Saratoga Investment Corp. (NYSE:SAR) Q1 2026 Earnings Call Transcript

Saratoga Investment Corp. (NYSE:SAR) Q1 2026 Earnings Call Transcript July 9, 2025

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corp. Fiscal First Quarter 2026 Financial Results Conference Call. Please note that today’s call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp’s. Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Henri J. Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp’s. fiscal first quarter 2026 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 2026 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 28, so any reference to Q1 results reflects our May 31 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 Long Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga Investment Corp. highlights this quarter include a 17.9% increase in adjusted NII per share from the previous quarter, continued growth of NAV, a strong return on equity beating the industry average, 2 new portfolio company investments and, most importantly, a continued solid performance from the core BDC portfolio in a volatile macro environment. Building on our historical strong dividend distribution history, we announced a base dividend of $0.25 per share per month or $0.75 per share in aggregate for the second quarter of fiscal 2026. Our annualized second quarter dividend of $0.75 per share represents an 11.8% yield based on the stock price of $25.44 as of July 7, 2025, offering strong current income from an investment value standpoint.

Our Q1 adjusted NII of $0.66 per share continues to reflect the impact of the past 12-month trend of decreasing levels of short-term interest rates and spreads on Saratoga Investment’s largely floating rate assets and the continued effect of the recent repayments. This has resulted in $224 million of cash as of quarter end, available to be deployed accretively in investments or to repay existing debt. During the quarter, we continued to see a slower level of deal volume and M&A activity in the lower middle market following the recent tariff developments and a slowdown in new debt issuances. Despite these macro factors, our portfolio had multiple debt repayments and an equity realization in Q1, in addition to healthy new originations generating $2.9 million of realized gains and $50.1 million invested in 2 new portfolio companies, 6 follow-ons and new investments in multiple BB CLO debt securities.

Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create an attractive investment opportunities from high-quality sponsors, while we remain prudent and discerning in terms of new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our $968.3 million portfolio in the current environment with all 4 challenged portfolio company situations resolved. Our current core non-CLO portfolio was marked up by $2.6 million this quarter, and the CLO and JV were marked down by $0.2 million.

We also had $0.6 million net realized appreciation on an equity realization and numerous debt repayments that generated $2.2 million of life-to-date realized gains, further net realized gains of $0.7 million from escrow payments on the Netreo and HemaTerra investments and $0.2 million of net appreciation in our new BB investments, resulting in the fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter end, our total portfolio fair value was 2.1% below cost, while our core non-CLO portfolio was 1.7% above cost. The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the first quarter, our net interest margin expanded meaningfully from $13.7 million last quarter to $15.6 million, driven by a $1.4 million increase in non-CLO interest income as the full benefit of Q4 originations was realized and repayments largely occurred late in Q1.

Average yields were relatively unchanged. This was further supported by a $0.5 million decrease in interest expense, reflecting the full quarter benefit of repaying $44 million in SBIC II debentures at year-end and the partial period impact of retiring the $20 million 8.75% baby bond this quarter. In addition, the full period impact of the 1.2 million shares issued through the ATM program in Q4 and a partial impact of the additional 0.2 million shares issued in Q1 resulted in a $0.04 per share dilution to NII per share. Our overall credit quality for this quarter remained steady at 99.7% of credits rated in our highest category, with the 2 investments remaining on nonaccrual status being Zollege and Pepper Palace, both of which have been successfully restructured, representing only 0.3% and 0.6% of fair value and cost, respectively.

With [ 90% ] of our investments at quarter end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty. As we continue to navigate the challenges posed by the current geopolitical landscape and the volatility seen in the broader underwriting and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure and high underwriting standards to continue to steadily increase the size, quality and investment performance of our portfolio over the long term and deliver exceptional risk adjusted returns to our shareholders.

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 $430 million of investment capacity to support our portfolio companies with $136 million available through our existing SBIC III license, $70 million from our 2 revolving credit facilities and $224 million in cash. This level of cash improves our current regulatory leverage of 163.8% to 188.1% net leverage, netting available cash against outstanding debt. Moving on to Saratoga Investments fiscal ’26 first quarter key performance indicators as compared to the quarters ended May 31, 2024, and February 28, 2025. Our quarter end NAV was $396.4 million, up 7.8% from $367.9 million last year and up 0.9% from $392.7 million last quarter.

