Saratoga Investment Corp. (SAR) Q4 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corps Fiscal Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corporation's Chief Financial Officer and Compliance Officer, Mr. Henri Steenkamp. Please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s fiscal fourth quarter and fiscal year 2022 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 year end and fourth quarter 2022 shareholder presentation in the Events & Presentation section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 4 PM today through May 12. 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, Henri and welcome everyone. Our fiscal year 2022 and fourth quarter performance continues to reflect the strength and resilience of our financial position and portfolio companies. Despite the current global market volatility and continuation of COVID-19 impacts, we feel very fortunate to have navigated through these challenges thus far and to be in a position to benefit from the upside of the ongoing recovery and substantial increase in market activity. We believe Saratoga continues to be well positioned for potential future economic opportunities as well as challenges. Our existing portfolio companies are performing well, and our current business development pipeline remains robust with positive metrics and term sheets issued and deals executed. Our AUM grew significantly this quarter to $818 million as we originated $164 million and new platforms or follow on investments, offset by $11 million of repayments. Year-to-date saw significant achievement across all growth and credit metrics with record originations of $458 million, net realized gains of $13 million and net unrealized appreciation of $17 million, all contributing to our fiscal 2022 net AUM growth of $263 million and latest 12 months return on equity of 13.9%. Investment gains also demonstrate how our strategy of taking equity positions in our portfolio companies when available and when it makes sense to us has been rewarded. We continue to bring new platform investments onto the portfolio with three added of this fiscal quarter and all originations were made while maintaining the extremely high credit bar we set for all investments. The performance of our existing portfolio also drove our NAV per share growth by 0.5% this quarter to $29.33, again a historical record for the BDC. Notably, this quarter's increase is the 17th increase in the past 19 quarters. To briefly recap the past quarter on Slide 2, first we continue to strengthen our financial foundation in Q4 by maintaining a high level of investment credit quality, with over 98% of our loan investments, retaining our highest credit rating at quarter end, up from 95% last quarter, generating a return on equity of 13.9% on a trailing 12-month basis, and registering a gross unlevered IRR of 12.2% on our total unrealized portfolio, with our current fair value 3% above the total cost of our portfolio, and a gross unlevered IRR of 16.4% on total realizations of $764 million. Second, our assets under management increased substantially to $818 million this quarter, a 24% increase from $662 million as of last quarter, and a 47% increase from $554 million as of the same time last year. Our new originations included three new portfolio companies and 19 follow-on investments and our current pipeline remains robust with approximately $79 million of net originations since quarter end. Third, in volatile economic conditions such as we are currently experiencing, balance sheet strength, liquidity and NAV preservation remained paramount for us. Our capital structure at quarter end was strong. We entered $56 million of mark to market equity supported $313 million of long-term covenant free, non-SBIC debt, $185 million of long-term covenant free SBIC debentures, and $12.5 million long-term revolving borrowings. Our total uncommitted, undrawn lending commitments outstanding to existing portfolio companies are $29 million. Our quarter end regulatory leverage of 209% substantially exceeded our 150% requirement. We had $166 million of liquidity at quarter end available to support our portfolio companies with $76 million of the total dedicated to new and follow-on opportunities in our SBIC II fund and $53 million of cash that would be fully accretive to earnings when deployed. As of today, all this cash has been deployed and we demonstrated our ability to be opportunistic with the issuance of our new $87.5 million 6% 2027 baby bond last week, which more than replenished the $53 million of cash on hand invested since quarter end. As far as we know, this is the only baby bond issued this year. Finally, based on our overall performance and liquidity, the Board of Directors declared a quarterly dividend of $0.53 per share for the quarter ended February 28, 2022, which was paid on March 28, 2022. This quarter saw strong performance within our key performance indicators as compared to the quarters ended February 28, 2021 and November 30, 2021. Our adjusted NII is $6.4 million this quarter, up 10% versus $5.8 million last year, and 5% versus $6.1 million last quarter. Our adjusted NII is $0.53 this quarter, up from $0.52 last year and unchanged from last quarter. Notably, there was a $0.02 dilutive impact and a $27 million of proceeds ATM equity shares issued in the past two quarters and not yet fully deployed. Latest 12 months return on equity is 13.9%, up from 5% last year, and down from 14.6% last quarter, and our NAV per share is $29.33, up 8% from $27.25 last year, and up 1% from $29.17 last quarter. This is the highest quarterly NAV per share for Saratoga investments since the inception of our management in 2010. Comparing the two fiscal years, adjusted NII is up 14% from $22.6 million to $25.7 million, while the adjusted NII per share this year is $2.24, up from $2.02 last year, and we