Saratoga Investment Corp Q1 FY2027 Earnings Call - Spreads Tighten, Dividend Gap Widens, but Credit Quality Holds

Conference Call Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Saratoga Investment Corp’s fiscal first quarter 2027 financial results conference call. Please note that today’s call is being recorded. During today’s presentation, all parties will be in 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 Corp Chief Financial Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Thank you. I would like to welcome everyone to Saratoga Investment Corp’s fiscal first quarter 2027 earnings conference call. Today’s conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal first quarter 2027 shareholder presentation in the Events and Presentation section of our investor relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28th, so any reference to Q1 results reflects our May 31st quarter-end period.

A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Thank you, Henri, and welcome everyone. Saratoga Investment Corp’s highlights this quarter include net positive originations of $31 million, including two new portfolio companies originated in the quarter. Sustained long-term AUM growth, with AUM growing 1.6% during the quarter and reaching close to a record level of $1.126 billion. Latest 12 months return on equity of 4%, continuing to beat the BDC industry average of 2.4%, and importantly, continued overall solid performance from the core BDC portfolio in a challenging and volatile macro environment, with core BDC portfolio fair value remaining within 0.2% of cost, demonstrating solid overall credit quality in a challenging and volatile macroeconomic environment.

Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the second quarter of fiscal 2027, which when annualized, represents a 14% yield based on the stock price of $21.42 as of July 6th, 2026, offering strong current income. Originations and AUM growth during the quarter contributed to adjusted NII of $0.47 per share compared to $0.53 per share last quarter. Overall, our adjusted NII continues to reflect the impact of significantly lower short-term interest rates and tightening spreads on our largely floating rate asset base, as well as the full period impact of the recent changes to our growing capital structure. 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.

Market dynamics continue to be very competitive. While our portfolio saw multiple debt repayments in Q1, our strong origination activity more than offset those exits, resulting in net originations of $31 million for the quarter from $79 million in new originations across two new investments and 10 follow-ons, including $11 million in new BB and BBB CLO debt investments. Our strong reputation, differentiated market positioning, and the ongoing development of sponsor relationships continue to create attractive investment opportunities from high-quality sponsors. Investment activity continues post quarter-end, with $47 million of follow-ons already closed, offset by $31 million of repayments. We remain prudent and discerning in our underwriting approach, particularly in light of the current volatile and uncertain environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges.

Our total $1.126 billion portfolio was marked down $15.2 million during the quarter, including net depreciation of $18.3 million in the non-CLO core portfolio, partially offset by a write-up of $2.9 million in the JV and $0.3 million in the BB and BBB CLO debt portfolio. Of the non-CLO core BDC portfolio depreciation, Pepper Palace, which has been written down to zero, together with a handful of credits, primarily Exigo and Chronus, represented $9.9 million or 54% of the total reduction, reflecting company performance adjustments. A further $6 million or 33% reflected broad market adjustments to comparable market multiples across many industries on equity positions held at or above cost. The remaining 13% reflected the impact of general changes in market spreads across valuations. As of quarter end, our core non-CLO portfolio was 0.2% below cost, with our total portfolio valuation 3.6% below cost.

This quarter’s results reflect a combination of portfolio company performance and market impacts on our overall portfolio, with both Pepper Palace, now carried at zero, and Exigo carried at $17.3 million, or $0.70 of its own total cost on red watchlist status, indicating potential risk of loss of capital. During the first quarter, our core BDC net interest margin increased to $13.4 million from $13 million last quarter. This was driven primarily by a 4.8% increase in average core assets, which was partly offset by the average SOFR rate used in the portfolio decreasing by five basis points from last quarter. Spreads on originations this quarter being almost 50 basis points lower than on the repayments they replaced. The relative timing of originations and repayments this quarter. As always, particularly in the current uncertain environment, balance sheet strength, liquidity, and NAV preservation remain paramount for us.