Our adjusted NII was $10.1 million this quarter, down 29.3% from last year and up 26.2% from last quarter. Our adjusted NII per share was $0.66 this quarter, down 37.1% from $1.05 last year and up 17.9% from $0.56 last quarter. Adjusted NII yield was 10.3% this quarter, down from 15.5% last year and up from 8.4% last quarter. Latest 12 months return on equity was 9.3%, up from 4.4% last year and up from 7.5% last quarter and above the industry average of 7%. And our NAV per share was $25.52, down from $26.85 last year and down from $25.86 last quarter. Of note, the recently implemented change to monthly dividend distributions resulted in the March and April dividend record dates falling into this first quarter for an additional onetime dividend, reducing NAV per share by $0.50.

Excluding this onetime occurrence, NAV per share would have risen to $26.02, reflecting a $0.16 or a 0.6% increase. While last year saw markdowns to a small number of credits in our core BDC, Slide 3 illustrates how our recent strong results have delivered a return on equity of 9.3% for the last 12 months, above the industry average of 7%. Additionally, our long-term average return on equity over the past 11 years of 10.2% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 8 in the past 11 years and consistently positive every year. Of note, the weighted average common shares outstanding in Q1 was 15.3 million, increasing from 14.5 million and 13.7 million shares for the last quarter and last year’s first quarter, respectively.

Adjusted NII was $10.1 million this quarter, down from 29.3% — down 29.3% from last year and up 26.2% from last quarter. This quarter’s increase in adjusted NII as compared to the prior quarter was primarily due to the nonreoccurrence this quarter of the $2.4 million annual excise tax recognized in the prior quarter. The decrease from the previous year’s first quarter was largely due to the lower AUM from recent significant repayments and lower base interest rates. The weighted average interest rate on the core BDC portfolio of 11.5% this quarter compared to 12.6% as of the previous year’s first quarter and 11.5% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year. Total expenses for this first quarter 2026, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes, decreased $0.1 million to $2.8 million as compared to $2.9 million last year and increased $1.4 million from $1.4 million last quarter.

This represents 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 1% last year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago, despite a slight pullback recently reflecting significant repayments. This quarter saw significant repayments again, offsetting solid originations. This recent AUM decline does not detract from our expectation of long-term AUM growth. The quality of our credits remain strong, with only the 2 recently restructured Pepper Palace and Zollege credits on nonaccrual, consistent with last quarter. Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline, while at the same time being appropriately cautious in this evolving credit and volatile economic environment.

With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.

Henri J. Steenkamp: Thank you, Chris. Moving on to Slide 6. NAV was $396.4 million as of fiscal quarter end, a $3.7 million increase from last quarter and a $28.5 million increase from the same quarter last year. During this quarter, $6.4 million of new equity was raised at or above net asset value, respectively, through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 22 of the past 31 quarters, seeing a decrease this quarter solely due to the transition to monthly dividends in March, resulting in the March and April dividend record date both falling into the first fiscal quarter, reducing NAV per share by an additional $0.50. Excluding this onetime reduction, NAV per share would have risen to $26.02, reflecting a 0.6% increase.

Over the long term, our net asset value has steadily increased since 2011 and grown by $3.55 per share or 16% over the past 8 years. Also we have again added the KPI slides 26 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 2 years. Slide 30 is a new slide comparing our nonaccruals to the BDC Industry. You will see that our nonaccrual rate of 0.6% of cost is significantly lower than the industry average of 3.7%, and that the broader industry has experienced an increase in nonaccruals of 0.3% since the previous quarter, while ours have remained steady and low. This highlights the strength in credit quality of our core BDC portfolio. Moving on to 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 up $0.10 in Q1 primarily due to: first, the nonrecurrence of the annual excise tax, which was $0.13 in the previous quarter related to unpaid spillover; and second, an increase of $0.09 in non-CLO net interest income, reflecting the full period impact of Q4 originations. This was offset by an increase in operating expenses, excluding excise taxes and dilution from the increased net ATM and DRIP share count, reducing NII by $0.06 and $0.04, respectively. On the lower half of the slide, NAV per share decreased by $0.34, primarily due to the $0.50 reduction from the change to a monthly dividend payment structure discussed earlier. Net realized gains and unrealized depreciation added $0.25 to NAV per share.