will provide more detail later. As you can see on Slide 3, our assets under management have steadily and consistently risen since we took over the BDC almost 12 years ago, and the quality of our credits remain high with no current nonaccruals. Our management team is working diligently to continue this positive trend as we deploy our available capital into our growing pipeline, while at the same time being appropriately cautious in this evolving credit environment. With that, I would like to now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 4 highlights our key performance metrics for the fourth quarter ended February 28, 2022. When adjusting for the incentive fee accrual related to net capital gains and the second incentive fee calculation, adjusted NII of $6.4 million dollars was up 4.3% from $6.1 million last quarter, and up 9.9% from $5.8 million, as compared to last year's as Q4. Adjusted NII per share was $0.53, up $0.01 from $0.52 per share last year, and unchanged from last quarter. Across the three quarters weighted average common shares outstanding were $12.0 million for this quarter, $11.4 5 million for last quarter, and $11.2 million for last year's Q4. The equity issuances above NAV we did in Q3 and Q4 under our ATM program resulted in a $0.02 dilution to NII per share this quarter, and reflects the impact to earnings while this capital is still undeployed. The increase in adjusted NII from last year primarily reflects the higher level of investments and resultant high interest and other income, with AUM up 24% since last quarter, offset by lower absolute interest rates with a weighted average current coupon on non-CLO BDC investments decreasing from 9.6% to 8.5% year-over-year. Adjusted NII yield was 7.3%. This yield is down 40 basis points from 7.7% last year and unchanged from 7.3% last quarter. For this fourth quarter, we experienced a net gain on investments of $2.7 million or $0.23 per weighted average share and a $0.1 million realized loss on the repayment of SBIC I debentures or $0.01 per weighted average share, resulting in a total increase in net assets from operations of $8.4 million or $0.70 per share. The $2.7 million dollars net gain on investments was comprised of $0.1 million in net realized gains and $2.9 million in net unrealized appreciation offset by $0.2 million of deferred tax expense on unrealized appreciation. The $0.1 million dollars net realized gain comprises an escrow payment to $2.9 million net unrealized appreciation primarily reflects, first $1.9 million unrealized appreciation on the company's PDDS preferred stock investment, a $1.0 million unrealized appreciation on the company's Artemis Wax preferred equity investments, $0.8 million unrealized appreciation on the company's Netreo investment and $1.0 million unrealized appreciation on the company's Destiny equity investment, partially offset by the $1.6 million and $1.1 million unrealized appreciation on the company's CLO and JV equity investments respectively. This depreciation reflects the volatility in the broadly syndicated loan market as of yearend. In addition, there were numerous other net appreciations across the overall portfolio, resulting in the non-CLO portfolio total value increasing by 0.7% in total during the quarter. Return on equity remains an important performance indicator for us which includes both realized and unrealized gains. Our return on equity was 13.9% for the last 12 months. Both our adjusted LTM NII of 7.8% and our ROE is well above our blended average cost of capital of 4.6% as of yearend. Competition remains fierce, but we continue to find opportunities to earn above our cost of capital. Total expenses, excluding interest and debt financing expenses, both management fees and incentive fees and income taxes remained unchanged at $1.8 million for this quarter compared to last year. This represented 0.9% of average total assets on an annualized basis, down from 1.1% last year. We have also again added the KPI slides starting from Slides 28 through 31 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained. Of particular note is Slide 31 highlighting how our net interest margin run rate has continued to increase and has almost quadrupled since Saratoga took over management of the BDC and also increased by 2% in the past 12 months, while still not yet receiving the benefit of putting to work our significant amount of Q4 undeployed cash. Slide 4 highlights these same key performance metrics for the full fiscal year. When adjusting for the incentive fee accrual related to net capital gains and the interest on the redeemed SAF baby bonds during the call period this year, adjusted NII of $25.7 million was up 13.9% from $22.6 million as compared to last year. Adjusted NII per share was $2.24, up $0.22 from $2.02 and adjusted NII yield was 7.8%, up 20 basis points from 7.6%. For fiscal year 2022, we experienced a net gain on investments of $28.2 million dollars, or $2.46 per weighted average shape, and a $2.4 million realized loss on the repayment of various pieces of debt, or $0.21 per weighted average share, resulting in a total increase in net assets from operations of $45.7 million or $3.99 per share. This net gain on investments included $13.4 million in net realized gains, and $17 million in net unrealized appreciation for this year. Moving on to Slide 6, NAV was $355.8 million dollars as of this quarter end, a $13.2 million increase from last quarter, and a $51.6 million increase from the same quarter last year, primarily driven by net realized and unrealized gains and accretive ATM equity issuances. During Q4 approximately 390,000, shares were sold for net proceeds of $11.5 million at an average price of $29.31, while 50,000 shares were repurchased at an average price of $25.86. NAV per share was $29.53 as of yearend, up from $27.25 12 months ago. This chart