5% from 11.8% last quarter, with two-thirds of the decrease due to the impact of decreasing core SAR base rates. The CLO yield decreased to 16.4% from 24.6% last quarter, reflecting continued lower portfolio performance.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Slide 13 shows how our investments are diversified through the U.S., and on Slide 14, 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 and JV, which are included as structured finance securities. Moving on to Slide 15, 7.4% of our investment portfolio consists of equity interests, which remain an important part of our overall investment strategy. This slide shows that for the past 13 fiscal years, we had a combined $39.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This is net of the Zollege, Netreo, and Pepper Palace realized losses this year, slightly offset by the realized gains on our InVita investment in Q3 and our Nauticon, Vector, and Modern Campus investments in Q4.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

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.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Thank you, Henry. Today, I'll focus on our perspective on the changes in the market since we last spoke with everyone in January, and then comment on our current portfolio performance and investment strategy. Broader middle market deal volumes were showing signs of improvement until the recent tariff developments, which initially widened loan spreads and had a stifling effect on new debt issuances. Characteristic to the volatility resident in the larger loan markets, we've more recently observed spreads tightening again and new issuances picking up as concerns about the potential economic impact of tariffs have somewhat abated, at least for the time being. It's important to point out that the lower middle market in which we operate is generally not subject to such immediate volatility and tends to move in sync with medium-term macroeconomic variables.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Thus, our market has remained relatively unchanged throughout this economic turmoil, and we haven't experienced the roller coaster ride of the larger markets. Deal volumes in our market have remained down significantly over 2024 and down further still as compared to 2021 to 2023. We believe a number of factors are influencing the decline in lower middle market deal activity, including a disconnect between where buyers and sellers are willing to transact, elevated interest rates making debt financing more expensive, and a trend toward PE firms holding on to assets longer in order to meet their return expectations. The combination of historically low M&A volume 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.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

We have experienced this over the course of this past year, with a little over half of our repayment activity resulting from loans being refinanced on more favorable terms. Notably, in about two-thirds of these cases, we had the opportunity to stay in the investments. Price alone was less of a determining factor; rather, we were not comfortable with either the new leverage profile or the structural features of the loan agreements. Despite the volatility in the broader macro environment, loan terms in our market remain stubbornly borrower-friendly, and we have not seen lenders revising their underwriting criteria, hiking spreads, or cutting leverage. These dynamics could, of course, change if the macroeconomic outlook changes materially. The historically low deal volumes we are experiencing have made it more difficult to find quality new platform investments than in prior periods.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

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. We will 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 are greatly expanding our business development efforts and are investing in resources to provide greater bandwidth for our professionals to dedicate themselves to this effort.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

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 built relationships with. 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.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Our payoffs tend to be lumpy as our portfolio investments reach 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 five fiscal years. In summary, the way we're approaching the currently challenging environment is to, first, stay disciplined on our 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.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

The relationships and overall presence we've built in the middle market and 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 $42 million gross and $26 million net asset growth this quarter. Before leaving this topic, I'll also point out that we continue to believe that the lower middle market is the best place 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.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

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. Now I'll move on to the subject of tariffs more directly. Although there naturally remains much uncertainty around tariffs and their potential impact on small businesses, we believe we are relatively well-positioned if tariff conditions persist. A large majority of our portfolio companies are SaaS businesses or businesses that operate in the domestic services sector, with direct cost structures that should largely not be affected by tariffs.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

While we're still actively working with the management teams and ownership of each of our portfolio companies to fully assess the potential exposure, it appears that for the handful of companies with more direct tariff exposure, only a portion of their input costs would potentially be affected. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital. As seen on Slide 16, our more recent performance has been characterized by continued asset deployment to existing portfolio companies, as demonstrated with 40 follow-ons in calendar year 2024. While we invested in two new platform investments last calendar year, we focused much of our time and resources towards supporting our portfolio and managing a discreet few challenge credits.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