There was no dilution from the ATM and DRIP program. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $430.3 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facility. This quarter end level of available liquidity allows us to grow our assets by an additional 44% without the need for external financing, with $224 million of quarter end cash available, and that’s fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing also very accretive. In addition, all $301 million of our baby bonds, effectively all our 6% plus debt is callable now, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed.

These calls are also available to be used prospectively to reduce current debt. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet. Also our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would 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 $968 million of AUM at fair value, and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and various new BB investments.

Our first lien percentage is 86.9% of our total investments, of which 22% is in first lien last out positions. On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield remained unchanged from last quarter at 11.5%, despite the 10 basis points reduction in average SOFR. The CLO yield decreased to 13.7% from 16.4% last quarter, reflecting the inclusion of the new BB CLO debt investments to this category that have a yield of approximately 10%. Slide 11 shows how our investments are diversified through primarily the U.S., and on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 40 distinct industries in addition to our investments in the CLO JV and BB CLO debt securities, which are all included as structured finance securities.

Moving on to Slide 13. 7.9% 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 13 fiscal years, we had a combined $42.5 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This includes $2.2 million of realized gains on the sale of our identity equity investment this quarter. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market.

Michael Joseph Grisius: Thank you, Henri. Today, I will give an update on the market since we recently spoke with everyone in May and then comment on our current portfolio performance and investment strategy. Year-to-date deal volumes in our market have been down significantly every month as compared to 2024 and are down further still as compared to 2021 through 2023. We believe that M&A activity will invariably revert to historical levels, but that pickup in deal volume appears to be postponed for the time being. The combination of historically low M&A volume in the lower middle market and an abundant supply of capital is causing spreads to tighten and leverage to remain full, as lenders compete to win deals especially premium ones.

We’ve also experienced repayment activity from some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we’re experiencing has made it more difficult to find quality new platform investments than in prior periods. As we noted on last quarter’s call, this may naturally prompt the question of, what is our approach to operating in this difficult asset deployment climate. First, the Saratoga management team has successfully managed through a number of credit cycles over many years, and that experience has made us particularly aware of being disciplined when making investment decisions and being proactive in managing our portfolio. Taking this approach has allowed us to produce unlevered realized returns in our core non-CLO portfolio of 15%.

The weighted average return on our exits this quarter were consistent with our track record at 14.9%. We’ll continue to invest in high-quality assets and will not lower our investment standards and take on more risk than we feel is prudent, just because the market is presently difficult. We believe our shareholders will appreciate this approach in the long run. Second, we’re greatly expanding our business development efforts and are investing in resources to provide greater bandwidth for our professionals to dedicate themselves to this effort. We have a new Managing Director joining us this summer, who has a strong origination and investment track record in our markets. We’ve also recently hired a VP of Portfolio Management and a business development analyst, and we have 2 new investment associates joining us this summer.

All of these investments will allow our professionals to better leverage themselves and shift more emphasis on investment origination. While we have developed a strong presence in the lower end of the middle market, the number of companies in our marketplace is vast compared to the traditional middle market and is occupied with hundreds of thousands of businesses. We believe the number of deal sources in our market that we have yet to build relationships with far exceeds the number that we have. Further, our market benefits from a natural underpinning of deal flow, driven by business owners seeking to transition ownership as they age. We’re in the early stages of our expanded business development initiatives, but have already seen some positive results in our current pipeline and in the most recent portfolio company we closed in April.

Third, our existing portfolio serves as a healthy source of deal flow. Our payoffs, as again seen this quarter, tend to be lumpy as our portfolio investments reached scale and maturity, while our new portfolio companies tend to be small initially and provide an embedded resource for asset deployment as we support their growth. Because of the nature of the way we invest our capital in this manner, follow-on activity has exceeded our new portfolio company deployment in each of our past 5 fiscal years. In summary, the way we’re approaching the currently challenging environment is to first stay disciplined on asset selection; second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth.

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. In the midst of these market conditions, we had $50 million of gross originations in the lower end of the middle market this quarter. Now before leaving this topic, I’ll also point out that we continue to believe that the lower end of the 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.

