Saratoga Investment Q1 Earnings Call Highlights

Key Points

• Assets under management rose to $1.126 billion, and net originations were positive at $31 million, helped by new investments and follow-ons despite a still-competitive private credit market.
• Adjusted net investment income fell to $0.47 per share, pressured by lower short-term rates, tighter spreads, and higher borrowing costs after recent debt refinancing.
• NAV declined to $23.23 per share as portfolio markdowns and a dividend that exceeded GAAP NII weighed on results, while management said credit quality remains generally stable aside from watchlist names like Pepper Palace, Exigo, and Chronus.

Saratoga Investment NYSE: SAR reported higher assets under management and positive net originations for its fiscal first quarter 2027, while lower short-term rates, tighter spreads and higher borrowing costs weighed on net investment income and net asset value.

Chairman and Chief Executive Officer Christian Oberbeck said the business development company ended the quarter with $1.126 billion of assets under management, close to a record level, up 1.6% sequentially. Net originations totaled $31 million, driven by $79 million of new originations across two new portfolio companies, 10 follow-on investments and $11 million of new BB and BBB CLO debt investments, offset by repayments.

“During the quarter, our deal activity remained robust, reflecting the impact of our recent business development efforts despite persistent sector headwinds and cautious sentiment across the broader private credit sector,” Oberbeck said.

Net Investment Income Declines as Rates and Spreads Pressure Returns

Adjusted net investment income was $7.6 million, or $0.47 per share, down from $0.53 per share in the prior quarter and down 28.8% from the year-earlier period. Oberbeck said adjusted NII continued to reflect “significantly lower short-term interest rates and tightening spreads” on the company’s largely floating-rate assets, as well as the full-period impact of recent changes to Saratoga’s capital structure.

Chief Financial Officer Henri Steenkamp said the decrease also reflected higher interest expense after Saratoga issued a $50 million 7.25% private bond and a $100 million 7.5% public baby bond in the prior quarter to repay a $175 million 4.375% institutional bond at the end of February. The weighted average interest rate on the core BDC portfolio was 10.5%, compared with 11.5% a year earlier and 10.4% in the prior quarter.

Saratoga declared a monthly base dividend of $0.25 per share, or $0.75 per share for the second quarter of fiscal 2027. Oberbeck said the dividend represented a 14% annualized yield based on the company’s July 6, 2026, stock price of $21.42. The company’s latest quarterly dividend exceeded GAAP NII, contributing $0.28 of the sequential $1.19 decline in NAV per share, according to management.

NAV Falls on Portfolio Marks and Dividend Under-Earning

Quarter-end NAV was $378.5 million, down from $396.2 million in the prior quarter and up from $296.4 million a year earlier. NAV per share was $23.23, compared with $24.42 last quarter and $25.52 a year earlier.

Saratoga’s total portfolio was marked down $15.2 million during the quarter. Oberbeck said this included $18.3 million of net depreciation in the non-CLO core portfolio, partly offset by a $2.9 million write-up in the joint venture and a $0.3 million write-up in the BB and BBB CLO debt portfolio.

Management said Pepper Palace, which was written down to zero, along with Exigo and Chronus, accounted for $9.9 million, or 54%, of the core non-CLO portfolio markdown. Another $6 million, or 33%, reflected broader market adjustments to comparable market multiples on equity positions held at or above cost, while the remainder reflected changes in market spreads.

Oberbeck said the core non-CLO portfolio ended the quarter 0.2% below cost, while the total portfolio valuation was 3.6% below cost. Pepper Palace and Exigo were on Saratoga’s red watchlist, indicating potential risk of capital loss.

Credit Quality Remains a Focus Amid Watchlist Developments

Chief Operating Officer David DeSantis said Saratoga had one core BDC investment on non-accrual status, Pepper Palace, along with the CLO’s F note, which was placed on non-accrual last quarter. Together, those investments represented 0.0% of the portfolio at fair value and 1.2% at cost, compared with a BDC industry average cited by Saratoga of 3.7%.

DeSantis said Exigo remained on accrual but had been moved from yellow to red during the quarter as the company faced weakness in a challenging end market tied to softer consumer purchasing. He said Saratoga’s investment in Exigo was marked at $17.3 million, or $0.70 of its total cost, and that the lending group was working with management and the sponsor to explore options to stabilize performance.

Chronus also remained on accrual, with Saratoga writing down its debt and preferred equity investment by $1.5 million. DeSantis attributed the markdown to declining customer retention and slower new customer acquisition.

“In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is only 0.2% below cost,” DeSantis said.

Originations Improve, But Competition Remains Intense

DeSantis said Saratoga is not seeing a general pickup in merger-and-acquisition activity in its lower middle market segment, but its own deal flow has increased because of business development efforts. Four of the 11 new platform companies closed over the past year came from new relationships, he said.

He described market dynamics as “at their most competitive level since the pandemic,” with tight spreads and full leverage as lenders compete for higher-quality issuers. However, he said Saratoga is beginning to see some signs of spread widening. In response to an analyst question, DeSantis said new first-lien unitranche loans are generally being originated in the 550- to 600-basis-point range, although some repayments involve higher-priced assets.

DeSantis also said Saratoga expects a “substantial shift away from software” in both deal flow and eventually the portfolio, noting that neither of the two new platforms closed in the quarter were software-related.

Liquidity and Capital Allocation Discussed

Saratoga ended the quarter with $197 million of investment capacity, including $61 million in cash, $46 million available through its SBIC III license and $90 million from revolving credit facilities. Steenkamp said that liquidity would allow the company to grow assets by an additional 17% without external financing.

In the question-and-answer session, analysts asked about dividend coverage, leverage, portfolio growth and share repurchases. Oberbeck said management believes the gap between NII and the dividend will close, but the timing remains uncertain. Steenkamp said Saratoga had about $1.75 per share of spillover income as of May 31, and about $1.50 after a subsequent dividend payment.

On leverage, Oberbeck emphasized Saratoga’s use of fixed-rate, long-term debt and limited covenant pressure, while acknowledging that the structure has been less favorable for earnings in a declining-rate environment. Asked about share repurchases, he said Saratoga has repurchased stock in the past and would evaluate buybacks depending on the stock’s discount to NAV and other circumstances.

Looking ahead, Oberbeck said the macroeconomic backdrop remains complex, citing geopolitical tensions, elevated inflation, concerns around AI and software exposure, and uncertainty around interest rates. He said Saratoga remains focused on disciplined underwriting, balance sheet conservatism and selective deployment into its investment pipeline.

About Saratoga Investment NYSE: SAR

Saratoga Investment Corp. 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.

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