More recently, during calendar Q1, we have closed two new platform companies and a third one in April, as our business development efforts continue to ramp up despite these low-volume markets. Overall, our deal flow remains steady, and our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics, is a strength of ours. The portfolio management continues to be critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. There remain two portfolio companies that we are actively managing, as discussed in previous quarters, and I will touch on them shortly. In general, our portfolio companies are healthy. Notably, the fair value of our core BDC portfolio is 1.6% above its cost.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

88% of our portfolio is in first-lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress 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. We have the same two investments on non-accrual, namely Pepper Palace and Zollege, consistent with last quarter. We continue to hold them on non-accrual following their restructurings, but their combined remaining fair value, including equity, is just $5.5 million. Looking at leverage on this same slide, you can see that industry debt multiples increased slightly for senior debt. Total leverage for our overall portfolio decreased slightly to 5.35 times, excluding Pepper Palace and Zollege, reflecting lower leverage across our several portfolio companies. Slide 17 provides more data on our deal flow.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

As you can see, the top of our deal pipeline is up from the end of the year, despite the current M&A activity in the lower middle market remaining low. This recent increase is as a result of recent business development initiatives. 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 18, our overall portfolio credit quality and returns remain solid.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

As demonstrated by the actions taken and outcomes achieved on the non-accrual and watchlist credits we had over the past year, our team remains focused on deploying capital in 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 $2.28 billion in 120 portfolio companies and have had just three realized economic losses on these investments. Over that same timeframe, we've successfully exited 78 of those investments, achieving gross unlevered realized returns of 15.1% on $1.2 billion of realizations.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Even taking into account the recent write-downs of a few discreet credits, our combined realized and unrealized returns on all capital invested equals 13.5%. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first-lien senior debt. Consistent with the previous couple of quarters, we have only two investments on non-accrual. Although 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 $5.5 million, including equity. We continue to have majority control over Pepper Palace, with the turnaround specialist we have been working with in the role of CEO and owning significant equity in the business. Management of the company by us continues as we explore avenues to expand the business. The total fair value of the remaining investment is $1.5 million.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Zollege continues to show positive signs of improvement and profitability. The previous owner has invested meaningful dollars in the business, is leading the enterprise, and has reassembled some of the former senior leadership. He and the management team are working in partnership with us with the immediate goal of returning the business to its former profitability levels and the ultimate objective of exceeding those levels. Many of the initiatives management has undertaken have resulted in improved key performance indicators for the business. We have equity in a first-line term loan in the company with a current fair value of $3.9 million, with the equity marked up this quarter to reflect the recent positive financial performance of the company. In addition, during the year, we recognized $3.4 million net realized depreciation in our core non-CLO portfolio, including Pepper Palace and Zollege.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

About half of this depreciation represents adjustments to market multiples and prepayment premiums, while the other half is a $1.5 million markdown to our Stretch Zone investment, reflecting slower-than-projected sales growth combined with increased investment in corporate management team. Company management and ownership are undertaking initiatives to address these trends, and the sponsor has provided meaningful credit support to the business. The CLO and JV have $2.7 million of unrealized depreciation this quarter, reflecting primarily markdowns due to individual credits in these vehicles, most notably in the investment in the first CLO's F-note. Importantly, we recognized net realized gains of $7.2 million on the equity sales of our Modern Campus, Nauticon, and Vector investments this quarter, continuing our history of healthy realized gains.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Our overall investment approach has yielded exceptional realized returns in recovery of our invested capital, and our long-term performance remains strong, as seen by our track record on this slide. Now, moving on to Slide 19, 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 over to our CEO, Chris.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Thank you, Mike. As outlined on Slide 20, our latest dividend of $0.74 per share for the quarter ended February 28, 2025, was paid on March 25, 2025.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Additionally, as previously discussed, building on our strong distribution history, we announced a transition to a monthly dividend structure, increasing our quarterly-based dividend by $0.01 per share to $0.25 per share per month, or $0.75 per share in aggregate for the first quarter of fiscal 2026. This reflects a 1% increase over the past year and a 7% increase over the past two years. 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 21, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 26%, outperforming and doubling the BDC index's 13% for the same period. Our longer-term performance is outlined on our next Slide 22.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Our five-year return places us well above the BDC index, while our three-year performance is in line with the index. Of note, the five-year performance for the BDC industry is uncharacteristically high due to the five-year period starting during the COVID-19 market crash. Since Saratoga took over management of the BDC in 2010, our total return has been 831% versus the industry's 308%. On Slide 23, 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.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