The legal protections and covenant features in our documents are considerably stronger, and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk adjusted returns, and our track record of realized returns reflects this. A new initiative I’d like to highlight is that we have recently seen a new opportunity to invest BB and BBB CLO debt securities. These investments have performed well through numerous economic cycles in the past, experiencing very low long-term default rates, while also providing enhanced yields relative to comparably rated corporate debt securities. Further, our underwriting process driven by quantitative metrics that measure individual manager and deal level performance allows us to identify those managers and deals we believe will outperform over the long term and provide attractive risk adjusted returns for our shareholders.

During this past quarter, we invested 9 different CLO BB securities across 7 different CLO managers for a total notional amount of $13 million. We anticipate third-party managed CLO BBs and, to a lesser extent, CLO BBBs will play a role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high-yield credit markets. 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, our more recent performance has been characterized by continued asset deployment to existing portfolio companies, as demonstrated with 8 follow-ons in calendar year 2025 thus far, and we have invested in 3 new platform investments this calendar year as well.

More recently, during calendar Q2, we closed 1 new portfolio company. Overall, our deal flow is increasing as our business development efforts continue to ramp up. 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 continues to be critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. They remain the same 2 portfolio companies that we are actively managing as discussed in previous quarters. But in general, our portfolio companies are healthy, and the fair value of our core BDC portfolio is 1.7% above its cost. 86.9% of our portfolio is 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. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. At quarter end, we have the same 2 investments on nonaccrual, namely Pepper Palace and Zollege, consistent with last quarter. We continue to hold them on nonaccrual following their restructurings, with Zollege particularly demonstrating notable improvement in company performance. Looking at leverage on the same slide, you can see that industry debt multiples increased north of 5x with unitranche loans in the mid-5s. Total leverage for our overall portfolio decreased slightly to 5.22x, excluding Pepper Palace and Zollege, reflecting lower leverage across several portfolio companies.

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, despite the current M&A activity in the lower middle market remaining low. This recent increase of deal sourced as is a result of our recent business development initiatives, with 18 of the term sheets issued over the last 12 months being from 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. As you can see on Slide 16, our overall portfolio credit quality and returns remain solid.

As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, 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 businesses will sustainably exceed the last dollar of our investments. Our approach and underwriting strategy has always been focused on being thorough and cautious at the same time. Since our management team began working together almost 15 years ago, we’ve invested $2.36 billion in 122 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we’ve successfully exited 82 of those investments, achieving gross unlevered realized returns of 15% on $1.26 billion of realizations.

Even taking into account the recent credit write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.4%. Total realized gains for the quarter were $2.9 million, of which, this quarter’s identity realization produced a gross IRR of 22.6% with a $2.2 million realized gain, continuing our track record of successful capital deployment. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien debt. Consistent with previous couple of quarters, we have only 2 investments on nonaccrual. Although both Pepper Palace and Zollege have been restructured, we are still classifying Pepper Palace as red and Zollege as yellow, with a combined fair value of $6.9 million, including equity.

Pepper Palace continues to be managed actively with several initiatives underway. Zollege has demonstrated notable improvements in company performance that resulted in a $1.1 million appreciation in its value this quarter. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.6 million of net appreciation, including Pepper Palace and Zollege, reflecting the strength of our overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital, and our long-term performance remained strong as seen by our track record on this slide. Now moving on to Slide 17. You can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons, and we are currently ramping up our new SBIC III license with $136 million of lower cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing.

This concludes my review of the market, and I’d like to turn the call back to our CEO. Chris?

Christian Long Oberbeck: Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended May 31, 2025, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended August 31, 2025, marking the second 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 our earnings. Moving to Slide 19. Our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 22%, beating the BDC index’s 3% for the same period by over 7x.

Our longer-term performance is outlined on the next Slide 20. Also our 5-year and 3-year returns both place us above the BDC index. And since Saratoga took over management of the BDC in 2010, our total return has been 826% versus the industry’s 294%. On Slide 21, you can further see our last 12 months’ performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth and dividend coverage are lagging in this past year, this is largely due to last year’s 2 discrete nonaccrual investments previously discussed as well as the aforementioned impact of the shift to a new dividend structure impacting this quarter’s NAV per share growth.