At quarter end, we maintained a substantial $197 million of investment capacity to support our portfolio companies, with $46 million available through our existing SBIC III license, $90 million from our two revolving credit facilities, and $61 million in cash. As we begin fiscal 2027, the operating backdrop remains challenging, with geopolitical uncertainty, shifting U.S. tariff policy, continued scrutiny of AI and software exposure, and an unsettled interest rate environment, all contributing to volatility across the credit markets. These factors have also weighed on public BDC sentiment and credit spreads. We continue to believe that negative perceptions reflected in the public market are not fully aligned with the current conditions in the broader private credit market, where performance remains more measured, differentiated by manager discipline, portfolio construction, and credit selection.

Moving on to Saratoga Investments fiscal 2027 first quarter key performance indicators as compared to the quarters ended February 28, 2026, and May 31, 2025. Our quarter end NAV was $378.5 million, down 4.5% from $396.2 million last quarter and $296.4 million last year. Our NAV per share was $23.23, down from $24.42 last quarter and $25.52 last year. Of the $1.19 sequential quarter reduction, $0.28 or 24% was due to the under-earning of the dividend. This excess distribution represents previously undistributed NII profits from prior years. Our adjusted NII was $7.6 million this quarter, down 11% from last quarter and down 25.1% from last year. Our adjusted NII per share was $0.47 this quarter, down 11.3% from last quarter and 28.8% from last year. Adjusted NII yield was 7.8% this quarter, down from 8.4% last quarter and down from 10.3% last year.

Latest 12 months return on equity was 4%, down from 9.1% last quarter, down from 9.3% last year, and above the industry average of 2.4%. Slide three illustrates how our combined portfolio and financial results delivered an ROE of 4% for the last 12 months, above the industry average of 2.4%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.7%. Our long-term return on equity has remained strong over the past decade plus, beating the industry nine of the past 12 years while remaining 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 15 years ago, despite a slight pullback in fiscal 2025, reflecting significant repayments.

As of the end of the quarter, our assets under management reached an almost record level of $1.126 billion, in part due to this quarter’s originations again outpacing repayments, resulting in a meaningful increase in AUM as compared to the previous quarter. Our overall credit quality for this quarter increased to 98.3% of credits rated in our highest category. A result we are proud of given the current headwinds in the industry, while recognizing the credit markdowns discussed. We have two investments on non-accrual status, Pepper Palace, which has been restructured, and our CLO’s F note that was written off and placed on non-accrual last quarter, representing 0.0% of fair value and 1.2% of cost, well below the industry average of 3.7%.

With 81.7% of our investments at quarter end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that we have historically performed well in stress situations, we believe our portfolio composition and leverage profile are well structured for the future economic conditions and uncertainty. Our management team is working diligently to continue this positive AUM growth long-term trend as we deploy our available capital into our pipeline while remaining appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Thank you, Chris. Slide five highlights our key performance metrics for the fiscal first quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q1 was 16.3 million, increasing from 16.2 million and 15.3 million shares for last quarter and last year’s first quarter respectively. Adjusted NII was $7.6 million this quarter, down 25.1% from last year and down 11.0% from last quarter. This decrease from comparable quarters, in addition to the above-mentioned interest income changes and the non-recurrence of last quarter’s annual excise tax expense, primarily reflects the full period impact of the additional interest expense on the $50 million, 7.25% private bond and the $100 million 7.5% public baby bond that were issued last quarter and used to repay the $175 million 4.375% institutional bond at the end of February.

The weighted average interest rate on the core BDC portfolio was 10.5% this quarter, compared to 11.5% as of last year and 10.4% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for the quarter, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, is $2.7 million as compared to $2.8 million last year and $2.4 million last quarter. This represented 0.9% of average total assets on an annualized basis, up from 0.8% both last quarter and last year.

Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past two years, we have again added KPI slides 26 through 29 in the appendix at the end of the presentation. Slide 30 compares our non-accruals to the BDC industry. You will see that our non-accrual rate of 1.2% of cost, representing two investments, is more than three times lower than the industry average of 3.7%. This highlights the current strength of our core BDC portfolio’s overall credit quality. Moving on to slide six, NAV was $378.5 million as of fiscal quarter end, a decrease of $17.9 million from last year and $17.7 million from last quarter. The decline represents both the Q1 markdowns discussed earlier, as well as the current underearning of the dividend.

This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 35 quarters, with discrete reductions recently. Over the long term, this metric has increased since 2011, growing by $1.26 per share or 5.7% over the past 10 years, when not many BDCs have grown NAV per share long term. We’ll cover the changes since last quarter on the next slide. On slide seven, you’ll 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 $0.06 in Q1, primarily due to the decrease in other income from lower interest income on cash balances that have now been deployed and partially offset by the non-recurrence of our annual excise tax expense.

On the lower half of the slide, NAV per share increased by $1.19 due to the $0.75 monthly dividend exceeding the $0.47 GAAP NII, plus the $0.92 of net realized gains and unrealized appreciation recognized in Q1. Slide eight outlines the dry powder available to us as of quarter end, which totaled $197 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities. This quarter-end level of available liquidity allows us to grow our assets by an additional 17% without the need for external financing. With $61 million of quarter-end cash available, and thus fully accretive to NII when deployed, and $46 million of available SBA debentures with a low-cost pricing, also very accretive.

In addition, $269.4 million of our baby bonds are 8%+ bonds and are callable now, providing us the option to refinance them and 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. Additionally, during the quarter, we issued a $25 million 7.25% private note. 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 long-term nature of most of our debt.

Also, a reminder that our debt is structured in such a way that we have no material BDC covenants that can be stressed during volatile times, which is especially important in the current economic environment. Now I would like to move on to slides nine through 12 and review the composition and yield of our investment portfolio. Slide nine highlights that we have $1.126 billion of AUM at fair value, and this is invested in 50 portfolio companies, one CLO fund, one joint venture, and numerous BB and BBB CLO debt investments. Our first lien percentage is 81.7% of our total investments, of which 19.0% is in first lien lost out positions. On slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, including this past year, reflecting the recent decreases to base interest rates and tightening spreads.

This quarter, our core BDC yield stayed relatively stable at 10.5%. The CLO yield decreased to 11.0% from 11.6% last quarter due to a higher fair value in Q1. Slide 11 shows how our investments are diversified primarily across the U.S. On slide 12, you can see the industry breadth and diversity that our portfolio represents. Spread over 44 distinct industries, in addition to our investments in the CLO, JV, and BB and BBB CLO debt securities, which are all included as structured finance securities. Moving on to slide 13, 7.2% 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 14 fiscal years, we had a combined $45.5 million of net realized gains from the sale of equity interests. During the first quarter, we generated $20.2 million in net realized gains.

This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV over time, and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Operating Officer, David DeSantis, will now provide an overview of the investment.

David DeSantis, Chief Operating Officer, Saratoga Investment Corp: Thank you, Henri. Today, I will give an update on the market since we last spoke in May, and then comment on our current portfolio performance and investment strategy. We are not seeing a general pickup in M&A activity in the specific market we participate in, but our deal flow has increased due to the success we are having with our own business development efforts, as seen by the fact that 4 of the 11 new platform companies we have closed this past year are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended period of time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premier issuers, being those with strong EBITDA profiles, diversified revenue streams, and higher quality credit characteristics.

Market dynamics remain at their most competitive level since the pandemic, although we are seeing some signs of spread widening. We’ve also experienced repayment activity for some of our lower leverage loans being refinanced on more favorable terms. As a management team, we’ve successfully navigated through numerous credit cycles and capital markets and have learned to stay laser-focused on the things we can control. In summary, those are, first, be disciplined on asset selection. Second, to expand our business development efforts in a market that is still largely under-penetrated by us. Third, to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we’ve built in the marketplace, combined with our ramped-up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run.