While return on equity, NAV per share growth, and dividend coverage are lagging this past year, this is largely due to the two discreet non-accrual investments previously discussed, as well as the impact of recent lower base interest rates and AUM levels, reflecting the full-period impact of recent third-quarter net repayments. 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 to have grown NAV accretively over the long term, with our long-term return on equity at 1.5 times the industry average. Moving on to Slide 24, all of our initiatives discussed in this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

We believe that our differentiated performance characteristics outlined on 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 11.2%, ensuring we are strongly aligned with our shareholders. Looking ahead on Slide 25, 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.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

This will allow us to deliver exceptional risk-adjusted returns to the 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, and I would like to now open the call for questions.

[Operator]

Certainly. Ladies and gentlemen, if you would like to ask a question at this time, please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again.

[Operator]

Our first question comes from the line of Erik Zwick from Lucid Capital Markets. Your question, please.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

Thanks. Good afternoon, everyone. It was encouraging to hear your comments on the pipeline strengthening. I'm curious if you can maybe add a little color in terms of what that mix looks like in terms of new versus add-on opportunities, as well as any particular industries where you're seeing strength at this point.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

It's a difficult question to answer, mostly because there's so much going on in the marketplace, particularly some of the uncertainty that's being driven by the tariff environment. I think that, plus the low volume of deals in the marketplace, makes it a bit challenging to look out at the pipeline with any real level of certainty.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

I would say that we feel very confident in the initiatives that we're undertaking to reinforce our business development efforts and that in the space that we occupy in the lower middle market, there's an enormous number of businesses and deal sources there, and that over time, our asset deployment will exceed the payoffs that we experience in the marketplace. A little bit hard to say too much about where our pipeline is right now. It's kind of reflective of what you've seen the last couple of quarters would be the best way to characterize it.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

All right. Thanks. Maybe just a bit of a follow-up. One of the initiatives that you talk about on Slide 24 is the commitment to grow AUM, and I realize to a large degree that's dependent on market opportunities for new lending as well as paybacks.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

Just taking a look from maybe a different perspective, just your current kind of personnel and infrastructure capabilities, what is the ideal size for the portfolio from your perspective?

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

I don't know that we think about it in terms of ideal size. I mean, we've certainly grown the business to a point where it's at a decent scale, a scale that works very well in the market that we're in. We do think that there are opportunities for us to grow quite significantly without any change in strategy. In the marketplace that we're in, we could be quite a bit larger, but we don't feel like we're underscale, and that's a weakness in any respect either. I don't know if that helps answer your question. I would say this, just to reinforce what I mentioned on the business development front.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

I mean, we are actively investing in personnel growth. So we've added people on the portfolio management side. We've added people on the business development side. We've invested in other resources to help make our business development efforts that much more efficient and free up our investment professionals to also get much more involved in outward-facing activities that should feed our pipeline. And we're seeing some evidence of that bearing fruit, but it's a little bit early to tell. As you can imagine, by our nature, our DNA is to be cautious, and it's not an easy environment to invest in right now because the deal flows are down, but we feel very good that we can grow our portfolio over time.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

If I could just add a little bit too about the nature of the markets that we're addressing.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

In the smaller middle market range, we're often investing in companies that are founder, the founder is still present and often transition. The founder's trying to effect a transition, either a complete sale or a partial sale in anticipation of moving out and institutional capital coming in. We're often the first institutional capital in some of these situations. The presence and the volume of those deals is kind of an actuarial thing, right? It has to do with how many founders are in their mid-60s and 70s and starting to think about what's the next stage for their business and their estate planning and things like that. I think, as Mike had said, those type of deals are out there almost regardless of the environment, and it's really incumbent on us to find those and address those.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

I think we have an opportunity in the smaller middle market to generate deal flow in an adverse environment like we're in. It's a little easier, or there are more prevalent deals than there would be in the larger markets that are driven much more by the broader market trends.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