In addition, we had significant recent repayments that have reduced Q1’s NII as AUM has recently shrunk, resulting in us having healthy levels of cash to deploy. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. We also continue to be one of the few BDCs who have grown NAV accretively over the long term with our long-term return on equity at 1.5x the industry average. Moving on to Slide 22. All of our initiatives discussed on 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 in 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 11.1%, ensuring that we are strongly aligned with our shareholders. Looking ahead on Slide 23, as we navigate through a reshaped yield curve environment with decreasing short term and increasing long-term rates and an uncertain economic outlook in the face of an ever-evolving geopolitical landscape, we remain confident that our reputation, experienced management team, robust pipeline and historically strong underwriting standards and time and market tested investment strategy will serve us well to continue to steadily increase our portfolio size, quality and investment performance over the long term.

This will allow us to deliver exceptional risk adjusted returns to shareholders and to navigate through the current challenges in the market and uncover opportunities in the current and future environment. Recognizing the challenges posed by the current tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure and liquidity places us in a strong position to successfully address these types of uncertainties. In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions.

Operator: [Operator Instructions] And our first question will be coming from Erik Zwick of Lucid Capital Markets.

Q&A Session

Erik Edward Zwick: I wanted to kind of just start on your commitment to kind of getting back to AUM expansion, and I realize there’s some variables outside of your control that have kind of driven the declines over the past couple of quarters. But as you kind of frame up the opportunities now, it sounds like the efforts you’ve made on kind of the nonsponsored origination side are showing some positive trends. I think the things that are harder to predict now are just the level of prepayments going forward. And I guess, to some extent, you may have some visibility into potential relatively large maturities that could be coming due over the next quarter or 2. But as you kind of frame those all together, what is your expectation for your ability to return growing the portfolio over the next quarter or 2?

Christian Long Oberbeck: Well, maybe I’ll start and then hand it off to Mike. Look, I think you expressed it very well. Redemptions are difficult to predict as our originations. And I think the — I think one of the important things that we have focused on is portfolio quality. And I think Henri had some slides on some metrics on them where you can see that while our AUM has declined due to net originations being less than our redemptions, the credit quality of our portfolio remains very, very strong. Credit performance, we think, significantly outperforms the industry. So we have a period of time here where the environment, there’s kind of a significant inflow of capital into the private credit industry. And at the same time, with tariffs and other things, the total M&A market has slowed down.

M&A has generally been one of the big drivers of activity and financings. And so there’s a lot of refinancing activity, but not as much M&A driven. And so you kind of have a little bit of a mismatch in supply and demand, and we’re trying to manage that very, very carefully because credit quality in the long — putting some more assets to work that are not going to be great assets is certainly not in our interest or the shareholders’ interest. And so we had to be cautious. I mean, we’ve had a lot of opportunities, but we haven’t executed on as many of them because of the quality and, in some instances, pricing, but mostly it’s credit quality. So with all that said, we’ve got a very — we’ve got a reinvigorated and invigorated new business effort.

I think Mike mentioned, we’ve got — we’ve been hiring more new people, and we’ve got a very robust pipeline. And we think that’s going to come through for us over time. But one of the things we have learned is you just got to be very careful and pick your spots and pick your markets and being aggressive for the sake of AUM growth as opposed to sticking to our real knitting, which is quality credits is going to be the most important thing in the long run. And Mike, I don’t know if you want to add to that.

Michael Joseph Grisius: Yes. Let me add a little bit of additional color. And I’ll also just address one of the things that you had brought up to directly, which is that on the redemption side, as Chris mentioned, that’s very unpredictable. But I would say that best that we know, we don’t see anything that’s looming, if you will. So we would expect that the redemption experience that we’d have would be sort of consistent with what we’ve experienced in the past generally. Also our pipeline is growing and not only with non-sponsored deals, but there are a number of lower middle market sponsors and investor groups that we’re forming relationships with that we haven’t historically. And it’s just due to the fact that the lower end of the middle market that we operate in is so fragmented that it’s amazing.

I mean, we’ll go to a new city and make the rounds with 4 or 5 of the groups that we know, and we’ll come back with new groups that we didn’t know of almost every time we visit the countryside looking for deal opportunities. I’ll step back a little. I mean, there’s one — and I think this is probably just healthy to think about in general, just in terms of our business. We — as we mentioned, we very much like being at the lower end of the middle market. It’s one of the reasons we believe that we’ve produced such outsized returns to get 15% returns over time with very low volatility and very low loss experience in mostly senior debt is to us just a very, very attractive place to be. Being at the lower end of the middle market allows us to do much better underwriting.