Software continues to get a lot of attention in the market. Last quarter we spoke a lot about our approach to Software as a Service and the attributes we look at when reviewing deals in that space. Three months later, our existing portfolio continues to have strong credit metrics with loan to value, or LTV, of 37%, with a portfolio consisting of 89% first lien loans with an additional 5.7% in equity securities, and with our overall portfolio fair value currently just 0.9% below cost. As to future investments, we do believe there will remain select opportunities for Saratoga to invest in exceptional software businesses where we have confidence that our capital is well protected by the sustainable enterprise values and unique value propositions of the underlying businesses.

However, I’d like to emphasize that Saratoga is seeing significantly fewer software-related investments that meet our strict underwriting requirements than in previous years. As a result, we expect to see a substantial shift away from software in our deal flow and ultimately within our portfolio. By way of example, we’ve closed two new platforms in Q1, none of which were software-related businesses. I’d like to shift to highlight key elements of the lower middle market where we operate. We continue to believe that the lower middle market is the best place to be in terms of capital deployment. Compared to the larger end of the middle market, the due diligence we’re able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity, the legal protections and covenant features in our documents are considerably stronger.

Our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As such, we continue to believe that the lower middle market offers the best risk-adjusted returns. Our track record of realized returns reflect this. Our underwriting bar remains high, as usual in a very tough market, yet we continue to find opportunities to deploy capital. As seen on slide 14, providing additional capital to existing portfolios continues to be an asset deployment means for us with 25 follow-ons in the first two calendar quarters of 2026. We have also invested in seven new platform investments in this period, already matching last year’s full year origination effort. Overall, our deal flow is increasing as our business development efforts show continued success.

Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics, is a strength of ours. Portfolio management is critically important. We remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with still just one core BDC investment on non-accrual status, Pepper Palace, in addition to our CLO’s F note, which was placed on non-accrual last quarter. Together, these two investments represented 0% of the portfolio at fair value and 1.2% at cost. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is only 0.2% below cost. Additionally, two core BDC investments that had notable write-downs this quarter due to performance are Exigo and Chronus.

We recognized unrealized appreciation of $3.4 million on our debt and equity investments in Exigo, as it is experiencing continued weakness due to a challenging end market. The company’s customers are relying on consumer purchasing, which is softening due to competitive and economic pressures, despite the company being the market leader. As a result of this, our investment in Exigo was moved from yellow to red during the quarter, though it remains on accrual as interest continues to be paid. The lending group is actively working with management and the sponsor to explore options to stabilize and to improve performance. Our Chronus debt and preferred equity investment was written down by $1.5 million, reflecting declining customer retention and slower new customer acquisitions due to broader softness in the company’s end market. The deal team is also actively engaged with the sponsor on the deal given the near-term maturity.

Both of these investments, Exigo and Chronus, remain on accrual with healthy cash balances. Our Pepper Palace investment, which was previously restructured and we’ve spoken about for a couple of years now, was written off to zero this quarter. The business continues to face operational challenges, and while there have been new revenue channels opened in recent months, the company’s primary revenue channel of retail stores continues to see year-over-year traffic declines. This overall retail softness and its current cost base have caused profitability to decline further in the quarter, resulting in the full write-down. We are actively engaged with the company’s management team and continue to explore numerous strategic options for the company. The rest of the portfolio markdowns this quarter reflect market conditions. The two key recurring themes driving market markdowns are, first, reduced comparable market multiples, which primarily affect the equity valuations.

These have driven reductions in that portfolio. Generally, however, our positions still remain above or close to cost. Second, the impact of lower market spreads on our valuations. Recent decreases to base interest rates and tightening spreads on our valuations have seen this impact. Offsetting these markdowns, however, our JV and BB and BBB CLO debt portfolio were marked up by $3.2 million, showing portfolio performance improvement from last quarter. 81.7% of our portfolio was in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed situations. We have no direct energy or commodities exposure. Looking at leverage on this same slide, you can see that industry debt multiples recently increased to the mid five times, while the total leverage for our overall portfolio decreased to 4.8 times, excluding Pepper Palace, reflecting the new investments originated at much lower leverage levels.

Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024 and has steadily increased since then. This recent increase is the result of our recent business development initiatives, with 21 of the 107 term sheets issued over the last 12 months being for deals that came from new relationships. Excuse me. 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. Our originations this fiscal quarter totaled $79.2 million, consisting of two new investments totaling $34.1 million and 10 follow-ons totaling $34.1 million in six BB and BBB CLO debt investments of $11 million.

As you can see on slide 16, our overall portfolio credit quality and returns remain solid. Our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise value of the business will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together almost 16 years ago, we’ve invested $2.6 billion in 132 portfolio companies and have had just three realized economic losses on these investments. Over that same time frame, we’ve successfully exited 88 of those investments, achieving gross unlevered realized returns of 14.9% on $1.37 billion of realizations. Taking into account recent negative events and market turbulence, our combined unlevered realized and unrealized returns on all capital invested is 13.3%.

Our overall investment approach has yielded exceptional realized returns and recovery of our investment capital, and our long-term performance remains strong, as seen by our track record on this slide. Moving on to slide 17. You can see our second SBIC license is fully funded and deployed, and we have been ramping up our SBIC III license with $46 million of lower cost undrawn debentures still 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 look to turn the call back over to our CEO, Chris.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Thank you, Dave. As outlined on slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended May 31, 2026 was paid in three monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended August 31, 2026, marking the sixth quarter of our new dividend payment structure. The board of directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors, including the current interest rate and macro environment’s impact on our earnings and spillover levels. Moving on to slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 6%, meaningfully outperforming the BDC index’s negative 13%. This places us in the top five of all BDCs for latest 12 months to June 2026.

Our longer-term performance is outlined on the next slide 20, which shows that our one-year, three-year and five-year total returns all place us well above the BDC index. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 871% has been more than three times the industry’s 250%. On slide 21, you can further see our last 12 months performance placed in the context of the broader BDC 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. The recent reduction in our NAV per share is accounted for as a combination of the payment of previously undistributed profits, as well as the markdowns this quarter.

The NII yield and dividend coverage metrics reflect the long-term impact of reduced rates and undeployed levels of cash, as well as more recently, our increased cost of capital. In this volatile macroeconomic environment, we will continue to deploy our available capital to strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be one of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity, significantly beating the industry with our long-term return on equity at roughly 1.5 times the industry average. Latest 12 months return on equity almost double the average. Moving on to slide 22. All of our initiatives discussed in this call are designed to make Saratoga Investment a leading BDC that’s attractive to the capital markets community.

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%, ensuring we are strongly aligned with our shareholders. Looking ahead, the macroeconomic environment remains complex, shaped by geopolitical tensions, elevated inflation, and continued concerns about AI and software. These dynamics, combined with an uncertain interest rate environment, have driven a measurable rise in default rates and broad valuation pressure across the sector, with industry NAVs declining and a number of BDCs recently reducing their base dividends. This quarter’s credit-related NAV decline reflects credit-specific situations and does not appear indicative of a broader trend in our portfolio.

The recent wave of BDC bond issuances, the rebound in higher quality loan values, and anticipated improving M&A activity point to a market that appears to be improving and differentiating among managers. We are confident that our disciplined underwriting, conservative balance sheet, and strong investment pipeline positions Saratoga to navigate this environment and continue delivering durable risk-adjusted returns to our shareholders over the long term. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions.

Conference Call Operator: Thank you. At this time, we’ll conduct a question and answer session. As a reminder, to ask a question, you’ll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Erik Zwick of Lucid Capital Markets. Your line is now open.