now also includes our historical NAV per share, which highlights our NAV per share has increased 17 of the past 19 quarters. Our net asset value has steadily increased since 2011 and this growth has all been accretive as demonstrated by the consistent increase in NAV per share. We continue to benefit from our history of consistent realized and unrealized gains. On Slide seven, you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share remained the same at $0.53 per share a $0.07 increase in non-CLO net interest income from the partial impact of higher AUM and a $0.07 increase in other income from higher originations were offset by a $0.02 decrease in CLO interest income reflecting the volatile public markets, a $0.02 increase in base management fees and a $0.04 increase in operating expenses to more normalized levels. In addition, our 2021 excise tax resulted in a $0.04 reduction, and the net new shares issued led to a $0.02 net dilution. Moving on to the lower half of the slide, this reconciles the $0.16 NAV per share increase for the quarter. The $0.48 of GAAP NII and $0.24 of net realized gains and unrealized appreciation on investments were primarily offset by the $0.53 dividend paid in Q4. On Slide 8, you will see the same reconciliation, but now on a sequential annual basis. Starting at the top adjusted NII per share increased from $2.02 per share last year to $2.24 per share this year. The primary drivers were a $0.44 increase in other income from higher originations offset by a $0.20 cent increase in base management fees from higher average AUM. There was also a net 0.06 dilution from increased share count for the year. On the lower half of the slide, this reconciles the $2.08 NAV per share increase for the year. The $1.74 of GAAP NII and $2.66 of net realized gains and unrealized appreciation were partially offset by a $0.06 net expense related to deferred taxes on unrealized appreciation. The $1.92 dividend paid during the year, a $0.25 income tax provision from realized gains in our tax blockers and a $0.21 realized loss on extinguishment of debt. Slide 9 outlines the dry powder available to us as of yearend, which totaled $166.4 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 20% without the need for external financing, with $53 million of it being cash and that's fully accretive to NII when deployed, and $76 million of it SBA debentures with its low cost pricing also very accretive. In January, we closed an institutional bond offering of $75 million, 4.35% notes due 2027, and just last week we closed $87.5 million 6.0% baby bond due 2027. This baby bond liquidity is accretive to our year end liquidity outlined on this slide. 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, the fact that almost all our debt is long-term in nature with no non-SBIC debt maturing within the next three years, and importantly, that almost all our debt is fixed rate in this rising rate environment. Now I would like to move on to Slides 10 through 13 and review the composition and yield of our investment portfolio. Slide 10 highlights that we now have $818 million of AUM at fair value or $796 million at cost invested in 45 portfolio companies, one CLO fund and one joint venture. Our first lien percentage is 77% of our total investments, of which 12% is in first lien lost out positions. On Slide 11, you can see how the yield on our core BDC assets, excluding our CLO, as well as our total assets yield has dropped below 9% this year. This is primarily due to continued tightening of spreads in our market with another 50 basis points this quarter. In addition, our equity positions this fiscal year have increased significantly from 6.0% to 10.7% in Q4. Much of that is due to the appreciation in existing equity valuations resulting from strong performance, while some of the equity increase is also in the form of preferred equity that earns dividend income that is reflected in other income in the P&L rather than interest income. As a reminder, 97.5% of our interest earning portfolio is variable rate and 75% of our investments have a LIBOR flow of 100 basis points or less. So with a three-month LIBOR breaking through 100 basis points recently, we expect to see the earnings impact of rising rates to our NII shortly. Our 10-K outlines the pro forma impact of rate increases to our portfolio, including a $0.17 annual benefit to NII, net of incentive fee for the first 100 basis points. The CLO yield decreased to 10.5% quarter-on-quarter reflecting current market performance. The CLO is currently performing and current. Slide 12 shows how our investments are widely diversified through the US. And on Slide 13 you can see the industry breadth and diversity that our portfolio represents. Our investments are spread over 38 distinct industries with a large focus on healthcare software, IT services and education, consumer and healthcare services. In addition to our investments in the CLO and JV, which are included here as structured finance securities. Of our total investment portfolio 10.7% consists of equity interests, which remain a very important part of our overall investment strategy. For the past 10 fiscal years, we have a combined $73 million of net realized gains from the sale of equity interests or sale or early redemption of other investments. And over two thirds of these historical total gains were fully accretive to NAV due to the unused capital loss carry forwards that were carried over from when Saratoga took over management of the BDC. And to a smaller degree the Elyria realization last year and My Alarm Center final write down this year. We continue to have $1 million capital loss remaining at year end. This consistent 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. I will now turn the call over to Michael Grisius, our Chief Investment Officer for an overview of the investment market.

