Saratoga Investment Corp. (SAR) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investments Corp. Fiscal Second Quarter 2027 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 Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'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 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 ended February 28, so any reference to Q2 results reflects our August 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.

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 31 for health reasons. Henry's been an invaluable member of our team has made significant contributions to Saratoga over is almost 13 years with us. While we are sad to see them step away from this day-to-day roles, we fully support his decision to prioritize this 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. This quarter had numerous highlights and subsequent to the quarter, including net positive originations of $37.1 million, including 2 new non-software portfolio companies originated in the quarter and sustained high-quality AUM growth with AUM growing 2.1% and during the quarter and reaching a record level of $1.15 billion. Issuance of the $85 million SAKs Baby Bond, which subsequent to quarter end increased to $120.8 million through the exercise of the green shoe and reopening of the issuance. This allowed for the refinancing of the $105.5 million SAT baby bond due early 2027 last month, reducing refinancing risk for next year. This baby bond was opportunistically issued prior to Labor Day and subsequent increases in interest rates and competitive offerings. Stable adjusted NII of $0.46 per share, inclusive of the cost of our recently refinanced capital structure. Repurchasing approximately 444,000 shares at a discount to NAV, which was accretive to NAV by $0.09 per share. Taking advantage of robust refinancing environment to reset our legacy CLO at $350 million at lower rates, resulting in a new 3-year reinvestment period and ensuring future BDC management fees and significant interest income. Continuation of significant knowledge 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. Our core BDC portfolio fair value remains within 1.6% of cost, demonstrating solid overall credit quality in a challenging and volatile macroeconomic environment and our nonaccruals are now 0, following above resolutions, significantly lower than the industry's 3.5% of cost average. Some of the headwinds experienced this quarter included -- the balance sheet refinancing resulting in additional interest expense from higher cost of debt, while spreads on assets have not yet widened. See the base rate increases, which will benefit interest income, with every 25 basis points increasing interest income by $0.033 per quarter. Our NAV per share decline, including $0.82 per share, specifically related to company performance in 3 distinct credits and $0.30 per share related to dividend distributions exceeding net investment income, offset by $0.09 per share appreciation from share repurchases. And $13.3 million of $25.9 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. Continuing our track record of strong dividend distributions, we recently announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the third quarter of fiscal 2027, which when annualized, represents an 18.1% yield based on the stock price of $16.61 as of October 5, 2026, offering strong current income. Originations and AUM growth during the quarter contributed to adjusted NII and to adjusted NII of $0.46 per share compared to $0.47 per share last quarter. The modest sequential decline reflected higher interest income from portfolio growth, including new originations and BB and 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 continue to be very competitive during the quarter. Despite this, we originated $76.1 million of investments, including investments in 2 new software to do non-software portfolio companies and 9 follow-on investments compared with $39 million of repayments, resulting in $37.1 million of loan originations. Approximately $9.2 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 the private credit cross private credit continues to be cautious we remain highly selective and disciplined in evaluating opportunities given the uncertain operating environment. Our total $1.15 billion portfolio was marked down $14.4 million during the quarter, including net depreciation of $15.4 million in the non-CLO core portfolio, driven primarily by $13.1 million of markdowns in Madison Logic, Exigo and Cronos, reflecting company performance adjustments and the equity conversions of Gen 4 and Motus that resulted in a $1.5 million reversal of previously recognized unrealized appreciation. Other marks reflected a combination of lower equity market multiples and changes in market spreads, partially offset by $4.5 million of unrealized appreciation in [ Zale. ] The CLO-1 F note remained at 0 fair value. The JV was written down $1.1 million after paying a $0.8 million dividend to the BDC and the BB and BBB portfolio was relatively flat. We also recognized $2.1 million of realized gains, primarily from the Gen 4 and [indiscernible] equity conversions. As of quarter end, our core non-CLO portfolio was 1.6% below cost with our total portfolio valuation 4.9% below cost. During the second quarter, our core BDC net interest margin increased to $13.6 million from $13.4 million last quarter. This was driven primarily by a 1.2% increase in average core assets and the average SOFA 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 license, including the recent SBA approval of a $75 million upsize and $90 million from our 2 revolving credit facilities. All quarter end cash was used to repay the SAT baby bond in September. As we enter the back half of the 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 continued 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, 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 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 welter balance sheet position Saratoga to navigate this environment. Moving on to Saratoga Investments fiscal 2027 2nd quarter key performance indicators as compared to the quarters ended May 31, 2026, and August 31, 2025. Our quarter end NAV was $6 million, down 6.8% from $378.5 million last quarter and 14.1% from $410.5 million last year, with $8.4 million of the charge being due to share repurchases. Our NAV per share was $22.15, down from $23.23 last quarter and $25.61 last year. Of the $18 sequential quarter reduction, $0.30 or 28% was due to the under earning of the dividend. This excess distribution represents previously undistributed NII profits from prior years. Our adjusted NII was $7.4 million this quarter, down 2.6% from last quarter and down 18.7% from last year. Our adjusted NII per share was $0.46 this quarter, down 2.1% from last quarter and 20.7% from last year. Adjusted NII yield was 8.1% this quarter, up from 7.8% last quarter and down from 9% last