Saratoga Investment Reports Q2 2027 Results: Full Earnings Call Transcript

Saratoga Investment (NYSE: SAR ) released second-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below. This transcript is brought to you APIs. For real-time access to our entire catalog, please visit for a consultation.

The full earnings call is available at Summary Full Transcript OPERATOR (Operator) Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Fiscal Second Quarter 2027 Financial Results Conference Call. Please note that today's call is being recorded.

During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment's Chief Financial and Chief Compliance Officer, Mr. Henry Steenkamp.

Sir, please go ahead. Henry Steenkamp, Chief Financial Officer and Chief Compliance Officer Thank you. I would like to welcome everyone to Saratoga Investment's fiscal second 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 second 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 night. For everyone new to our story, please note that our fiscal year end is February 28th, so any reference to Q2 results reflects our August 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 will be making a few introductory remarks. Christian Oberbeck, Chairman of the Board & Chief Executive Officer Thank you, Henry, and welcome, everyone. Before discussing our results, I would like to take a moment to recognize Henry's transition that was recently announced.

Henry will be stepping down from his executive roles on October 31st for health reasons. Henry has been an invaluable member of our team and has made significant contributions to Saratoga over his almost 13 years with us. While we are sad to see him step away from his day-to-day roles, we fully support his decision to prioritize his health. We are grateful that he will remain a member of our Board and the CFO of the SBICs and continue to support the company in a consulting capacity.

On behalf of the Board and the entire Saratoga team, I want to thank Henry for his leadership, judgment, and dedication to the company and our shareholders. 8 million through the exercise of the greenshoe and reopening of the issuance. 5 million SAT baby bond due early 2027 last month, reducing refinancing risk for next year.

09 per share; taking advantage of a robust refinancing environment to reset our legacy CLO at $350 million at lower rates, resulting in a new three-year reinvestment period and ensuring future BDC management fees and significant interest income; continuation of significant Zolage investment appreciation; and the sale of both our Pepper Palace and CLO F Note investments subsequent to quarter end, resulting in the resolution of our remaining nonaccrual investments. 0% of cost average. 033 per quarter.

9 million NAV decline from accretive share repurchases being 32% of the change and excess dividend distribution of previously undistributed earnings being 19% of the change, which reduces the company's spillover obligation. 61 as of October 5, 2026, offering strong current income. 47 per share last quarter. The modest sequential decline reflected higher interest income from portfolio growth, including new originations and BB & BBB CLO debt investments, offset by the full-period impact of our recent refinancing activity.

Investment activity remained healthy during the quarter, supported by the continued expansion of our business development capabilities and sponsor relationships. Market dynamics continued to be very competitive during the quarter. 1 million in originations. 2 million of the quarter's originations consisted of 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 $35 million of originations, including one new portfolio company, offset by $2 million of repayments. While the competition remains significant and sentiment across private credit continues to be cautious, we remain highly selective and disciplined in evaluating opportunities given the uncertain operating environment. 5 million reversal of previously recognized unrealized appreciation.

5 million of unrealized appreciation in Zolage. The CLO 1's F note remained at zero fair value. 8 million dividend to the BDC, and the BB & BBB portfolio was relatively flat. 1 million of realized gains, primarily from the Gen4 Dental equity conversions.

9% below cost. 4 million last quarter. 2% increase in average core assets and the average SOFR rate used in the portfolio increasing by 5 basis points from last quarter. This was partially offset by spreads on originations this quarter being 220 basis points lower than the repayments they replaced, and increased interest expense on the changes in our capital structure.

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 $211 million of investment capacity to support our portfolio companies, with $121 million available through our existing SBIC 3 license, including the recent SBA approval of a $75 million upsize, and $90 million from our two revolving credit facilities. All quarter-end cash was used to repay the SAT baby bond in September.

As we enter the back half of fiscal year 2027, the operating environment remains uneven, as geopolitical uncertainty, persistent inflation, interest rate volatility, and concerns regarding AI-related disruption within the software sector continue to affect borrowers and valuations. These conditions have contributed to higher default activity, declining NAVs across the industry, and dividend reductions by several BDCs.

At Saratoga Investment, however, the NAV decline this quarter—in addition to it being due to the significant share repurchases that were accretive to NAV per share—was concentrated in a limited number of portfolio-specific situations and does not appear to reflect broad-based deterioration across the portfolio. At the same time, strong BDC debt issuance, firmer values for higher-quality loans, and slightly improving M&A activity point to a market that appears to be stabilizing and increasingly differentiated among managers.

We remain confident that our disciplined senior secured first lien—focused underwriting and well-structured balance sheet position Saratoga Investment to navigate this environment. 4 million of the change being due to share repurchases. 61 last year. 30, or 28%, was due to the under-earning of the dividend.

This excess distribution represents previously undistributed NII profits from prior years. 7% from last year. 7% from last year. 8% last quarter and down from 9% last year and latest 12 months.

1% last year. 2%. 2%. 4%.

Our long-term return on equity has remained strong over the past decade-plus, beating the industry 9 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 16 years ago, despite a slight pullback in fiscal 2025 reflecting significant repayments. 15 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 decreased slightly to 96% of credits rated in our highest category, reflecting the addition of Cronus and Madison Logic to our yellow category. We remain proud of the overall portfolio given the current headwinds in the industry while recognizing the credit markdowns. 5% of our investments at quarter end in first lien debt, generally supported by strong enterprise values and resilient balance sheets in industries that have historically performed well in stress situations. We believe our portfolio composition and leverage profile are well structured to handle a wide range of economic conditions and uncertainty.

Our management team is working diligently to continue this positive AUM long-term growth 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 turn the call over to Henry to review our financial results as well as the composition and performance of our portfolio. Henry Steenkamp, Chief Financial Officer and Chief Compliance Officer Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted.

8 million shares for last quarter and last year's second quarter, respectively. 6% from last quarter. The modest decrease from last quarter primarily reflected the impact of the recent changes to the capital structure, increasing our interest expense, as well as slight decreases in other income from lower structuring, advisory and prepayment fees, and higher base management fees from higher AUA. 5% 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. 7 million last quarter. 8% last year. 4%.

This highlights the current strength of our core BDC portfolio's overall credit quality. Moving on to Slide 6, NAV has declined from last year and last quarter. 4 million share repurchases this quarter. This chart also includes our historical NAV per share, which we'll cover 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. 01 in Q2 with multiple small changes as you can see on the slide. 08 primarily due to the 75 cent aggregate quarterly dividend exceeding the 45 cent, plus the 90 cents of net realized gains and unrealized depreciation recognized in Q2, with 82 cents of that in three discrete credits, partially offset by a 9 cent accretion from share repurchases. Slide 8 outlines the dry power available to us as of quarter end, which totaled $211 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 18% without the need for external financing. Of note, in May, legislation amending the Small Business Investment Act of 1958 increased the individual SBIC leverage limit and family of funds limit, in each case subject to SBA approvals.

On September 4 this year, the company received notification from the SBA that SBIC 3's individual leverage limit was increased to 250 million dollars, providing an additional $75 million of long-term capital in the form of SBA-guaranteed debentures, which we have included in available leverage liquidity. 00% 2027 Notes using all this cash as well as the subsequent proceeds received from the green shoe on the SAZ baby bond we closed in August. This refinancing helped us reduce our near-term refinancing risk.