Thank you, Henri. I'll take a couple of minutes to describe our perspective on the current state of the market, and then comment on our current portfolio performance and investment strategy. Since our last update in January, we see market conditions continuing to be very aggressive, exceeding where they were pre-COVID-19 and very much a borrowers market. Liquidity remains abundant. In the first calendar quarter of 2022, we saw high transaction volumes in M&A activity, albeit slightly lower than Q4, but continuing to be extremely robust. We currently have an actionable deal pipeline. Credit yields continue to be tight, with high multiples and low absolute yields. Broadly syndicated loan markets are experiencing much lower volumes year-over-year and rising spreads, but we are not seeing a movement yet in the lower middle market. High demand for quality deals is keeping spreads tight. Pricing and leverage metrics are among the most competitive levels that we've ever seen. Investors continue to differentiate themselves in other ways, such as accelerated timing to close and looser covenant restrictions. Now that said, lenders in our market are still wary of thinly capitalized deals, and for the most part are staying disciplined in terms of minimum aggregate base level of equity and requiring reasonable covenants. We're keeping a watchful eye on how continued inflationary pressures exacerbated by Russia-Ukraine conflict, combined with expected interest rate hikes could affect the credit markets and the economy. Despite this, we have confidence in our strong position entering a possibly different credit and rate environment. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital, as we will discuss shortly. Calendar year 2021 has been an incredibly strong deployment environment for us with a record origination pace. Follow-on investments in existing borrowers with a strong business model, balance sheets continued to be an important avenue of capital deployment for us, as demonstrated with 40 follow-ons this past fiscal year, 19 in the last quarter alone, including delayed draws. Most notably, we have invested in 13 new platform investments in this fiscal year. Portfolio management continues to be critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. All of our loans in our portfolio are paying according to their payment terms and so in addition to not having any new nonaccruals through COVID, we have zero nonaccruals across our whole portfolio. We also recognized $28.2 million net realized in unrealized gains this fiscal year and the fair value of Saratoga's overall assets now exceeds its cost basis by 2.7%. We believe this strong performance reflects certain attributes of our portfolio that bolster its overall durability. 77% of our portfolio is in firstly 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. 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. Our approach has always been to stay focused on the quality of our underwriting and as you can see on Slide 15, this approach has resulted in our portfolio performance being at the top of the BDC space, with respect to net realized gains as a percentage of our portfolio at cost. We are at the top of the list of only 12 BDCs that had a positive number over the past three years. A strong underwriting culture remains paramount at Saratoga. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to peer as deeply as possible into a business in order to understand accurately its underlying strength and characteristics. We have always sought durable businesses and invested capital with the objective of producing the best risk adjusted returns for our shareholders over the long-term. Our internal credit quality rating reflects the impact of COVID and shows 98.5% of our portfolio at our highest grade credit rating as of quarter end. Part of our investment strategy is to selectively co-invest in the equity of our portfolio companies when we're given that opportunity and when we believe in the equity upside potential. It has been our experience that there is significant overlap between those businesses that meet our strict debt underwriting requirements, and those that possess attributes that make them attractive equity investments. This equity co-investment strategy has not only served as yield protection for our portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated throughout this fiscal year with our Texas Teachers, Grey Heller, Passageways and Village Realty realizations, we intend to continue this strategy. Looking at leverage on Slide 16, you can see that industry debt multiples were relatively unchanged from Q3 to Q4, yet remain at historically high levels. Total leverage for our overall portfolio was 4.52 times an increase from last quarter, reflecting primarily the additional capital we provided our existing portfolio companies. Through past volatility, we have been able to maintain a relatively modest risk profile throughout. Although we never consider leverage in isolation, rather focusing on investing in credits with attractive risk return profiles, and exceptionally strong business models where we are confident the enterprise value of the businesses will sustainably exceed the last dollar of our investment. In addition, this slide illustrates our consistent ability to generate new investments over the long-term, despite ever changing and increasingly competitive market dynamics. During the first calendar quarter, we added two new portfolio companies and made 12 follow-on investments. Now moving on to Slide 17, our team's skill set, experience and relationships continue to mature and our significant focus on business development has led to new strategic relationships that have become sources for new deals. Our top line number of deals sourced remains robust but has dropped in the past two years, initially due to COVID, but more recently reflecting our efforts to focus on attracting a higher percentage of quality opportunities. Most notably, the number of deals executed during the last 12 months is markedly up from last year's pace, demonstrating that this more focused sourcing strategy is yielding results. What is especially pleasing to us is that eight of our 12 new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts. In addition to our growth this past year, since quarter end, we have executed approximately $85 million dollars of new originations in two new portfolio companies and seven follow-ons and have repayments of approximately $5 million in one exit for a net increase in investments of approximately $79 million. As you can see on Slide 18, our overall portfolio credit quality remains solid. The gross unlevered IRR unrealized investments made by the Saratoga Investment Management team is 16.4% on $764 million realizations. On the chart on the right you can see the total gross unlevered IRR on our $746 million of combined weighted SBIC and BDC unrealized investments is 12.2% since Saratoga took over management. The largest unrealized appreciation remaining due to the COVID is our Nolan Group investment, which is more dependent on in-person human interaction, and remains our only yellow rated investment. The remaining unrealized appreciation reflects the current performance of the company, but does not change our view of the fundamental long-term prospects for the business. Our C2 investment we have previously discussed, has performed well and is almost back at par. Even with Nolan's current mark down our overall portfolio fair value is now almost 3% above its cost. Our investment approach has yielded exceptional realized returns. Now moving on to Slide 19, you can see our first SBIC licenses fully funded. Our second SBIC license has already been fully funded with $87.5 million of equity of which $236 million of equity in SBA debentures have been deployed. There are still $2 million of cash and $76 million of debentures currently available against that equity. To summarize the past year, the way the portfolio has proven itself to be both durable and resilient against the impact of COVID-19 and the subsequent market adjustment and volatility really underscores the strength of our team, platform and portfolio, and our overall underwriting and due diligence procedures. Credit quality remains our primary focus, especially at times with such high activity levels, as we are seeing now. And while the world is in continuous flux, we remain intensely focused on preserving asset value, and remain confident in our team and the future for Saratoga. This concludes my review of the market and I'd like to turn the call back over to our CEO. Chris?

