Saratoga Investment (NYSE:SAR) released first-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below.

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Summary

Saratoga Investment Corp reported net positive originations of $31 million, with AUM growing 1.6% to a near-record $1.126 billion, maintaining strong credit quality despite a challenging macro environment.

The company declared a monthly base dividend of $0.25 per share, with an annualized yield of 14%, but adjusted NII decreased to $0.47 per share from $0.53 last quarter due to lower interest rates and tightening spreads.

Management emphasized strong credit quality and strategic focus on disciplined asset selection, with a robust pipeline and ongoing business development efforts, despite challenges in spread compression and market dynamics.

The company's NAV decreased by 4.5% from last quarter, impacted by portfolio markdowns and market conditions, but management remains optimistic about closing the NII and dividend gap over time.

Saratoga continues to leverage its conservative balance sheet and available liquidity of $197 million to support growth and navigate current economic uncertainties, with a strong long-term performance track record.

Full Transcript

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's Chief Financial Officer and Chief Compliance Officer, Mr. Henry Steenkamp. Sir, please go ahead.

Henri Steenkamp CA, Chief Financial Officer

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 Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last month on 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 of the Board & Chief Executive Officer

Thank you, Henry, 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 6, 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 a full period impact of the recent changes to our growing capital structure. During the quarter, 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 and 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 2 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 Cronus, 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 70 cents of its own total cost on Red Watch list 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 5 basis points from last quarter spreads on originations this quarter being almost 50 basis points lower than on the repayments they replaced and the relative timing of originations and repayments this quarter. 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 $197 million of investment capacity to support our portfolio companies with $46 million available through our existing SBI3 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 the 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 $396.4 million last year.

Our NAV per share was $23.23, down from $24.40 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 and 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 3 illustrates how our combined portfolio and financial results have 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 4, 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 in our CLOS 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 stressed 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 Henry to review our financial results as well as the composition and performance of our portfolio.

Henri Steenkamp CA, Chief Financial Officer

Thank you, Chris. Slide 5 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% 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, and 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 6, 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 under-earning 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 7, 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 $0.06 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 75 cent monthly dividend exceeding the 47 cents GAAP NII plus the 92 cents of net realized gains and unrealized depreciation recognized in Q1.

Slide 8 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% plus 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 we'd like to move on to slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 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 CLOs 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 US and 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 & Double B & BB CLO debt securities, which are all included as structured finance securities. And moving on to slide 13, 7.2% of our investment portfolio consists of equity interest 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 interest. During the first quarter, we generated $0.2 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.

David DeSantis, Chief Operating Officer

Our Chief Operating Officer David DeSantis will now provide an overview of the investment. Thank you, Henry. 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 four 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 leveraged 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 underpenetrated by us; and 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, and 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, and 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 Investment 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 Investment 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. Now 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 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, and 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 such, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects 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 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, and 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 CLOs 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 Cronos. We recognized unrealized depreciation 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 improve performance. Our Kronos 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 Cronos, 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 double B and BBB silo 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 stress 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 5x 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. 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 and six BB&BB silo 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 in 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 are 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 3 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 like to turn the call.

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

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 5 of all BDCs for the latest 12 months June 2026. Our longer-term performance is outlined on the next slide, 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, a 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 to 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 and latest 12 months, return on equity almost doubled 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 is 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 loans, loan values, and anticipated improving M&A activity point to a market that appears to be improving and differentiating among managers.

And we are confident that our disciplined underwriting, conservative balance sheet, and strong investment pipeline position 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.

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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q and A roster. And our first question comes from the line of Eric Swiss of Lucid Capital Markets. Your line is now open.

Eric Swiss, Lucid Capital Markets

You mentioned that spreads on originations in the most recent quarter came in about 50 basis points lower than the repayments that replaced. Dave, in your comments, you mentioned that you're starting to see some spread widening again. So 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?

David DeSantis, Chief Operating Officer

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% over on the applicable margin. So 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 to 600 range. 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.