year. And latest 12 months return on equity was negative 1.1%, down from 4% last quarter and down from 9.1% last year. This is currently below the industry average of 2.2%. Slide 3 illustrates how our combined portfolio and financial results have delivered an ROE of negative 1.1% for the last 12 months, below the industry average of 2.2%. However, our long-term average return on equity over the past 12 years of 9.2%, is almost 1.5x above the BDC industry average of 6.4%. Our long-term return on equity has remained strong over the past decade plus being 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. As of the end of the quarter, our assets under management reached a record level of $1.15 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 Medicine logic to our yellow category. We remain proud of the overall portfolio given the current headwinds in the industry while recognizing the credit markdowns as discussed. Both nonaccrual investments have now been sold with 81.5% of our investments at quarter end and first lien debt generally supported by strong enterprise values and resilient balance sheets in industries that have historically performed well in stressed 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 Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was $16.2 million, decreasing from $16.3 million and 15.8 million shares for last quarter and last year's second quarter, respectively. . Adjusted NII was $7.4 million this quarter, down 18.7% from last year and 2.6% 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 AUM. The weighted average interest rate on the core BDC portfolio was 10.6% this quarter compared to 11.3% as of last year and up from 10.5% 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. Total expenses for the quarter, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes were $2.9 million as compared to $2.5 million last year and $2.7 million last quarter. This represented 0.9% of average total assets on an annualized basis, unchanged from last quarter and up from 0.8% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added KPI Slides 26 through 29 in the appendix at the end of the presentation. And Slide 30 compares our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 1.3% of cost representing 2 investments is 2.5x lower than the industry average of 3.4%. 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. The sequential decline represent both the Q2 markdowns discussed earlier and the current under earning of the dividend as well as the $8.4 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. Starting at the top, adjusted NII share was down $0.01 in Q2 with multiple small changes, as you can see on the slide. On the lower half of the slide, NAV per share decreased by $1.08 primarily due to the $0.75 aggregate quarterly dividend exceeding the $0.45 GAAP NII plus the $0.90 of net realized gains and unrealized depreciation recognized in Q2 with $0.82 of that in 3 discrete credits, partially offset by a $0.09 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 EBA 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 FDA that SBIC III's individual leverage limit was increased to $250 million, providing an additional $75 million of long-term capital in the form of SBA guaranteed debentures, which we have included in available leverage liquidity on this slide. We did not include any cash here as on September 18, we redeemed in full $105.5 million aggregate principal amount of the issued and outstanding 6.00% 2027 notes. Using all this cash as well as the subsequent proceeds received from the green shoe on the SAX baby bond we closed in August. This refinancing helped us reduce our near-term refinancing risk. Subsequent to quarter end, we issued a further $23.1 million SAX baby bonds through a reopening, bringing the total principal amount issued to approximately $120.8 million. 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, our debt is structured in such a way that we have no material DDC covenants that can be straighted during volatile times, which is 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 $1.15 billion of AUM at fair value, and this is invested in 50 portfolio companies 1 CLO fund 1 joint venture and 32 distinct BB and BBB CLO debt investments. Our first lien percentage is 81.5% of our total investments, of which 21.2% 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, including this past year, reflecting the recent decreases to base interest rates and tightening spreads, this quarter, our core BDC yield increased slightly to 10.6%, consistent with base rate increases starting again this quarter. The CLO yield decreased to 10.9% from 11.0% last quarter. Subsequent to quarter end on September 17, we completed the sixth refinancing of the Saratoga CLO. This transaction extended the reinvestment period through October 2029 extended the legal maturity to October 23 and established a non-call period through April 2028. The refinance CLO has approximately $350 million of assets and benefits from lower financing rates as part of the transaction, we invested an additional $16.2 million in newly issued subordinated notes and purchased $2.6 million of Class E2R5 notes at par. Extended reinvestment period is expected to support future BDC management fees and interest income. Slide 11 shows how our investments are diversified primarily across the U.S. 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 and BB and BBB CLO debt securities, which are all included as structured finance securities. Moving on to Slide 13. 7.1% 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 $47.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. During the second quarter, we generated $2.1 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. Now before I turn the call over to David, I would like to say a few words personally. It has been a privilege to serve Saratoga our board, our shareholders and the entire team over the past 13 years. I'm proud of the progress we have made and what we have built together. While I'm stepping away from our executive responsibilities, I remain fully committed to Saratoga's long-term success and look forward to continuing to support the company as a Director and in a limited consulting capacity. I would also like to recognize Christina Ramdehell, who has been promoted to Chief Accounting Officer and Treasurer. Christina served as Controller of the BDC and brings significant accounting, financial reporting and audit experience to her expanded role. I've worked closely with Christine for almost 10 years and have great confidence in our knowledge of our business, her commitment and her ability to help provide continuity through this transition. I know she looks forward to working with everyone on this call in the shareholder and analyst community. That concludes my financial and portfolio review. Our Chief Operating Officer, David DeSantis. David DeSantis will now provide an overview of the investment market.

