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    Earnings call· May 2026(Q1 FY27)

    SARATOGA INVESTMENT Q1 FY27 earnings call SAR

    Jul 8, 2026 Source

    Executive summary

    Saratoga Investment Corp. Q1 FY27 — Strong Originations and AUM Growth Amidst Market Headwinds

    Saratoga Investment Corp. navigated a challenging Q1 FY27 with strong net originations and continued AUM growth, reaching nearly record levels. Despite these operational successes, the company faced pressure on adjusted NII due to lower interest rates and tighter spreads, leading to a decline in NAV per share. Management remains focused on disciplined underwriting and leveraging its robust pipeline to drive long-term accretive growth, while actively managing credit quality in a volatile market.

    Highlights

    5

    • Net positive originations of $31 million, including two new portfolio companies.

    • AUM grew 1.6% during the quarter, reaching $1.126 billion.

    • Latest 12 months return on equity of 4%, beating the BDC industry average of 2.4%.

    • Core BDC portfolio fair value remained within 0.2% of cost, with 98.3% of credits rated in the highest category.

    • Maintained substantial $197 million of investment capacity.

    Concerns

    4

    • Adjusted NII decreased to 47 cents per share, down 11.3% QoQ and 28.8% YoY, reflecting lower short-term rates and tightening spreads.

    • NAV per share declined to $23.23, down from $24.42 last quarter and $25.52 last year, partly due to under-earning the dividend.

    • Portfolio marked down $15.2 million, including $9.9 million from specific credits (Pepper Palace, Exego, Cronus) and $6 million from broad market adjustments.

    • Spreads on new originations were almost 50 basis points lower than on repaid assets.

    Operational metrics

    55
    Stock price
    $21.42
    July 6th

    Used to calculate 14% dividend yield.

    Exego Fair Value
    $17.3 million
    Q1 FY27

    Represents 70 cents of its total cost; on red watch list.

    NAV per share
    $23.23down from $24.42 last quarter and $25.52 last year
    Q1 FY27

    Sequential quarter reduction of $1.19, with 28 cents (24%) due to under-earning the dividend.

    Adjusted NII per share
    47 centsdown 11.3% from last quarter and 28.8% from last year
    Q1 FY27

    Reflects impact of lower short-term interest rates and tightening spreads, and changes to capital structure.

    Adjusted NII yield
    7.8%down from 8.4% last quarter and 10.3% last year
    Q1 FY27

    Reflects impact of lower short-term interest rates and tightening spreads, and changes to capital structure.

    Latest 12 months Return on Equity (ROE)
    4%down from 9.1% last quarter and 9.3% last year
    LTM

    Above BDC industry average of 2.4%.

    Long-term average ROE (12 years)
    10.1%
    LTM

    Well above BDC industry average of 6.7%.

    Credit Quality (highest category)
    98.3%
    Q1 FY27

    Percentage of credits rated in the highest category.

    Non-accrual investments (fair value)
    0.0%
    Q1 FY27

    Represents Pepper Palace and CLO's F note.

    Non-accrual investments (cost)
    1.2%
    Q1 FY27

    Represents Pepper Palace and CLO's F note, well below industry average of 3.7%.

    Public Baby Bond Interest Rate
    7.5%
    Q4 FY26

    Interest rate on $100 million public baby bond issued last quarter.

    Private Note Interest Rate
    7.25%
    Q1 FY27

    Interest rate on $25 million private note issued during the quarter.

    Institutional Bond Repaid
    $175 million
    Q4 FY26

    Repaid at end of February.

    Total Expenses (excl. interest, fees, taxes)
    $2.7 milliondown from $2.8 million last year and up from $2.4 million last quarter
    Q1 FY27

    Represents 0.9% of average total assets on an annualized basis.

    Total Expenses (as % of average total assets)
    0.9%up from 0.8% last quarter and last year
    Q1 FY27

    Annualized basis.

    NAV decrease (YoY)
    $17.9 million
    Q1 FY27

    Decrease from last year.

    NAV decrease (QoQ)
    $17.7 million
    Q1 FY27

    Decrease from last quarter.

    First Lien Loans (software portfolio LTV)
    37%
    Q1 FY27

    Loan-to-value for software portfolio.

    First Lien Loans (software portfolio composition)
    89%
    Q1 FY27

    Percentage of first lien loans in software portfolio.

    Equity Securities (software portfolio composition)
    5.7%
    Q1 FY27

    Percentage of equity securities in software portfolio.

    Overall Portfolio Fair Value vs. Cost
    0.9% below cost
    Q1 FY27

    Fair value of overall portfolio relative to cost.