Erik Zwick, Analyst, Lucid Capital Markets: Mentioned that spreads on originations in the most recent quarter came in about 50 basis points lower than the repayments they replaced. Dave, in your comments, you mentioned that you’re starting to see some spread widening again. I guess, have you been able to kind of close that gap yet? Or are they still seeing new origination spreads coming in with what’s rolling off at this point?

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Yeah. The new deals we’re seeing have shown elevated spreads relative to recent quarters. As far as what’s rolling off, some of those are our higher priced assets with interest rates above 6% on the applicable margin. We’re catching up, but not quite there yet. Most of the deals we’re originating now that are true first lien unitranche loans have elevated from recent quarters, but they’re usually in the 550-600 range.

David DeSantis, Chief Operating Officer, Saratoga Investment Corp: However, we’re seeing a number of attractive opportunities where we can play in a first lien asset with a small first out in front of us that allows us to replace those assets at a premium to what they’re coming off on. Obviously, it’s a dynamic situation, and most importantly to us is the protection of our capital at all costs. Looking for the protection of that capital is primary. Then secondary is obviously driving the highest yield we can on the investments that we’re evaluating and closing.

Erik Zwick, Analyst, Lucid Capital Markets: Thanks for the commentary there. Second question, maybe for Henry. Do you happen to have the spillover per share as of May 31st, that value?

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Yeah. As of May 31st, it was about $1.75. We’ve obviously paid a dividend since then, so it’s around $1.50 at the moment, Erik.

Erik Zwick, Analyst, Lucid Capital Markets: Okay, thank you. Kind of maybe putting those past two questions together, it seems like there still may be a little bit of pressure on the portfolio yield. However, you have a very nice pipeline and seems to be kind of growing AUM and growing the portfolio at this point, so a little bit of offset there. You still have, maybe call it five or so quarters of spillover to support the kind of current run rate of NII per share being below the dividend, kind of at that 28% level. I guess, is there a kind of near to midterm path of getting NII back in line with the dividend, in your mind at this point? Can you do that with growth? Is there potentially any equity realizations that you see over the next quarter or two?

Just trying to understand how you think about that and what goes into the decision to maintain the dividend at the current level.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Well, Erik, I think that’s a very important question and something that we consider actively, essentially at all times. Just going back to fundamentals, I think the most important thing is, as Dave just mentioned, is credit quality and our portfolio. I think that our credit quality remains very high, the new investments we’re making meet our credit standards. We feel that we are growing our portfolio consistent with our credit standards. That’s number one. Number two, there’s been kind of several trends that have kind of gone against us on the pricing front, right? The cost of liabilities, the shape of the yield curve, spread compression. A number of these elements have sort of gone against us from a pricing and a yield standpoint. Fundamentally, our credit standards and our credit performance is as solid as ever.

I think, again, as Dave mentioned, we’re starting to see some improvement in spreads. We think that we have a very robust pipeline. We’re actually turning down deals, some because of pricings and some because of credit. We feel that the moment we’re in right now is not the most favorable from a pricing standpoint. However, it’s getting better as we see it from a portfolio development build standpoint. We think some of these elements may shake out over this four to five quarter horizon we have. With all that said, with the amount of spillover we have and the prospects we see in our pipeline, we think it’s fairly early to make a hard call on what to do in terms of sort of closing that gap. We think that gap will close.

The question is how quickly it closes, and we’re working very hard to do that.

Erik Zwick, Analyst, Lucid Capital Markets: Thanks, Chris. I appreciate your comments. That’s all for me right now. Thanks.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Thank you.

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Thanks, Erik.

Conference Call Operator: Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.

Robert Dodd, Analyst, Raymond James: Hi, guys. Just thinking about the available capital you have, obviously between SBIC, the revolvers, the cash. Is it your expectation to utilize some of that debt and the revolvers, et cetera, to grow the portfolio? I mean, obviously, it depends on a lot of variables, but all other things being equal. I mean, obviously in the near-term with earnings not reaching the dividend, your NAV, all other things being equal, will tend to decline. If you grow the portfolio with a declining NAV, leverage is obviously going to go up. What’s your thought process on balancing all of those things? Obviously, you want to grow AUM, that’s been a long-held position. That probably right now comes with rising leverage, which is already well above the industry. What are your thoughts there?