Thank you, Henri. Today, I will give an update on the market since we last spoke in July, and then comment on our current portfolio performance and investment strategy. Our deal flow has primarily increased due to the success we are having with our business development efforts, as seen by the fact that 5 of the 13 new platform companies that we have closed in the past 12 months are with new relationships. However, 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 the higher quality credits. Market dynamics generally remain at their most competitive level since the pandemic, although we are seeing some signs of spread widening. We've also experienced repayment activity from some of our lower leveraged loans, which have been refinanced on more favorable terms. Historically, as a management team, we have successfully navigated through numerous credit cycles and have learned to stay laser-focused on the things we can control. In summary, those are: first, to be highly disciplined on credit 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, gives us confidence in our ability to achieve healthy and steady portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Software does continue to get a lot of attention in the market. And for us, the hurdle is very high to do new software deals. We expect to see a substantial shift away from the software in our deal flow and ultimately within our portfolio. By way of example, we closed 2 new platforms in Q2, either virtual or software-related businesses. Our existing software portfolio continues to have strong credit metrics with loan-to-value or LTV of 43% and 85% of those physicians are first lien with an additional 6% in equity securities. Now I'd like to shift to highlight the 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 are able to perform when evaluating investment is much more robust, and the capital structure are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documentation 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 reflect this. Our underwriting bar remains very high as usual, in a very difficult market, yet we continue to find opportunities to thoughtfully deploy capital. As seen on Slide 14, though providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 335 follow-ons in the first 3 quarters of 2026. We have also invested in 9 new platform investments in this period. already surpassing last year's full year origination effort. Overall, our deal flow is increasing as our business development efforts show continued success. Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics is the strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio of companies and in close contact with our management teams. We ended the quarter with still just 1 core BDC investment on nonaccrual status, in Pepper Palace in addition to our CLO's F note, which was placed on nonaccrual 2 quarters ago. This at note realized at 0 value as part of the CLO reset in September. And additionally, Pepper Palace was sold for a nominal amount post quarter end. We, therefore, have no nonaccruals today within our portfolio. Together, as of quarter end, these 2 investments represented 0.0% of the portfolio at fair value and 1.3% at cost. In general, our portfolio of companies are very healthy, and the fair value of our core BDC portfolio is only 1.6% below its cost. Given the recent sale of Pepper Palace, although fully written off already, excuse me, most of the unrealized depreciation will now be realized in Q3. The core BDC investments had notable write-downs this quarter due to performance. They were, [ Exigo, Cronos and Madison Logic. ] We recognized unrealized depreciation of $8.7 million on our debt investment in Exigo in Q2 and as it is experiencing continued weakness due to a challenging end market. Despite having a dominant position in this industry, the company's customers are facing significant competitive pressures from alternative sales channels, which is causing the end market to shrink as well as producing customer churn. As a result of this, our investment in Exigo remained right at the end of the quarter, though it kept its accrual status and interest continue to be paid. Subsequent to quarter end, we fully exited the Exigo investment close to our quarter end mark, resulting in a negative 6.1% IRR over the life of the investment. Our Cronos debt and preferred equity investment was written down by $2.5 million, reflecting declining customer retention and slower new customer acquisition due to broader softness in the company's end market. The deal team is actively engaged with the sponsor on the deal and recently completed an amendment, which included sponsor credit support and an extension. Our Madison Logic first lien debt investment was written down by $1.9 million reflecting declining sales and market softness in the company's end market. The deal team is ultimately to engage with management on that credit. Cronos and Madison Logic remain on accrual with sufficient cash balances. The rest of the portfolio markdowns this quarter reflect a combination of company performance and market conditions. The key recurring themes driving market markdowns are: one, comparable market multiples, have driven reductions; and two, the impact of recent general market spreads in our valuations. In addition, our JV and BB and BBB CLO debt portfolio were marked down by $1.1 million. showing slight portfolio performance decreases from last quarter. 81.5% of our portfolio is 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 the same slide, you can see that industry debt multiples recently increased to the 6x range, while the total leverage for our portfolio decreased to 4.7x, excluding Pepper Palace, reflecting the new investments originated at much lower leverage levels. Turning to Slide 15. That 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. This recent increase is a result of our recent business development initiatives. 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 $76.1 million consisting of 2 new investments totaling $54 million, 9 follow-ons totaling $12.9 million and for BB and BBB CLO debt investments of $9.2 million in aggregate. As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. Our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios. The enterprise value of the business will sustainably exceed the last dollar of our investment. Our approach in 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 $2.66 billion in 134 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 90 of those investments, achieving gross unlevered realized returns of 14.9% on $1.41 billion of realizations. Taking into account recent negative events and market turbulence are combined unlevered realized and unrealized returns on all capital investment is 13.1%. Our overall investment approach has yielded exceptionalized realized returns and recovery of our invested 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've been ramping up our SBIC II license with $46 million of lower cost undrawn debentures still available at the end of Q2, allowing us to continue to support U.S. small businesses, both new and existing. As Henri noted previously, the change in SBA rules will allow us to receive an additional $75 million of long-term capital in the form of SBA guaranteed debentures, increasing available debentures to $121 million. This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris?