Thank you, Mike. As outlined on Slide 20, our latest dividend for the quarter ended February 28, 2022 was paid on March 28, 2022. The Board of Directors continue to evaluate the dividend level on at least a quarterly basis considering both company and general economic factors. Moving on to Slide 21, our total return for the last 12 months which includes both capital appreciation and dividends, has generated total returns of 14% in line with the BDC index of 14%. Our longer term performance is outlined on our next slide. Our three and five-year returns place us in the top half of all BDCs for both time horizons. Over the past three years, our 40% return exceeded the 36% return of the index over in the past five years are 91% return greatly exceeded the index's 53% return. On Slide 23 you can further see our outperformance 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, net asset value per share performance, NII yield and dividend growth, which are both consistent and at the top of the industry and reflects the growing value our shareholders are receiving. Not only are we one of the few BDCs to have grown NAV, we have done it accretively by also growing NAV per share 17 of the last 19 quarters. Moving on to Slide 24, all of our initiatives discussed in this call are designed to make Saratoga Investment, a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. Our differentiating characteristics include maintaining one of the highest levels of management in our industry at 14%. Access to low cost and long-term liquidity with which to support our portfolio and make accretive investments recently increased with our new baby bond issued last week. A triple B+ investment grade rating and active public and private bond issuances, solid historic earnings per share and NII yield, leading historic long-term return on equity, helped with a growing NAV and equity per share, putting us at the top of the industry for growth. High quality return, attractive risk profile. In addition, our historical high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry. We remain confident that our experienced management team, historically strong underwriting standards, and time and market tested investment strategy, service well in battling through the challenges in the current and future environment and that our balance sheet, capital structure and liquidity will benefit Saratoga's shareholders in the near and long-term. In closing, I would like to again thank all of our shareholders for their ongoing support and I would like to now open the call for questions.