I appreciate the detailed commentary there. Curious, I appreciate the comments you gave regarding potential impact to tariffs. I'm curious if you could kind of address any potential exposure you have to government contracts that could be impacted by the federal agency cuts and reductions.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

We don't see anything in our portfolio that makes us feel like we're significantly exposed to that in any way.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

All right. That's good to hear. Last one for me, and then I'll step aside. I may have missed it in the prepared comments.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

Did you mention where the spillover level currently stands at this point?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

No, we did not, but it is being disclosed in the 10Q, Eric, that we just 10K that we just filed. It is also just similar to what we mentioned last quarter. It is sort of just over the $3 a share at the moment.

[Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets]

Thanks, Henry. And Chris and Mike, I appreciate answering my questions as well. Thanks, guys.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Thank you.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Thanks, Eric.

[Operator]

Thank you. Our next question comes from the line of Sean Paul Adams from B. Riley Securities. Your question, please.

[Sean Paul Adams, Equity Research Analyst at B. Riley Securities]

Hey, guys. Good afternoon. I dialed in a little bit late, so apologies if this already got asked, but when I am looking at the net deployment for the quarter, it looks like there was a significant uptick in repayments versus deployments.

[Sean Paul Adams, Equity Research Analyst at B. Riley Securities]

Is there a certain, given the cash on hand, is there a certain yield and structure that you guys are looking for for new deals where you would expect to deploy capital? Is the deal flow pipeline kind of aligned with previous quarters?

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

We're seeing our pipeline up slightly to address that question, but as I mentioned in prepared remarks, it's a tough market out there. We think our efforts to get out in front of potential deal sources are, we're getting some positive effects of that, but hard to really say given that the pipeline is, or the marketplace is, relatively challenged in that respect. I'm sorry, what was the other part of your question?

[Sean Paul Adams, Equity Research Analyst at B. Riley Securities]

Just if there's a specific yield or structure that you guys are looking for for the new deals.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Okay. Yeah.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Generally, the way we're looking at the market and any deals that we do is we're looking at our all-in cost of capital and making sure that we're pricing deals cognizant of what our all-in cost of capital is so that we can make sure that as we're deploying our capital, that it's accretive to our shareholders. Now, where we occupy in the lower end of the middle market, we've seen that generally over time, the spreads that we can achieve are a bit higher than where they are in the upper market. That's not always the case at every moment, but by and large, we tend to operate in a wider spread environment than the upper market.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

This market's a little bit volatile, so it's hard to tell, but we're finding deals, and certainly the deals that we're investing in right now, we're looking at them from a standpoint of what's our cost of capital and making sure they're accretive from that standpoint.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Yeah. And Sean Paul, just to clarify, so we actually did grow in AUM in Q4 this quarter. We're actually up about $26 million or so. The big reduction that we referenced the whole time and that you've seen was in Q3. Q3, we had healthy originations, $80-odd million, but we had $160 million of repayments in the one quarter, which is probably a record for a quarter for us. And so that obviously resulted in a decline in AUM in Q3 and most of the cash that we have on our balance sheet at the moment. But Q4 was actually growth.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

I would add to that too. One of the things I should have mentioned, just thinking about our cost of capital, one of the things that we benefit from is that we do have an SBIC license, and that gives us access to very favorable cost of capital for the deals that qualify for SBIC financing. The vast majority of what we do does qualify for SBIC financing. It makes it easier for us, even in market conditions like now, where pricing is pretty tight because everybody's clamoring for good assets, to deploy capital in a way that's still very accretive to our shareholders.

[Sean Paul Adams, Equity Research Analyst at B. Riley Securities]

Got it. I appreciate the color. Thank you.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Casey Alexander from Compass Point Research. Your question, please.

[Casey Alexander, Analyst at Compass Point Research]

Yeah.

[Casey Alexander, Analyst at Compass Point Research]

First off, Henry, did you repay some of the debentures on SBIC II during the quarter?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

We did. Absolutely. Yeah. We repaid $44 million of SBIC II debentures because we're at the end of our reinvestment period in SBIC II. When it makes sense, we'll start using available cash that is in SBIC II to repay debentures. We did that at end of February.