Thank you, Dave. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended August 31, 2026, and was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended November 30, 2026, marking the seventh 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 macro environment impact on our earnings and spillover levels. Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, generated total returns of negative 16% below the BDC index's negative 6%. Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 3-year and 5-year total returns, all place us in line with the BDC index. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 700% has been more than 2.5x the industry is 70%. On Slide 21, you can further see our last 12 months of 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 to discrete credits this quarter, partially offset by the quarter's share repurchases, well below NAV. 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 macro environment, we will continue to deploy our available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also -- we will also continue to be one of the few BDCs to have grown NAV accretively over the long term and have a consistently healthy return on equity significantly beating the industry with our long-term return on equity of roughly 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 differentiated characteristics, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 11.5%, ensuring we are strongly aligned with our shareholders. Looking ahead, we expect the macroeconomic backdrop to remain mixed. Persistent inflation and uncertain interest rate environment, geopolitical uncertainty and developments within the software sector continued this pressure on certain borrowers and valuations. Although the broader BDC industry has experienced higher defaults NAV declines and dividend reductions, valuation changes in our portfolio this quarter were concentrated in a small number of investments rather than reflecting broad-based deterioration. At the same time, we are seeing several constructive indicators, the recent wave of BDC bond issuances, the rebound in higher quality loan values and early signs of improving traction activity, all pointing towards a market that appears to be improving. And recent increased base rate base market rates are very positive for us with our variable rate asset base, primarily fixed rate debt structure. As always, we will continue to focus on disciplined underwriting, senior secured first lien investments and diligent balance sheet management. With a diversified funding base, available liquidity and a strong pipeline, we believe Saratoga is well positioned to continue delivering durable risk-adjusted returns to our shareholders over the long term. In closing, I would like to thank all of our shareholders for their ongoing support I would like to now open the call for questions.