    Net Positive Originations
    $31 million
    Q1 FY27

    Resulting from $79 million new originations and $11 million CLO debt investments, offsetting repayments.

    AUM Growth
    1.6%
    Q1 FY27

    Growth during the quarter.

    Core BDC Portfolio Fair Value vs. Cost
    0.2% below cost
    Q1 FY27

    Fair value of core BDC portfolio relative to cost.

    Total Portfolio Valuation vs. Cost
    3.6% below cost
    Q1 FY27

    Total portfolio valuation relative to cost.

    Core BDC Net Interest Margin
    $13.4 millionup from $13 million last quarter
    Q1 FY27

    Driven by 4.8% increase in average core assets, partially offset by 5 bps decrease in average SOFR.

    Average Core Assets Growth
    4.8%
    Q1 FY27

    Increase in average core assets.

    Average SOFR Rate Decrease
    5 bps
    Q1 FY27

    Decrease in average SOFR rate used in the portfolio.

    Origination Spreads vs. Repayment Spreads
    almost 50 basis points lower
    Q1 FY27

    Spreads on originations this quarter compared to repayments.

    Investment Capacity
    $197 million
    Q1 FY27

    Total available investment capacity.

    SBIC III License Capacity
    $46 million
    Q1 FY27

    Available from existing SBIC III license.

    Revolving Credit Facilities Capacity
    $90 million
    Q1 FY27

    Available from two revolving credit facilities.

    Cash Available
    $61 million
    Q1 FY27

    Cash at quarter end.

    Weighted Average Common Shares Outstanding
    16.3 millionincreasing from 16.2 million last quarter and 15.3 million last year
    Q1 FY27
    Weighted Average Interest Rate (Core BDC Portfolio)
    10.5%compared to 11.5% last year and 10.4% last quarter
    Q1 FY27

    Yield reduction from last year reflects SOFR decreases and tighter spreads on new originations.

    CLO Yield
    11.0%decreased from 11.6% last quarter
    Q1 FY27

    Due to higher fair value in Q1.

    Equity Interests (portfolio composition)
    7.2%
    Q1 FY27

    Percentage of investment portfolio consisting of equity interests.

    Net Realized Gain (Equity Interests)
    $0.2 million
    Q1 FY27

    Generated during the first quarter.

    Total Net Realized Gain (Equity Interests, 14 fiscal years)
    $45.5 million
    LTM

    Combined net realized gain from sale of equity interests.

    New Platform Companies (last year)
    11
    LTM

    Total new platform companies closed.

    First Lien Debt (portfolio composition)
    81.7%
    Q1 FY27

    Percentage of total investments in first lien debt.

    First Lien Last Out Positions (portfolio composition)
    19.0%
    Q1 FY27

    Percentage of first lien debt in first lien last out positions.

    Total Leverage (overall portfolio)
    4.8 times
    Q1 FY27

    Excluding Pepper Palace, reflecting new investments at lower leverage levels.

    Term Sheets Issued (last 12 months)
    107
    LTM
    Origination Total (fiscal quarter)
    $79.2 million
    Q1 FY27

    Consisting of two new investments, 10 follow-ons, and six BBB and BBB CLO debt investments.

    Realized Economic Losses (since management team began)
    3
    since 2010

    On 132 portfolio companies.

    Exited Investments (since management team began)
    88
    since 2010

    Achieving gross unlevered realized returns of 14.9% on $1.37 billion of realizations.

    Combined Unleveled Realized and Unrealized Returns
    13.3%
    since 2010

    On all capital invested.

    Dividend Declared
    75 cents per share
    Q2 FY27

    Declared for the quarter ended August 31, 2026.

    Total Return (last 12 months)
    6%outperforming BDC index's negative 13%
    LTM

    Includes both capital appreciation and dividends, places in top five of all BDCs.

    Total Return (since 2010)
    871%more than three times the industry's 250%
    since 2010
    Management Ownership
    11%
    Q1 FY27

    One of the highest levels in the industry.

    Spillover Income
    $1.75 per share
    May 31, 2026

    Spillover income as of May 31st.

    Spillover Income (current)
    $1.50 per share
    July 8, 2026

    Spillover income at the time of the call, after a dividend payment.

    Available Capital (non-regulatory leverage impacting)
    $100 million
    Q1 FY27

    Composed of cash and SBIC debentures, does not count towards regulatory leverage.

    Industry KPIs

    4
    MetricValueDetails
    AUM$1.126 billionUSD
    Dry powder$197 millionUSD
    Fundraising inflows$79 millionUSD
    Deployment realizations$79.2 million deployedUSD

    Risks & headwinds

    8
    Portfolio MarkdownsQ1 FY27

    $15.2 million

    Mitigation: Active management of positions, including exploring strategic options for Pepper Palace and working with sponsors for Exego and Cronus.