[Casey Alexander, Analyst at Compass Point Research]

What was the cost on those that you repaid? What was the interest rate?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

I think on average, they were about 6% or so. Sorry, 6% or so. Yeah.

[Casey Alexander, Analyst at Compass Point Research]

6%. What's the rate on the new SBIC debentures when you take them down right now?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Yeah. The most recent ones were priced around about the high fours. I think all-in is probably like 5.25%.

[Casey Alexander, Analyst at Compass Point Research]

5.25%. Okay.

[Casey Alexander, Analyst at Compass Point Research]

Have you considered moving to recognizing the excise tax quarterly as opposed to annually and kind of removing some of the distortion that such a large excise tax creates on your results?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Yeah. We actually did, and we actually walked through all the accounting with our accountants. The way the accounting works is you only recognize it once you know it's definitive. You can, depending upon when you pay your spillover, you have till the end of December to pay it. If, for example, you pay it on December 30th, you won't have any excise tax. It's a point in time. Only once you hit January 1 is the expense definitive, and do you pay it? Is it an obligation?

[Casey Alexander, Analyst at Compass Point Research]

I mean, with $3 a share in spillover, you know you're going to have it, though.

[Casey Alexander, Analyst at Compass Point Research]

You could accrue for it on a quarterly basis and reduce some of the distortion, can't you?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

You have the opportunity. So we'll face a point again come the end of December where we can pay that $3 and whatever else has built up since then on December 30th, and then you wouldn't have a liability or obligation.

[Casey Alexander, Analyst at Compass Point Research]

Okay. Okay. Can you remind me because I looked at the management contract recently? Is cash subtracted from gross assets for the purpose of calculating the management fee?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Yes.

[Casey Alexander, Analyst at Compass Point Research]

Okay. And Mike, you said that there was one deployment in April. Is there any way you can share with us how large it was?

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

I'm looking at Henry. I mean, I think we generally haven't done that. I think it's interesting, Casey.

[Michael Grisius, Chief Investment Officer at Saratoga Investment Corp]

I'm not trying to be evasive because what we're trying to avoid is getting right up to the earnings call and just saying everything that we've done in our portfolio right up to that date. I think the way we think about it, and I know you appreciate this, is that we think of growth of our portfolio more centered around adding portfolio companies, a little less about the size of that particular investment and more about every time we add a portfolio company, that is fuel for additional capital deployment over time. I think I referenced in the prepared remarks that over the last five years, we've actually done more add-ons than we have initial portfolio companies because most of what we invest in is small. Henry, I think we do say what we've deployed so far, right?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

We did disclose, Casey, I think it's in the actual earnings release that we had $45 million-odd since year-end, and that was two follow-ons, and I think, sorry, two new portfolio companies and five follow-ons. That gives you a sense of the size and how it's spread over multiple investments.

[Casey Alexander, Analyst at Compass Point Research]

That's what your deployment is thus far in this new year, $45 million?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Correct. From March 1st. Yep.

[Casey Alexander, Analyst at Compass Point Research]

Yep. Okay. I hate to go back to an old sticking point, but you entered the quarter with $250 million in cash and still somehow chose to raise $32 million in equity capital in a quarter where you only put out $26 million.

[Casey Alexander, Analyst at Compass Point Research]

I think every shareholder should ask you, "Why are you selling stock when you have so much that you need to get deployed?" And some of it is difficult to deploy because it sits in SBA subsidiaries. It just seems dilutive to your earnings and not in the best interest of shareholders.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Casey, I think we appreciate the question, and we think it's a totally legitimate question, and we have discussed this before. I think if we were managing on a quarter-to-quarter basis, or you're right, it's not the right thing you have to do if you're saying, "Are we trying to maximize this quarter?" I think one of the beauties of the BDC is it's a permanent capital vehicle, and we're not forced to deploy capital like a fund would be, like use it or lose it or anything like that.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