[Operator Instructions] And our first question will come from the line of Erik Zwick of Lucid Capital Markets.

I wanted to start with a question for Henri and first, just want to say, Henri, it's been a pleasure working with you, and I wish you all the best in your future health journey. Curious, can you update us on the amount of spillover per share at the end of the quarter?

Sure. Thanks so much, Eric, for that. And it's been a pleasure working with you as well. So as at the end of August, our spillover that has been reducing is down to about $1 per share as of 08/31.

Okay. And then next, Christian wanted to kind of follow up on the discussion from last quarter, maybe kind of a 2-part question. When we spoke last quarter, you mentioned maybe a kind of a rough outlook for a 4- to 5-quarter kind of path back to bridging the gap between NII and the dividend, a couple of factors kind of pointing towards that trend on market stability, healthy pipeline, outlook for portfolio growth. seems like widening in spreads plus base rates. So I guess, has anything materially changed in your view to kind of bridging that gap? And the second part of the question, kind of related is how do you prioritize the importance of maintaining the dividend versus NAV stability.

Well, obviously, that's a really important question. It's something that we are considering constantly at our Board level and at the management company at all times. I think you kind of outlined the kind of the spectrum of considerations I think one of the things we've all experienced in our history at the BDC is that when market conditions change, they don't necessarily all adjust at the same kind of same rate. . And we, at Saratoga and also the BDC industry, if you look at a lot of the debt that's been refinanced, we had debt that was issued 5 years ago at many hundred basis points less than the markets are today. And so the liability side of our structure has basically increase substantially relative to the change in long-term interest rates. And on the other side, the spread picture and the competitive dynamics in our industry has not changed at that same rate. I think what we're starting to see, and this is consistent with the past is that all these things will kind of readjust. And we're starting to see the beginnings of widening spreads, a little better terms on loans, I think there's a lot of pressure on private equity to start more realizations. There's a lot of maturities coming up in private equity companies that have to be refinanced. There's a lot of demands for credit out there. I think the everyone talks about the AI explosion of construction, and that's absorbing a lot of debt on a macro basis, the picture is changing from very substantial abundance of private credit availability to less. Now we're not predicting that it's going to change radically in the very near term, but we think the whole system is adjusting to a different level of rates. And unfortunately, the liability side has adjusted sooner than the asset side. But we think the asset side is coming around. In addition, in particular, for example, the SBIC debt, the incremental $75 million, I mean that's very favorably financed. Both in terms of the absolute rate relative to what we're seeing for new originations, but also the structure of that debt, I think, is really interesting and important to consider and basically, every one of those debentures is a 10-year facility with a bullet maturity. So none of those debts come due for 10 years. And they pay a fixed interest rate and there's no covenants. And so this is a very stable source of credit, and it's -- the SBIC has been a very important program for us historically. And that allows us to invest and reinvest during that 10-year period very substantially. And so with all that said, I think we we believe our pipeline and deployment is working well. Where we think that the reset of the is very important, is going to have incremental management fee income and higher interest income. And the debt structure of that is radically different than it was and that was done opportunistically and very well financed. I think we've taken a lot of the refinancing risk off the table for next year by the bond offering that we did and then the resources credit-wise we have for refinancing for next year. So I think the things that we can -- we have control over, I think we've done a pretty good job of executing growing our portfolio, et cetera, a lot of the things we've talked about on this call, the things we can't control are industry spreads and the absolute cost of capital. But I think the market is going to come around and adjust to that somewhat. So we are -- we feel good about our credit portfolio. I think as we've discussed at length on this call, don't have any nonaccruals in our -- anymore and as a result of activities. And so we think our portfolio is solid at this time. And we also think that our earnings are in the process of being ready to increase. You mentioned spillover. I think Henry mentioned, we still have a $1 spillover to go and every that we pay incremental dividends to our earnings, we reduced that spillover obligation of the company. And so we're whittling that obligation down and setting the stage for, we think, a better earnings picture going forward.