We can be far more value add with our borrowers and our ownership group, much less commoditized than what you see at the upper end of the middle market, where they’re just kind of responding to a grid, and it’s largely who’s going to get the lowest price, the most leverage in the easiest terms, i.e., who’s going to be most borrower friendly. In our case, we actually have a chance to create real relationships with our management teams and our ownership groups. We typically have Board observation rights or very active interaction with the management teams that we’re lending to. And that interaction allows us to build a really healthy pipeline of follow-ons. And I think as I mentioned in the prepared remarks, if you went back over the last 5 years, our follow-on activity actually exceeds our new origination platform activity in dollars, reflective of sort of what I just described in terms of the type of relationship that we have with our borrowers.

Now what comes with that, and this is kind of where I’m going, is that it does require a lot more hands-on work, not only in asset selection and underwriting, and we’ve been doing this for a long time, so we know how important it is to remain very disciplined on asset selection, but also on portfolio monitoring. Staying close to the businesses that we lend to does allow us to feed the growth in follow-on activity, but it requires a lot more time. In a normal market, where you have kind of historical normal levels of deal activity, we can grow at a healthy clip as we have historically, and our origination pace generally would outpace our repayments. In this market, especially in the lower end of the middle market where you see such a low amount of deal activity, it’s really below almost any historical level that we’ve seen for quite some time.

We’ve decided that given all of what I described in the lower end of the middle market and what it requires, that it is important for us to invest in people. And the investments that I highlighted in the prepared remarks are really aimed at giving our deal professionals an opportunity to shift some of the allocation of their time much more toward outward-facing origination activity and enabling them to leverage themselves much better. And we’re already seeing the benefits of that where that’s starting to bear fruit in our pipeline. And over the long term, we’re very confident that it will allow us to get back on a path of growth, while continuing to be very disciplined in our asset selection.

Erik Edward Zwick: I appreciate the very detailed commentary there. Kind of taking some of that and realizing that the near-term growth is likely to continue to still be challenged kind of given all of the factors that you’ve mentioned there, it seems that the run rate of NII could continue to come in below the kind of declared dividend here for the near term. So could you just remind us, I don’t think I have it for the most recent quarter, kind of where the spillover level is, either dollar terms or on a per share basis?

Henri J. Steenkamp: Yes. Sure, Erik. If you recall, we had about $3 of — just over $3 as of year-end, and we paid now $1.24 in this quarter. So we’re just under $2 at the moment from the February spillover. And then, of course, we’ve also earned earnings since March 1. So we’re probably closer to the $2.50 level at the moment.

Erik Edward Zwick: Henri, okay. And then just kind of continuing on the theme of growth being challenged in the near term, you have quite a bit of liquidity on the balance sheet and capacity to lend further. You do have some notes coming due later this year and some in early calendar ’26 as well. So just kind of thoughts on how you would look to kind of replace those today with new notes versus maybe using the revolver. And I guess, there’s also the unknown of where rates may be. I think the market over the next year is forecasting about another 100 basis points in Fed funds cut. But whether or not we get those, I think, still remains to be seen. But just curious on your thoughts on kind of the liability and funding side of the balance sheet.

Christian Long Oberbeck: Well, I think we tend to cross a lot of those bridges when we come to them because there’s so many variables in what we’re looking at. And so by the time we have to face that, we certainly are in a good position with all the liquidity that we have. So we don’t have — we have a lot of flexibility as to how to address those upcoming maturities. We have plenty of credit facilities and cash. But I think a lot of it’s going to be driven by the next 6 months or so of originations and the net picture on asset deployment. And so when we come to that moment, things — look how much things have changed in the last 3 months. And we think in the next 3 to 6 months, we’ve got a very, very different economic picture.

It could be much better, and it could be somewhat worse or it could be stable. And we’re not economists or predictors of that. We just structure ourselves to be most flexible and conservative. We don’t think this is time to take excess risks. And so as we come up to that moment, we’ll have to decide. And I apologize for not giving you a hard answer because we don’t — that’s not how we are managing the situation right now. We just have a lot of flexibility. And as things change, will there be Fed cuts, will there not be Fed cuts, will the economy step up and grow after the Build Back Better bill, will the tariffs have a negative or a positive impact, there’s just so many variables at work right now. And again, we just feel like we’re extremely well positioned with a lot of liquidity and a portfolio that’s performing extremely well.