Our first question will come from the line of Mickey Schleien from Ladenburg. Your line is open.

Yes, good afternoon, everyone. Hope you're well. Couple of questions. The portfolio looks pretty defensive, but there are some investments, not particularly large, but they are in restaurants, retail and hospitality, which depending on the companies could be more cyclical. So I'm curious whether you're seeing any signs of things slowing down at these companies? And how do you feel about their ability to withstand a potential recession down the road?

That's a good question, Mickey, this is Mike. The way we underwrite our portfolio and all of the investments that we make is with a mindset toward thinking about and modeling scenarios where you might go into an environment where there's less demand or there's a correction in consumer demand, for instance, in the industries that that you just referenced. And so we're giving thought to that as we structure the balance sheet, and we structure where we sit on the balance sheet. And the cases that you reference, we feel very strongly, for instance, we've got a couple of restaurant deals that we feel very comfortable with their performance to date, as well as where we sit in the balance sheet relative to the enterprise value. We do have a hospitality deal that is one that we've been focused on and following for some time, one that participates in the hospitality space. But the experience that they're having there is really a reflection of COVID. And I think, as I referenced in the prepared remarks, that is by far and away the industry leader, and so we have a lot of confidence in the prospects of that business over time and feel like when we get through the other end of COVID, it's performance should look more like it was historically. So overall, I think I will say, I say this though, again I want to reiterate every deal that we do, we're looking at the fundamentals of the business, not thinking about where we are in the economy at the time, but always thinking about the fact that it could be during our investment period, that we go through potentially a downturn and so we're very thoughtful in terms of how we construct our debt instruments and where we position ourselves in the balance sheet. As a result, we very much gravitate to businesses that just have very strong fundamentals. They' are the ones where they offer a very compelling value proposition to their customers that we think is sustainable in a variety of markets. They've got a proven track record with really good management teams and strong ownerships, typically very strong margins, and those margins lead to healthy cash flow with which to service and pay down their debt. And generally, they're recession resistant businesses as well. You're not going to see us go into businesses that have lots of volatility associated with them. All businesses can get some impact as a result of recession. But generally, as we look at our portfolio, we feel very good about how it's constructed as you referenced at the beginning.

