Detailed narrative
Earnings, NAV bridge and dividend coverage
Adjusted NII (non-GAAP) was $7.4M ($0.46/share), down 2.6% QoQ and 18.7% YoY. Portfolio growth was offset by the full-period cost of the refinancing, lower structuring, advisory and prepayment fees, and higher base management fees. NAV per share fell $1.08 sequentially.
The $0.75 dividend exceeded GAAP NII of $0.45, and net realized and unrealized losses were $0.90, of which $0.82 came from 3 credits. Buybacks added $0.09. NAV was $378.5M last quarter and $410.5M a year ago; the quarter-end total is garbled in the transcript.
Management says excess distributions pay out previously undistributed income and reduce the spillover, which stands at about $1.00/share.
Originations and market environment
Gross originations were $76.1M: 2 new platforms for $54M, 9 follow-ons for $12.9M and $9.2M of BB/BBB CLO debt. Repayments were $39M. Post quarter end, originations were $35M including one new company, against $2M of repayments. Spreads on originations were 220 bps below the repayments they replaced.
Management sees early spread widening, and 5 of the last 13 new platforms came from new relationships. Term sheets issued are 88% with PE sponsors, which management prefers for credit support and efficiency.
Credit quality and markdowns
The portfolio was marked down $14.4M. Non-CLO core depreciation was $15.4M, driven by $13.1M on Madison Logic, Exigo and Cronos. The Exigo debt was written down $8.7M and exited after quarter end near its mark, for a -6.1% IRR. Cronos was written down $2.5M and Madison Logic $1.9M; both remain on accrual.
Pepper Palace was sold for a nominal amount and the CLO F-note realized at zero, so nonaccruals are now zero. Most of the unrealized depreciation will be realized in Q3. Management says AI is not a meaningful factor in Cronos or Madison Logic.
Capital structure and liquidity
The $85M SAK baby bond was upsized by a $23.1M reopening to about $120.8M and used to redeem the $105.5M 6.00% 2027 notes on Sept 18. SBA raised SBIC III's individual leverage limit to $250M, adding $75M of 10-year, fixed-rate, bullet debentures with no covenants.
Investment capacity was $211M, equal to 18% asset growth without external financing. Total leverage on portfolio companies is 4.7x vs an industry level of about 6x. Management says there are no material covenants that can be tripped in volatile markets.
CLO reset
On Sept 17 the sixth Saratoga CLO refinancing reset the CLO at about $350M of assets at lower financing rates. It extended the reinvestment period to October 2029, set legal maturity in October 2038 (the transcript says 'October 23', which is garbled) and set a non-call period to April 2028.
The BDC added $16.2M of new subordinated notes and bought $2.6M of Class E2R5 notes at par. Management expects the reset to support management fees and interest income.
Share repurchases and leverage trade-off
The company repurchased about 444,000 shares for $8.4M at a discount to NAV, accretive $0.09/share. Management acknowledges buybacks reduce equity and raise leverage, so it buys only at the margin. It argues the laddered, fixed-rate, non-recourse structure helps in a rising-rate environment and says it highlights this to rating agencies.
Management transition and track record
CFO and Chief Compliance Officer Henri Steenkamp steps down from his executive roles on Oct 31 for health reasons. He stays on the Board, remains CFO of the SBICs and will consult. Christina Ramdehell (name as transcribed) is promoted to Chief Accounting Officer and Treasurer.
Since inception about 16 years ago, the team has invested $2.66B in 134 companies with only 3 realized economic losses. Management ownership is 11.5%.