And so we’ve got a lot of options, and we’re going to keep those options open as we come to these situations.

Erik Edward Zwick: Yes. No, that makes sense. Optionality is very positive to have. So that’s great. And last topic for me, then I’ll step aside, in terms of the new CLO, the BB investments kind of maybe 2 questions. One, were those new primary issues? Or were those purchased in the secondary market? And secondarily, just kind of thinking maybe longer term, it sounds like you’re attracted to that asset class. How large could you potentially see that portfolio come relative to the total investment portfolio?

Christian Long Oberbeck: Sure. Well, I think the origins of our investment there, we’ve been managing the CLOs for many, many, many years. And so we’re very familiar with that marketplace. And our objective is risk adjust — strong risk adjusted returns and credit — largely credit securities. And what we have found through our research over time is that the BB asset classes generally delivers very close to the type of yields we’re looking for in some of our regular way, private credit investments.and with a very, very good historic credit performance and also liquidity. And then so you can get in and you can get out of these. Obviously, if there’s a big market dislocation, all bets are off for that period of time. But as a general rule, one of the differences in this asset class is that you have a general — much more liquidity than you would have in another class.

And we stated this for a long time. We have a very elaborate process and research in terms of which of the BBs we invest in, which of the managers we invest in. We have our own tiering mechanism, Tiers 1, 2, 3, 4 and top tier and then even within the top tier, the different vintages. And so we’ve been able to assemble a tremendous research base and experience in watching this market for a long time. And so now we started to enter it. In terms of asset size, I think it’s a very substantial industry and a very substantial asset class, but not massive. But there — I mean, it would be the ability to deploy significantly more than we’re deploying. Whether we do that or not is going to be a function of, a, the opportunities in this BB class; and b, the — also the opportunities in our traditional private credit exposure area.

And then as to your question,on the mix, we have a mix between the secondary — do you have that at the top of your tongue? I mean, I think there is sort of a little bit of both. At certain times like right now, there’s kind of a big cycle of issuance. It is somewhat of a seasonality or at certain times of the year, more of these are issued on a primary basis and at other times of the year of having to do with payment dates and things like that. There’s a lot of peculiarities to this market. And so just recently, it’s been weighted more heavily to the primary and, at other times, the secondary. And we just watch both, and we’re looking for the best alpha in putting the assets to work. Henri?

Henri J. Steenkamp: Yes. No, exactly. We do both, Erik, and both primary and secondary is we obviously focus on where the opportunity is at that point in time. So it will — I think it will always be a combination of both.

Operator: Our next question will be coming from Robert Dodd of Raymond James.

Robert James Dodd: On kind of following up on one of the questions about the balance sheet, and you do have a lot of liquidity and you have plenty of time to address some of the larger maturities. But I mean, looking at this quarter, you did have a $20 million bond that you paid off. But the — you clearly made the decision to utilize — or to adjust the revolvers by increasing the size of the Live Oak facility, et cetera, rather than using the cash. So would it be fair to read into that, that the bias is to kind of retain the cash for deployments and manage the refinancings in terms of drawing on other debt kind of liabilities, either refinancing or the revolver, et cetera. I mean, just trying to get — is the bias to use the cash for deployments to grow your AUM? Or how much — how likely is that cash to be used to actually just pay down debt?

Christian Long Oberbeck: Well, I think that’s a very good question. And obviously, it’s something that we were constantly considering. I guess, we would take issue with your — you said several times the word bias. We try not to have a bias. What we try and do is optimize…

Robert James Dodd: Inclination.

Christian Long Oberbeck: Okay, inclination. And we don’t even have an inclination. We try not to have an inclination. We try to basically assess the situations as they arise from a relatively neutral position with a lot of optionality. And I think that it was kind of axiomatic. You raise capital when you can and you raise — and you generate lending relationships when you can, and that’s often in good times. As everybody knows on this call, it’s very difficult to increase your credit facility in an adverse market environment. And so I think Henri and the team has worked very hard to create sort of an optimal flexible revolver position for the company. And these are good times. And then the [ Valley Bank ] is a very good relationship that’s being developed.