Thanks for that Mike. That's really helpful. My next question is pick maybe a little more high level with, I'm curious about the new senior loan fund. Those are obviously quite popular amongst BDCs to potentially operate these vehicles in a different segment of the credit markets with some more leverage in the BDC itself can usually take on. But you're unique in the sense that you own and manage a CLO, which is effectively a larger form of a senior low fund. So why add the senior loan fund instead of just expanding the CLO business?

Mickey, maybe I'll answer that. I think there's an element of diversification that occurs there and so that's something that is important, but we also have co-investors. It's another source of diversification in capital. And it's also another source of diversification in time. The cycle for our existing CLO is driven by certain dynamics and call periods and that type of thing. And so this allows us to have more diversification over time.

That's helpful, Chris. I understand. And just following up on the CLO, I see that the estimated yield was down to 9.3 on the equity from 11.3 in the previous quarter. And you know, other vehicles in that space are seeing estimated yields in the teens and cash flows north of 20. I know that Henri said in the prepared remarks that the CLO is performing, but are there some credit problems percolating or what's depressing the estimated yield there?

Yes, hi Mickey, it's Henri. So as you know that yield is sort of an output of the valuation. And it's a weighted average interest rate that gets calculated as an output of sort of how the valuation is doing. And if you look at this past quarter as of February, and a reminder, our measurement period is as of the end of February, what you saw when we did our valuation was that, firstly we made no changes actually to the valuation assumptions. So they were unchanged for last quarter. And when it came to one of the things you assess as part of the valuation assumptions is any assets trading under 80 or 75 or a certain level, the number of assets that we defaulted in the valuation, because they were trading under that level actually remained the same. So it definitely wasn't a reflection of credit. Really the main driver of the unrealized appreciation that you saw in the valuation and when there's unrealized appreciation, the interest rate, which is the output decreases as well, was really all driven by a little bit of a temporary impact of the rising rate environment, because if you recall, what happens is in a CLO the liabilities reprice a lot quicker than the assets firstly, so often assets are either one month or three months repricing, whereas the liabilities reprice immediately. And then secondly, also some of the assets have flows in place and that initial rise in rates through February, if you recall, three-month LIBOR at the end of February was only 50 basis points. So that rise that you saw sort of through the end of February, was not yet through the asset floors. And so the net impact of sort of the timing, and the flows resulted in a reduction in the projected cash flows as of 228. And once those projected cash flows go down in the valuation, that drives the interest rate down as well. So, it's based on what existed at the end of February, it's more of a temporary phenomenon than anything else.

Yes, I was just going to ask it sounds like that could reverse itself as interest rates go up? Henri can you just remind us, where are you in the reinvestment period in the CLO?

We refi-ed it just over a year ago and it is for three years, so the next refi period is in -- I think at the beginning of 2024.

Oh it is the end of the where you would consider refi-fying it again.

I understand. That's it from me this afternoon. Thank you for your time.

Thanks, Mickey.

Thanks, Mickey.

Thank you.

Our next question will come from the line of Bryce Row from Hovde Group. You may begin.

Thanks, good afternoon. Let's see, I wanted to just maybe ask about the activity here post quarter end and how you're thinking about the balance sheet, and leverage on the balance sheet, as well as usage of the SBA, the available SBA, I see that you haven't drawn down new SBA debentures with some of this here recent activity and just curious if some of the deals you've done post quarter end would fit the SBIC.

Yes, I'll go first, Bryce. Hi, there. So yes, we've had quite healthy activity post quarter end and yes, some of that activity related to SBIC qualified investments. So there was some draw downs of our SBA debentures to partially fund that. In addition, we have cash on hand. And then as you probably saw last week, and as you know, last week, we did a we did a baby bond as well, which afforded us the opportunity to lock in a rate for long-term. And in a structure, maybe one structure that from a structuring perspective unsecured long-term we've always liked. So, we're sort of if you think of post quarter end we're using a combination of some of the remaining SBIC debentures as well as cash. And obviously, the new issuance that we did is partially also a reflection of the healthy pipeline that you saw since quarter end and that we still see in the horizon,

Well it is post, this is Mike. The post quarter end is really continuation of what you have, the trend that you saw in Q4 where we had a healthy mix of new portfolio companies and since quarter end we've invested in two new portfolio companies and then we've done a number of follow-ons and that's the sort of indicative of what we did in Q4 as well.