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Well, I think, as you’ve been following us for many years, we’ve had a lot of discussions on leverage.

Robert Dodd, Analyst, Raymond James: Yeah.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: At the risk of repeating things we’ve already said to you, in the past, there’s the absolute leverage number, and then there’s the structure of the leverage. I think we have been historically very careful in how we have financed ourselves, largely with fixed rate, long-term amortizing debt that has no covenants. We have a lot of control over our leverage situation, and we don’t have a lot of covenants that can come back to bite us, if you will. That’s been important. Now, that is a slightly more expensive capital structure than it would’ve been if we were mostly floating rate, for example, but it is safer, and that’s the structure we’ve been in. That structure has kind of gone against us a little bit earnings-wise in a declining rate environment.

With the yield curve the shape that it is. Because we’re financed out the yield curve and obviously we’re pricing on the front end of the yield curve. Those are some of the pricing challenges. However, I think, consistent with our long-term strategy, we have a very strong credit quality in the assets we’re putting onto our books. We have a very high percentage of first lien credit. We think the credit quality is a very important ingredient in combination with the structure of our leverage. We absolutely watch the points you make, which is that, as we grow the portfolio, there is an increase in the leverage. However, we believe that is mitigated by the quality of the assets we’re putting on the books and the structure of the underlying leverage that we have.

We also believe that we’re going to see better pricing going forward than we’re having right now. As we put these on, we think we’re going to be earning more. As to the decline in the NAV, again, I think as Henri pointed out earlier, I think it’s very important to recognize that we had a period of time where we over-earned our dividends substantially. On these calls, a lot of the questions were, "Are you going to raise your dividend? Because you’re over-earning it by so much." Now, with again, some trends, we don’t think they’re indicative of the quality of the credits we’re putting on our books, but more reflective of market trends. We’re under-earning our dividend. We think that’s going to shake out, and we’re in the position to take steps to address it if it doesn’t.

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Yeah.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Go ahead.

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Robert, one other thing also, as you mentioned, we’ve got that available capital of $200 million. Flexibility remains extremely important for us in everything we do, like, for example, our debt structure and that. $100 million of that $200 million available capital can be used either to do more assets or does not impact our leverage when used. Because it’s either cash or it’s SBIC debentures that don’t count towards the regulatory leverage. That at least gives us $100 million of flexibility as we sort of consider on every single asset we do, the credit quality, et cetera, what the best next thing is to do.

Robert Dodd, Analyst, Raymond James: Got it. Thank you. Yeah. Understood. Yes, I have asked this question many times, Christian, but thank you for humoring me. On the FILO part of the book, I think David, in his comments said, you do a small FILO ahead of you, and you can get onboarding yields functionally higher than repayments and get some NII accretion. I mean, it’s already 19%, I think you said, of the 81 first liens. How much of that would you be willing to do? I mean, so 20%-25% of your first lien assets are FILO. Would you be willing to go to 50% to kind of give a little bit of a NII boost? To your point, it does produce functionally net spreads that might be a little higher than the market is doing on a pure first lien today.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Well, I think, obviously, we would take that thinking, that consideration sort of one deal at a time. I think when we do these FILOs, I think we aren’t just looking at the yield, right? We’re looking at the total first lien position. I think Dave mentioned a small FILO. I think, you want to be careful in doing this, that your first out isn’t so large that we aren’t in a position where we could take it out if we needed to if we got into some kind of trouble or something like that, so we could control the credit. We view it as kind of a yield enhancement inside of a credit that fits our criteria. The answer is, would we be willing to go higher than the levels we’re at now? Yes. How much higher?