But obviously, it's a dynamic situation and most importantly to us is the protection of our capital at all costs. And looking for the protection of that capital is primary and then secondary is obviously driving the highest yield we can on the investments that we're evaluating and closing.

Eric Swiss, Lucid Capital Markets

Thanks for the commentary there. And second question, maybe for Henry, do you happen to have the pullover per share as of May 31, that value?

Henri Steenkamp CA, Chief Financial Officer

Yeah, as of May 31, it was about $1.75. We've obviously paid a dividend since then, so it's around 1.50 at the moment, Eric.

Eric Swiss, Lucid Capital Markets

Okay, thank you. So maybe putting those past two questions together, it seems like there's still maybe a little bit of pressure on the portfolio yield. However, you're a very nice pipeline and seems to be growing AUM and growing the portfolio at this point. So a little bit of offset there and 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. So 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 of the Board & Chief Executive Officer

Well, Eric, 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, as Dave just mentioned, is credit quality and our portfolio. And I think that our credit quality remains very high. And then the new investments we're making are, you know, meet our credit standards. And so we feel that we are growing our portfolio consistent with our credit standards.

So that's number one. Number two, you know, there's been kind of, you know, 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, you know, a number of these elements of sort of gone against us from a pricing and a yield standpoint. But 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, you know, some improvement in spreads.

You know, we think that we're starting to see we have a very robust pipeline. We're, you know, we're actually turning down deals, you know, some because of pricing and some because of credit. So 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. And we think some of these elements may shake out over this four to five quarter horizon we have.

And so with all that said, you know, with the amount of spillover we have and the, you know, the prospects we see in our pipeline, we think it's, you know, we think it's fairly early to make a hard call on what to do in terms of, you know, sort of closing that gap. We think that gap will close and the question is how quickly it closes and we're working very hard to do that.

Eric Swiss, Lucid Capital Markets

Thanks, Chris. I appreciate your comments. That's all for me right now, thanks.

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, Raymond James

Hi guys. Just thinking about the available capital you have. Obviously between SBIC, the revolvers, the cash, is it your expectation to grow, to utilize some of that revolvers, etc., to grow the portfolio? I mean, obviously it depends on a lot of variables, but all other things being equal, I mean, obviously the near term, with the dividend not reaching. Sorry, with earnings not reaching the dividend, your NAV, all other things being equal, will tend to decline.

So if you grow the portfolio with a declining NAV, leverage is obviously going to go up. So how are you balancing, what's your thought process on balancing all of those things? Obviously you want to grow AUM, that's been a long-held position, but that probably right now comes with rising leverage, which is already well above the industry. So what are your thoughts there? Well, I think as you've been following us for many years, we've had a lot of discussions on leverage. And so at the risk of repeating things we've already said to you in the past, there's, you know, there's the absolute leverage number and then there's the structure of the leverage. And 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. And so, you know, it's, you know, we're not at a, 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.

And so that's been important. Now that is a slightly more expensive capital structure than it would have been if we were mostly floating rate, for example. But it is safer and that's the structure we've been in. And that structure has kind of gone against us a little bit earnings wise in a declining rate environment. And 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 and 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. And so we think the credit quality is a very important ingredient in combination with the structure of our leverage. And so we absolutely watch the points you make, which is that, you know, as you 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, that we have.

We also believe that we're going to see better pricing going forward than we're having right now. And so 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 Henry pointed out earlier, I think it's very important to recognize that we had a period of time where we over earned our dividend substantially. And 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?

And now, you know, 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 you know, we're under earning our dividend, but we think, we think that's going to shake out and we are in the position to take steps to address it if it doesn't.

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

I think one other thing, Robert, one other thing also, you know, as you mentioned, we've got that available capital of 200 million and flexibility remains extremely important for us in everything we do, like for example our debt structure and that. But 100 million of that 200 million available capital, you know, 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. They don't count towards a regulatory leverage. So 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, Raymond James

Got it, got it. Thank you.