We take a long-term view on growth. Again, I think as we have emphasized in our presentation, our long-term performance is substantially above the industry's long-term performance. We are very focused on that. We think right now, while the earnings are what they are as we presented and we had repayments and our net originations are not as robust as they have been in other periods of time, our balance sheet is incredibly strong. I think in an uncertain environment like this, strengthening the balance sheet is critical in the near and the long term. The equity component of our enterprise is also critical.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

We have been, people have commented on the levels of leverage being high, and we've talked a lot about our views on leverage, especially the fact that we have a lot of fixed-cost debt with no covenants and long-dated maturities and things like that. Also, I think that this raising of the equity does deleverage us in this environment. Yes, we have a lot of capital on hand. On the one hand, you're saying, "Well, that costs us something," which it does. On the other hand, we're incredibly well-positioned with a kind of a fortress balance sheet. We've never had such a strong balance sheet position in our history. Having a super strong balance sheet, we think, is very, very important.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

The other thing I would say is that, and again, I do not have the data at the tip of my tongue here, but if you look, and you know this very well yourself, if you look at the history of BDCs, you can only raise equity capital in certain types of environments. Equity capital is not a continuously available resource. Often, the times when you want to be able to deploy, like for example, during the COVID downturn, you could not sell any equity, but there were tremendous opportunities to invest. We invested a lot of capital. We were very well-prepared in that downturn and grew our assets under management very well and improved our relationships with sponsors and things like that.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

There was absolutely no equity to be raised during that period of time when there was very robust pipeline opportunities and very fat spreads in a lot of the things we were doing. I think thinking about the long run, you kind of have to raise equity capital when you can as opposed to when you need to, and then strengthen your balance sheet so that as the opportunities change and evolve, you're in a very strong position to do so. Again, it's a long-term investment in our foundational equity structure, which is the cornerstone of all the leverage and all the things that we do. That's how we view it.

[Casey Alexander, Analyst at Compass Point Research]

Thank you for taking my questions.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Robert Dodd from Raymond James. Your question, please.

[Robert Dodd, Analyst at Raymond James]

Hi, guys.

[Robert Dodd, Analyst at Raymond James]

Just to go back to the spillover question, I mean, it looks to me like you've got about $3.30 per current share. Obviously, share counts can change. I mean, that's more than four quarters of current run rate dividend. So I mean, is the spillover balance too high? Is what it boils down to. Because I mean, is there an issue that you're sort of almost mandated to grow the dividend or pay out special distributions again as you did in the third quarter, even if base rates go down and earnings go down? With a spillover level that high, there's now an emerging disconnect between what your dividend must do to meet the BDC distribution requirements versus what earnings might do. So I mean, is there a case to be made that lowering it more than the $0.35 special?

[Robert Dodd, Analyst at Raymond James]

Should you do more than that to lower it so that you can reconnect dividend trends to potential earnings trends, if that makes sense?

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

I think there's been a lot of change in the marketplace. I think, for example, we talked about at length sort of outsized redemptions affecting our earnings level. The good news is those were redemptions of very successful investments, some of them dating back five and more years. On the one hand, we had realized equity gains and things like that. It is reflective of a solid portfolio with strong underwriting. Nonetheless, it does reduce our earnings relative to our dividends. We do have a dividend level, and we do have the spillover, as you remarked. A lot of things remain to be seen. I mean, there may be some opportunities to substantially deploy capital and pay out sufficiently.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Further, as Henry mentioned in answering the question earlier about the accounting for the spillover, we do have until the 30th of December to decide what to do. If, as you laid out, things sort of continue on the path they're continuing, yeah, there would be a special dividend to be paid to reduce the spillover and the excise tax and things like that. Again, I think a lot of it's going to be conditioned on our relative performance over the balance of the year.

[Robert Dodd, Analyst at Raymond James]

Got it. I appreciate that. Another one I forgot. On the cash, right? I mean, obviously, you've deployed some of your portfolio is growing again. The AUM is growing again. You're going to consume that cash over a period of time. At what point does it make sense?