We don’t have a target for that. It would be essentially sort of an investment-by-investment decision-making process. With all the credit characteristics being considered.

Robert Dodd, Analyst, Raymond James: Got it. Thank you. If I have one more quick one. On Exigo, I think Dave mentioned it is paying. It’s now red. Do you actually expect to collect or, obviously it’s hard to call, but all the principal and interest on that thing over the rest of the life of the asset? Or are restructuring discussions in progress where you expect you might have to make adjustments to the capital structure and maybe not collect all the par on that?

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Yeah, I think, Robert, one of the reasons we put it on red this quarter is because we feel like as an asset, some of the principal is definitely at risk there. Interest is paying currently, and they have cash, but I think the move we made in the coloring sort of indicates that we feel like there is some principal at risk there.

David DeSantis, Chief Operating Officer, Saratoga Investment Corp: Yeah. Certainly a dynamic situation where the outcome is uncertain.

Yeah.

We’re obviously fighting for a full recovery and certainly have some belief that that’s certainly possible. Given the debt’s marked at 72.8, I believe, obviously it inspires the probability of an outcome that’s less than par.

Henri Steenkamp, Chief Financial Officer and Chief Compliance Officer, Saratoga Investment Corp: Yeah. Understood.

The jury’s still out, and we’re working it actively and today evaluating strategic alternatives and a variety of different measures with the company in our active management of the position.

Robert Dodd, Analyst, Raymond James: Got it. Thank you.

Conference Call Operator: Thank you. One moment for our next question. Our next question comes from the line of Jason Stewart of Compass Point. Your line is now open.

Jason Stewart, Analyst, Compass Point: Hey, good morning. Thank you. In these discussions, how are you weighing share repurchases in terms of thinking about allocating capital and maybe with respect to the liquidity you hold? How are you weighing those two?

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: That’s a very good question, and that’s something we discuss actively, particularly if the stock starts to trend down the price to NAV scale. We have repurchased stock at different times in our past. I think it’s just a dynamic case-by-case situation. I think when the stock’s trading in the high 80s to 90s, it’s one consideration. If it might trade below that, it becomes another. Again, that’s sort of a situational decision-making. Again, something we have done in the past on numerous occasions.

Jason Stewart, Analyst, Compass Point: Okay. I’m assuming that with your comments around liquidity feels substantial enough to be able to make those decisions if the price gets to a level where it’s interesting.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Yeah, I think in terms of liquidity, I think as Henri mentioned, we have the $60 million of cash. We also have over $60 million in liquid securities elsewhere as well as credit facilities and all that. At the moment, we’ve got a good amount of liquidity to make the type of decisions that make the most sense at the time.

Jason Stewart, Analyst, Compass Point: Okay. Got it. Then the question on the new relationships and on the origination side, are these new relationships sourcing deals in new sectors that are outside of software, or are you going back to time-tested sponsors for new sectors? How is that deal flow shaping up in terms of sector and new sponsor sourcing?

David DeSantis, Chief Operating Officer, Saratoga Investment Corp: Yeah, generally, the vast majority of the deal flow has been non-software related. We’re certainly seeing some deals in that space. As we mentioned in our comments, significantly reduced. The non-software deals that we’re seeing, which is the vast majority of what we’re seeing, have been across all different industries. We don’t see essentially a trend of what we’re seeing in any one concentrated sector. We’re certainly not attacking sponsors in one particular sector or another. It’s really diverse, and it’s across a variety of end markets and types.

Jason Stewart, Analyst, Compass Point: Okay. All right. Thank you.

Conference Call Operator: Thank you. I’m showing no further questions at this time. I’ll now turn it back to Christian Oberbeck for closing remarks.

Christian Oberbeck, Chairman and Chief Executive Officer, Saratoga Investment Corp: Okay. We want to thank you, everyone, for joining us today. We appreciate your support and interest in Saratoga. We look forward to speaking with you next quarter. Thank you very much.

Conference Call Operator: Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.