    Specific Credit Performance IssuesQ1 FY27

    $9.9 million of non-CLO depreciation

    Mitigation: Ongoing engagement with management and sponsors to stabilize and improve performance, explore strategic options for Pepper Palace (written to zero), Exego (moved to red, principal at risk), and Cronus (written down $1.5M due to declining customer retention).

    Market Multiple AdjustmentsQ1 FY27

    $6 million of depreciation (33% of non-CLO depreciation)

    Mitigation: Focus on disciplined underwriting and strong enterprise values.

    Market Spread ChangesQ1 FY27

    13% of depreciation

    Mitigation: Focus on disciplined underwriting and strong enterprise values.

    Lower Origination SpreadsQ1 FY27

    almost 50 basis points lower than on repayments

    Mitigation: Increased business development efforts, selective underwriting, and seeking opportunities with small first-out positions to enhance yield.

    Under-earning DividendQ1 FY27

    28 cents or 24% of NAV reduction; Adjusted NII of 47 cents per share compared to 75 cents dividend

    Mitigation: Leveraging robust pipeline, improving pricing, and potential for future equity realizations to close the NII gap over 4-5 quarters.

    Challenging Macro EnvironmentOngoing

    Unquantified

    Mitigation: Prudent and discerning underwriting, focus on balance sheet strength, liquidity, and NAV preservation amidst geopolitical uncertainty, shifting U.S. tariff policy, AI/software scrutiny, and unsettled interest rates.

    Software Sector HeadwindsOngoing

    Unquantified

    Mitigation: Diversifying deal flow across different industries and focusing on lower middle market with robust due diligence, as significantly fewer software-related investments meet strict underwriting requirements.

    Q&A highlights

    7

    Asked if the 50 bps gap between new origination spreads and repaid asset spreads has closed, and if there's a path to align NII with the dividend given the current shortfall.

    David DeSantis confirmed new deals show elevated spreads but haven't fully caught up to higher-priced repaid assets. Christian Oberbeck stated that credit quality is paramount, and while pricing has been challenging, it's improving. He believes the NII gap will close over the 4-5 quarter spillover horizon, and it's too early to make a hard call on dividend adjustments.

    “We think that gap will close, and the question is how quickly it closes, and we're working very hard to do that.”

    asked by Eric Swiss · answered by Christian Oberbeck

    2 min read5 chapters

    Detailed Narrative

    01

    Portfolio Performance and Credit Quality

    Saratoga's total portfolio of $1.126 billion experienced a $15.2 million markdown this quarter. This included $18.3 million in net depreciation in the non-CLO core portfolio, partially offset by write-ups in the JV and CLO debt. Specific credits like Pepper Palace (written down to zero), Exego, and Cronus accounted for $9.9 million (54%) of the non-CLO depreciation, reflecting company-specific performance issues. An additional $6 million (33%) was due to broad market adjustments in comparable multiples, and the remaining 13% from general changes in market spreads.

    02

    Origination and AUM Growth

    The company achieved net positive originations of $31 million in Q1 FY27, driven by $79 million in new originations across two new investments and 10 follow-ons, including $11 million in new BBB and BBB CLO debt. This activity outpaced repayments, leading to a 1.6% AUM growth to $1.126 billion, an almost record level. Post-quarter end, $47 million of follow-ons have closed, offset by $31 million in repayments.

    03

    Capital Structure and Liquidity

    Saratoga maintains $197 million in investment capacity, comprising $46 million from its SBIC III license, $90 million from revolving credit facilities, and $61 million in cash. The company's debt structure includes $269.4 million of callable baby bonds (8%+ interest) providing refinancing options. The recent issuance of a $25 million, 7.25% private note and a $100 million, 7.5% public baby bond replaced a $175 million, 4.375% institutional bond, impacting interest expense.

    04

    Market Dynamics and Underwriting

    Despite competitive market dynamics, tightening spreads, and persistent sector headwinds🌐, Saratoga's deal flow has increased due to business development efforts. The company emphasizes disciplined underwriting, particularly in the lower middle market, where it finds more robust due diligence, conservative capital structures, and stronger legal protections. While software investments are being scrutinized more heavily, the company continues to find opportunities across diverse industries.

    05

    Dividend and Shareholder Returns

    Saratoga declared a monthly base dividend of 25 cents per share (75 cents for Q2 FY27), maintaining its historical distribution. The latest 12-month total return was 6%, significantly outperforming the BDC index's negative 13%. Over the long term⏳ (since 2010), the total return of 871% is more than three times the industry average of 250%.

    AI-generated summary of the company’s earnings call. Not investment advice.