Eric Swiss, Lucid Capital Markets

Yeah, understood. And yes, I have asked this question many, many times, Christian, but thank you for humoring me on the Philo part of the book. I think David in his comments said, yeah, you do a little small filo ahead of you and you can get onboarding yields functionally higher than repayments and get some NAI accretion. And I mean it's already, it's 19% I think you said of the 81 first liens, how much of that would you be willing to do? So I mean 20, 25%.

Your first lien assets are Philo. Would you be willing to go to 50 to kind of give a little bit of NII boost to your point? It is, you know, it does produce functionally net spreads that might be a little higher than the market is doing on a pure today.

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

Well, I think it's obviously we would take that, you know, that thinking, that consideration sort of one deal at a time. But I think when we do these phylos, I think, you know, we aren't just looking at the yield, right. We're looking at the total first lien position. And I think Dave mentioned a small filo. So I think, you know, with the you want to be careful in doing this that your filo isn't 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 can control the credit. So we view it as kind of a yield enhancement inside of a credit that fits our criteria. And so 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. And it would be essentially sort of an investment by investment decision making process with all the credit characteristics being considered.

Eric Swiss, Lucid Capital Markets

Got it, thank you. Now, if I can, one more quick one on Exigo. I think David mentioned it is paying, but it's now red. Do you actually expect to collect or this is 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 might have to make adjustments to the capital structure and maybe not collect all the part on that?

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

Yeah, I think, Robert, I think 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 that's 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

Yeah. Certainly a dynamic situation where, where the outcome is uncertain. We're obviously fighting for a full recovery and certainly have some belief that that's certainly possible. But given the debts marked at 72.8, I believe obviously it inspires the probability of an outcome that's less than par. But 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.

OPERATOR

Thank you. Thank you. One moment for our next question. And our next question comes online of Jason Stewart of Compass Point. Your line is not open.

Jason Stewart, Compass Point

Thank you. So 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, are you weighing those too?

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

Again, that's a very good question and that's something we discuss actively, particularly if the stock starts to trend down the, you know, priced nav scale. We have repurchased stock at different times in our past. And you know, I think that's, it's just a dynamic case by case, you know, situation. You know, I think when the stock's trading, you know, in the high 80s to 90s, it's one consideration, if it might trade below that, that it becomes another.

And again, that's sort of a situational decision making, but again, something we have done in the past on numerous occasions.

Jason Stewart, Compass Point

Okay. And I'm assuming that with your comments around liquidity, it would be. Liquidity feels substantial enough to be able to make those decisions. If the price gets to a level where it's Interesting. Yeah.

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

I think in terms of liquidity, I think as Henry mentioned, we have the $60 million of cash, but we also have, you know, over $60 million in liquid securities elsewhere as well as, as well as, you know, credit facilities and all that. So I mean, we have, we have, you know, you know, at the moment we've got a good amount of liquidity to make. You know, the type of decisions that make the most sense at the time.

Jason Stewart, Compass Point

Okay, okay, got it. And then on the, 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 and how is that deal flow shaping up in terms of sector and new sponsor sourcing?

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

Generally, the vast majority of the deal flow has been non software related. We're certainly seeing some deals in that space, but as we mentioned in our comments, significantly reduced. And the deals, the non software deals that we're seeing, which is the vast majority of what we're seeing, have been across all different industries. And we don't, we don't see essentially a trend of what we're seeing in any one concentrated sector. And we're certainly not attacking sponsors in one particular sector or another. So it's really diverse and it's across a variety of end markets and types.

Jason Stewart, Compass Point

Okay. All right, thank you.

OPERATOR

Thank you. I'm filling all further questions at this time and I turn it back to Christian Overbeck for closing remarks.

Christian Oberbeck, Chairman of the Board & Chief Executive Officer

Okay, we want to thank you everyone for joining us today. We appreciate your support and interest in Saratoga and we look forward to speaking with you next quarter. Thank you very much.

OPERATOR

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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