And so putting that — that’s a facility that you can’t predict these things, but we’ve had very long relationships with our creditors, and this could be something in place for 5, 10 years. I mean, this is a strong relationship and all that. And so that is kind of market independent event, right? That’s just like let’s create the most flexibility we have for our balance sheet. And we have a lot of fixed rate debt. This is variable rate. This is revolver, so we can draw it and pay it back and that type of thing. So that’s like a super flexible thing. And then I think as we said earlier, how we deploy the cash and plan. Right now, the cash is earning around 4%. So it’s better than it was a few years ago when it was 0. But — so it’s not like the cash isn’t producing something.

And obviously, it’s risk-free, the way we’re investing it. So we feel like we want to be prepared for a lot of different eventualities. And I think, again, not to overly repeat the things we’ve said before, we’ve basically had a period of very significant redemptions. And these redemptions on the one hand, you say, oh — but these redemptions, a lot of them are — were very significantly sized investments that we made 5 years ago, 6 years ago. They started out as small investments. They became very large over time. And then now they’ve just been sold and realized. And so this is the way it goes in our business. And we don’t think that’s anything different or should cause us to change our approach to the market, right? That’s just something that’s happened, and this happened in a concentrated period of time.

And we have — and so sometimes, you can’t match everything up. So again, we just want to be — we want to maximize our flexibility and have the best credit structure we can and put that in place in good times, so that if there are bad times, we’re ready. And if there aren’t bad times, we’ve got a lot of flexibility to grow.

Henri J. Steenkamp: Yes. Robert, just to clarify one thing on the credit facility. So we actually didn’t choose to draw that. What we chose to do was to upsize it, which for us is much more strategic, long term, and there’s a 50% utilization. So that’s why there was the draw. The more important thing is it’s upsize — the upsize and creating more liquidity for us that’s available.

Robert James Dodd: Understood, understood. And just the next one. I mean, to your point, and a repayment is, if you do high-quality assets, getting repaid is a good outcome, right? And your focus is doing on quality in those high-quality assets. But the color on — there’s just less of that right now, right? Unfair question. What does it take in the market — is it just the stability? Are we too late in the year that even if tariffs, et cetera, et cetera, stabilized now? Is M&A activity a 2026 event? Or can you give us any color on like when things could ramp for quality deals, right? There’s always lower quality deals, but you don’t want to do that. So for your quality deals, when do you think…

Christian Long Oberbeck: Sure. I’ll turn this over to Mike after I say a couple of things. But I mean, we have a lot of very interesting deals in our pipeline. Now it’s a competitive environment. But I mean, if we have a bit of a winning streak here, there could be some very significant additions over the next 3 to 6 months, but there also could not be. And again, there’s a competitive environment. Our sponsors are — some of them are at the LOI stage. Some of them are still looking stage. But we have some very nice quality deals we’re looking at in our pipeline. It’s just predicting that we’re going to land those on our balance sheet. It’s just something, first of all, that we’re not going to do on a call like this. And secondly, it’s not something we can actually predict.

And we can only work very hard to get in a position to win these deals, but it’s a competitive market right now. And so — and the part of the reason we’re not worried about our cash is we feel like there’s a lot of opportunity out there, and we’re in the process of getting to it. But the timing is not something that we can control on a quarter-to-quarter basis. Mike?

Michael Joseph Grisius: Let me add to that. So just addressing your question directly in terms of where we are and what we’re seeing in the marketplace, we’re continuing to see deal activity down, and we aren’t seeing any signs of that recovering. Having done this for a long time, usually, you don’t — you just really don’t have visibility on that. And so it’s not something that we predict or try to time like what inning are we in or any of those things. But what we do have confidence in — in addition to what we’re seeing in our pipeline right now, but what we do have confidence in is that the initiatives that we’re undertaking in terms of investing in more resources and really getting out there and doubling our efforts to be on the origination kind of focus will, we think, yield results where we can get back on a growth path, even if the deal activity doesn’t recover.

So we’re optimistic of that. I mean, time will tell, but we do have confidence that we can operate successfully and continue to grow our balance sheet, even if the deal market doesn’t recover. And if it does, all the better.

Operator: And I would now like to hand the call back to Christian Oberbeck for closing remarks.

Christian Long Oberbeck: Okay. Well, again, we’d like to thank everyone for joining us today, and we look forward to speaking with you next quarter.

Operator: Thank you, everyone, for joining us today. We look forward to speaking to everyone next quarter. This concludes today’s conference call.