Saratoga Investment (SAR) Q1 FY27 earnings call: the analyst Q&A

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

Inquired about the spillover income per share as of May 31st.

Henry Steenkamp stated the spillover was about $1.75 as of May 31st, and around $1.50 at the moment after a dividend payment.

“Yes, as of May 31st, it was about $1.75. We've obviously paid a dividend since then, so it's around $1.50 at the moment.”

asked by Eric Swiss · answered by Unknown Speaker

Questioned the balance between growing AUM using available capital (revolvers) and the potential for rising leverage, given the current NII/dividend shortfall and declining NAV.

Christian Oberbeck reiterated their historical focus on a safer, fixed-rate, long-term debt structure with no covenants, which is more expensive but safer. He emphasized strong credit quality and high first-lien percentage mitigating leverage concerns. Henry Steenkamp added that $100 million of available capital (cash and SBIC debentures) does not impact regulatory leverage.

“But $100 million of that $200 million available capital can be used either to do more assets or to do more money. or does not impact our leverage when used because it's either cash or it's SBIC debentures that don't count towards the regulatory leverage.”

asked by Robert Dodd · answered by Christian Oberbeck

Asked about the willingness to increase FILO exposure (currently 19% of first liens) to boost NII, given that it can offer higher net spreads.

Christian Oberbeck stated that FILO decisions are made on a deal-by-deal basis, considering the total first-lien position and ensuring the first-out portion isn't too large to prevent control issues. He confirmed willingness to go higher than current levels but without a specific target, always prioritizing credit criteria.

“Would we be willing to go higher than the levels we're at now? Yes. How much higher? We don't have a target for that, and it would be essentially sort of an investment-by-investment decision-making process with all the credit characteristics being considered.”

asked by Robert Dodd · answered by Christian Oberbeck

Inquired if the company expects to collect all principal and interest on Exego, given its red status, or if restructuring discussions imply potential principal at risk.

David DeSantis confirmed that some principal on Exego is definitely at risk, which is why it was moved to red, despite interest currently being paid. He noted the current mark of 72.8 implies a probability of less than par recovery, but they are actively working for full recovery.

“I think one of the reasons we put it on red this quarter is because we feel like as an asset, some of the principal is definitely at risk there.”

asked by Robert Dodd · answered by Unknown Speaker

Asked how share repurchases are weighed against capital allocation and liquidity.

Christian Oberbeck stated that share repurchases are actively discussed, especially if the stock trades down relative to NAV. He noted they have repurchased stock in the past and it's a dynamic, situational decision.

“We have repurchased stock at different times in our past. And I think it's just a dynamic case-by-case situation.”

asked by Jason Stewart · answered by Christian Oberbeck

Asked if new relationships are sourcing deals in new sectors outside of software, or if they are going back to time-tested sponsors for new sectors, and how the deal flow is shaping up.

David DeSantis confirmed that the vast majority of new deal flow is non-software related and diversified across various industries, with no concentration in any single sector. He emphasized that they are not targeting sponsors in specific sectors.

“Yes, generally, most, the vast majority of the deal flow has been non-software related... and we're certainly not attacking sponsors in one particular sector or another. So it's really diverse, and it's across a variety of end markets and types.”

asked by Jason Stewart · answered by David DeSantis