Okay, that's helpful and we've added in terms of what you're seeing from kind of a repayment perspective, we saw relatively light repayment activity here in the February quarter. And it looks like so far quarter-to-date relatively light. Is that something you kind of expect to continue here as we look out to the balance of the year?

Well, I'll say, go ahead.

Before you go Mike, I'll just say we certainly hope that would continue, because that's one of the things at least in our control.

Exactly. That's, that's, that's the one thing that is, we have no way of really determining precisely. I'd say this though, Bryce. The way we think about it in general, is that 25% to 30% of our portfolio on a normalized basis, is what's likely to turn over in a given year. But having said that, especially someone that's been through so many cycles, I would say that often gets tempered in a rising rate environment, because in a rate environment where spreads are compressing and rates are declining, you have more repayments that may not be as a result of a change of control, but somebody just recapitalizing their balance sheet to take advantage of more aggressive capital markets. I would expect that in this environment, we would see less of that, all else equal and so it's possible that the repayment speeds could be less than that, but very undeterminable. I think that kind of general way we think about. It is 25% to 30% of our portfolio that's likely to turn over is kind of a base case that seems reasonable to us.

Okay. Okay, thanks a lot. I'll jump back in the queue. I appreciate it.

Our next question will come from the line of Matt Tjaden from Raymond James.

Hey guys, afternoon, and I appreciate you taking my questions. I wanted to follow up on the senior loan fund JV, was wondering if you could give us a sense of targeted size and ROE for the vehicle, as well as kind of timing as to when we could see a dividend from the membership interest piece.

Sure, hi, Matt. Hope you guys are doing well. Yes so we haven't disclosed all of the sort of the components yet, because it's still early days. This past quarter was the first time that we did investments. And it's around, just from the disclosure that we included in our case, I believe we've made an investment as of about 20, it was like $25 million or so, in total and it's a form of debt and equity. And we're busy ramping up that joint venture. So at the moment, it's still very much sort of in a putting the money to work phase. From an ROE perspective, I mean, obviously for us to do something like a joint venture, and it's our first one that we did. We're thinking that it's more similar to sort of…If you think of the diversity of the different business lines we have, it's most similar to our existing CLO or our existing HVAC investments from an ROE perspective. And that's the reason that we sort of went into this first joint venture for Saratoga.

Got it? That's helpful. Maybe to pivot a bit to the origination front, was wondering, given the uncertainty in the economic outlook, what's the appetite for kind of more junior capital, say second lien and unsecured debt?

That's a good question. I mean, I think the approach that we've always taken is that we underwrite the strength of a business model, and then decide where is it that we can get the best risk adjusted returns for our shareholders. And with that approach in mind, we've been careful to stay more often at the top of the capital stack than to get the middle spot in the capital stack, just because we found better risk adjusted return opportunities in this market with potentially a lot of reasons that you could look at the market and be concerned about where the economy may be down the road. You know, the bar is probably even a bit higher for a junior capital position than it would be in normal times, let's say. So I think we're going to continue to stick with our playbook which is to lean heavily on first lien senior debt positions and that's what served us very well. We like being dollar one in a capital structure and we can do that in a way that's very accretive for our shareholders. So stretching for yield, especially in uncertain times are uncertain capital markets, we've seen over the years, often doesn't pay. Now, having said that, you know, we're always open-minded to opportunities that may present themselves. So if we found something that was a super great opportunity to deploy capital in a very accretive fashion, and we felt like it was a safe investment for our shareholders that would be something we'd consider. But by and large, we're looking to do what we've done historically focused primarily on first lien debt securities.

Got it. That's it from me. I appreciate the time.

Thanks, Matt.

Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Chris Oberbeck for any closing remarks.

Okay, well, again, we appreciate all of your support, interest and time and listening to our yearend report, and we look forward to speaking with you next quarter. Thank you very much.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.