I appreciate the detailed commentary. And then just one last one for me and I'll hop back in the queue. David, you addressed on Slide 15 in the prepared remarks. And just looking at that roughly even split between the sourcing between deals via PE sponsors versus private companies without sponsors. And when I look down at the currently issued term sheets, it's 88% in favor of PE sponsors. So just kind of curious, bigger picture over the longer term, is that pretty typical that you'll transact more with the PE sponsors just kind of given the structure and the support you get from them? Or is there something more specific today that is tied scale is more in that direction?

Thank you. Great question. Typically, just taking a step back, having a traditional private equity sponsor that has a committed fund is advantageous. Just giving additional credit support for a transaction, both at the outset as well as from an ongoing perspective. And the level of sophistication that they provide is obviously attractive to us, especially now in -- as we've talked about a few times today, in a fairly volatile and somewhat uncertain environment. So as we navigate the current environment, we want to have more protection as opposed to less and be more conservatively underwriting things as opposed to more aggressively. And so having those private equity sponsors there provides just an added layer of security through not only their sophistication, but most importantly, their capital. And then secondly, finding transactions through the traditional private equity channels is a little more efficient for us than the direct and what I'll say, independent sponsor channel. So I think they're also seeing a bit of that dynamic coming through in those figures as well. .

And our next question will be coming from the line of Jason Stewart of Compass Point.

A question on leverage in the share repurchase program. If you could just give us a little bit more color especially with where the stock is trading and how you're thinking about the share repurchase program in the context of balance sheet leverage?

Well, I think, again, that's an important question that we consider quite seriously at all times. There is a balance there to maintaining the equity every share repurchase reduces our equity and obviously increases our leverage. And so that's something that we watch very carefully. But when our stock trades at the type of discounts that we're seeing, we also feel it's important at the margin, not in a very large way, but to take advantage of that. And so it's a balance between the 2. But at the levels of discount we're trading at, the return on repurchasing our stock is quite substantial. And so we're trying to balance those 2 things. And as you see, we were pretty 9% for the amount of stock we repurchase, that's a pretty sizable level of anti-dilution. So we're weighing all those things at the same time. And again, I think as we've discussed many times on our calls, the structure of our leverage, there's a certain amount of leverage, which is a number -- and then there's the structure of the leverage, which is when does it come due. And we've always had a very sort of laddered long-term maturity structure. And so we think that has helped to ameliorate perhaps and a fixed rate so that in a rising rate environment, which we appear to be in, we think that is somewhat of a tailwind that helps us on our earnings.

Okay. And on that front, with your conversations with the rating agencies, do they appreciate your structure of leverage? Or are they looking simply at a number?