[Robert Dodd, Analyst at Raymond James]

You've mentioned for many, many quarters that some of this higher cost, the baby bonds, for example, are callable now. At what point with the cash balance that you have, obviously, some of it's in semi-restricted areas, but at what sense does it actually make sense to start calling that higher cost debt in the medium term to kind of utilize some of that cash, which would be accretive to earnings, in a market where deployment opportunities are there, but $200 million-plus, I mean, that's a lot. Any thoughts there?

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

I think if you look at the baby bonds, you've got to look at the remaining time outstanding, the cost of the call, and then also the cost of reissuance to the extent we would grow subsequent to calling them.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

We did, at one point in our history, a couple of years ago, we did call a baby bond and regretted it six months later. I think we want to be careful. The baby bonds are some of the most favorable types of financing available to companies. They are interest-only, no covenants, and callable. There are tremendous features to those that are very, very attractive. You want to make sure you do not, and then also, you need to look at what the reissuance costs are. It would be one thing if our baby bonds were trading several hundred basis points higher in cost than we could reissue at. The reissuance markets is not that different from the pricing of our baby bonds.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

It is one of these things where you could maybe have some near-term benefit for a couple of quarters, but you could regret it dramatically later if you had to reissue and all the costs of the breakage and the calling. There is not enough juice in it right now relative to what we think we can do on a deployment basis for us to make a bold move. I mean, I think as Henry mentioned, we have repaid some of our outstanding debt opportunistically here and there, but calling the baby bonds is something that is not something we are actively looking at at this moment in time.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Robert, also, we are currently and have been for a while now earning about 4.25% on the cash. We sort of think of the, when you think of the negative drag, it is not 6%-8%.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

It's sort of 2%-4%. And then as Chris says, you want to be A, it's really great to have a strong capital structure. We almost view that as deleveraging at the moment. But secondly, there is a real reissuance cost in this market that we wouldn't be able to issue at less at the moment. The bond market hasn't changed yet. Maybe it will if rates start changing. At the moment, your break-even is quite an extended period. The value of this cash and the capital structure is quite valuable.

[Robert Dodd, Analyst at Raymond James]

I understand your point. I mean, my point is just that you wouldn't need to immediately refinance. It's kind of the point with the amount of cash you have. I certainly wouldn't encourage you refinancing them right now. The question was more motivated by using lowering the cash balance, paying them off.

[Robert Dodd, Analyst at Raymond James]

I understand your point, and thank you for the answer.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Yeah. If I could just go back, sort of tying these two questions together a little bit to the spillover conversation before, I think what's important to note is that the excise tax amounts to a one-time payment of 4% of the obligation. One can look at it as quite low-cost financing in this environment. In years past, when we had SBIC ventures below 4%, we didn't run any spillover at all. It's something that is part of our capital deployment considerations. The cost of the spillover is a pretty favorable one right now. Thanks, Robert.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Thank you.

[Operator]

Thank you. Our final question for today comes from the line of Mickey Schleien from Ladenburg. Your question, please.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

Yes. Good afternoon, everybody.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

As usual, your prepared remarks were very thorough, and a lot of folks have already asked a lot of great questions. I just have a couple of more straightforward questions, I suppose. I noticed that the portfolio yield did not change quarter to quarter. At the same time, the portfolio's allocation by security did not change. So far, or average so far, went down about 50 basis points. I was hoping you could triangulate how portfolio yield was stable in that environment.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

No, actually, Mickey, our portfolio did go down 30 basis points. If you look at slide 12, you will see it is important to differentiate the CLO and the joint venture out of sort of the overall interest and portfolio. What we call the core portfolio went down from 11.8% to 11.5%.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

That was 30 basis points, and about two-thirds of that was SAR, which changed by about 20 basis points during the quarter. The other third was just sort of, like you said, the mix and some of the impact of the new deals that we have done over the last couple of quarters versus the repayments.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

Okay. That is helpful. Henry, was there any sort of reversal of interest income during the quarter?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

No.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

No.

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

No.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

I just want to make sure I understand, and following up on Casey's question, did the external manager subsidize some of the common share issuance during the quarter?

[Henri Steenkamp, CFO and Chief Compliance Officer at Saratoga Investment Corp]

Yes. Yes, we did. Consistent with what we have done in other quarters as well. All the issuances were done at NAV or even slightly above while we were trading anything from 3%-7%, 3%-8% below NAV.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

Okay.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

Lastly, on the balance sheet leverage question, maybe a question for Chris, just thinking long term, I do understand, obviously, that you have a series of unsecured notes outstanding, and that gives you flexibility that's superior to having secured debt. The leverage ratio is quite high, and the regulatory coverage ratio is quite low. At the same time, that economic risk is increasing. Just thinking broadly and longer term, would you like to see balance sheet leverage perhaps trend down some more? You specifically talked about issuing equity last quarter to help that along the way. Is that the long-term goal of management?

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

That is a very good and complex question that we wrestle with ourselves and with our board quite a bit. What is the right leverage level at a given point in time?

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

I think, as we mentioned earlier, the issuance of equity is something that's kind of opportunistic because certainly BDCs our size don't have the opportunity to do that on a regular basis. There's only certain times and places where you can do that, and we think you have to do that. Our intent and our history has been one of significant long-term growth. The cornerstone of that long-term growth is equity. You have to have more equity to grow, and there's different ways to get that equity. One is by selling it in the open market. Others have been realizations on capital gains, which has been an important source because we do get equity in our investments often. We did have $7 million of realized gains this past quarter. All that contributes to the cornerstone building of it.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Now, in terms of our view of leverage, I think we've talked about that many times over the years. We feel that if you have long-term covenant-free fixed-rate financing with a maturity structure 2-10 years out, that leverage is very different than asset-based leverage, which has got mark-to-market risks and things like that. I mean, we don't have mark-to-market risks. A lot of people, a lot of entities that have the asset-based lending, if there's some event like happened in 2008 or COVID or something like that, mark-to-market risks have to be addressed immediately or else there's a foreclosure kind of action that takes place. We don't have that risk really at all. We think we've got a very, that's sort of like a sort of a huge risk factor that's really not present for us.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

That gives us the confidence to run with a higher leverage rate because over time, we feel confident in the U.S. economy. We're confident in our underwriting, our underlying companies, and all that. We think there may be dislocations in short periods of time, but over long periods of time, we think we're going to be all right with everything. That kind of governs a lot of how we look at that. We don't feel that we're over-leveraged right now. I think also, if you go back to the comments that Mike was making about our portfolio and Henry, our portfolio right now is in very good shape. I don't know what all the other portfolios you cover look like, but we have our quote problems are very, very minor. We have some very solid companies, very well underwritten.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

We feel like we've got a very solid portfolio. That gives us also more confidence that the leverage level that we're at right now is certainly not too high relative to all those things that we've just mentioned.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

If I could just follow up, Chris, I hear what you're saying, but you do have mark-to-market risk on your assets, right? If we were to, God forbid, we had an 2008, 2009 sort of environment, I could paint a picture where you would trip your regulatory asset coverage ratio, and you'd have to suspend the dividend. Are you saying that you're willing to take that risk at this point in time?

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

I think what I'm saying is that I don't foresee, given the nature of our portfolio, a very substantial mark-to-market risk in the type of businesses that we're financing.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

Okay. I appreciate that.

[Mickey Schleien, Managing Director of Equity Research at Ladenburg]

Those are all my questions this afternoon. Thanks for your time.

[Operator]

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Christian Oberbeck for any further remarks.

[Christian Oberbeck, Chairman and CEO at Saratoga Investment Corp]

Okay. I'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Participants

Executives

• Henri Steenkamp, CFO and Chief Compliance Officer
• Christian Oberbeck, Chairman and CEO
• Michael Grisius, Chief Investment Officer

Analysts

• Casey Alexander, Analyst at Compass Point Research
• Mickey Schleien, Managing Director of Equity Research at Ladenburg
• Erik Zwick, Managing Director of Equity Research at Lucid Capital Markets
• Robert Dodd, Analyst at Raymond James
• Sean Paul Adams, Equity Research Analyst at B. Riley Securities