Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adjusted net investment income per share for the year increased by 44% compared to last year, reflecting strong portfolio performance and growth in assets under management.
- Saratoga Investment Corp's dividend of $0.73 per share for the quarter ended February 29, 2024, represents a significant increase and is well-covered by earnings, with a dividend yield of 12.4%.
- The company has a high credit quality with 98.1% of credits rated in the highest category and a strong focus on first lien debt, which comprises 86% of investments.
- Saratoga Investment Corp successfully raised $48 million of equity at NAV, enhancing balance sheet strength and supporting strong originations.
- The company has maintained a substantial amount of investment capacity, totaling $207 million, to support portfolio growth and navigate economic uncertainties.
Negative Points
- Adjusted net investment income per share for Q4 decreased by 2.5% compared to last year and 4% compared to last quarter, influenced by dilution from equity issuances and higher excise taxes.
- The company experienced a $13.8 million markdown in its core BDC portfolio this quarter due to two discrete credits, impacting overall portfolio valuation.
- Despite overall portfolio health, there are still three investments on nonaccrual, indicating some level of distress within specific portfolio components.
- The latest 12 months return on equity decreased to 2.5%, down from 7.2% last year, reflecting some challenges in maintaining previous performance levels.
- NAV per share has decreased by 7% from last year and 1% from last quarter, primarily due to net unrealized depreciation and dividend payouts exceeding GAAP NII.
Q & A Highlights
Q: Could you discuss the current state of the portfolio, particularly in light of tighter spreads and increased leverage? Are you expecting a similar trend in the upcoming quarters, particularly with a focus on add-on investments?
A: (Christian Oberbeck - CEO) The market still offers excellent risk-adjusted returns on first-lien securities despite tighter spreads and slightly increased leverage. While overall M&A activity is down, affecting new investment opportunities, the existing portfolio is robust and requires capital. The focus has been on supporting existing portfolio companies, which has resulted in significant add-on activity. As market conditions improve, it is expected that investment activity will align accordingly.
Q: With the current liquidity levels and the new $50 million revolving credit facility, do you plan to continue using the equity distribution agreement to raise additional capital?
A: (Christian Oberbeck - CEO) The strategy involves maintaining a diversified source of capital, which is crucial for flexibility and adapting to market changes. The equity ATM program is part of this strategy, providing foundational capital that supports other financial activities. No specific plans are in place for immediate capital raising through this program, but it remains an important component of the overall capital strategy.
Q: Are there plans to expand the management team, and what is the market like for hiring new investment professionals?
A: (Mike Grisius - CIO) The focus is on building the team from the bottom up, primarily hiring young professionals from investment banking backgrounds. The market currently is favorable for hiring talented young professionals, allowing for the training and development of a strong internal credit culture. This approach has been a cornerstone of maintaining a consistent and successful investment strategy.
Q: Can you provide more details on the decision-making process regarding new platform investments and the quality of deals in the market?
A: (Mike Grisius - CIO) The primary reason for passing on new deals has been the quality of businesses, which often do not meet Saratoga's high credit standards. While some deals were lost to competition, the focus remains on maintaining rigorous credit evaluation rather than adjusting to market leverage or pricing pressures. The observation is that the quality of available businesses may be lower, possibly because stronger businesses are being retained until market conditions improve.
Q: With the repayment from Nutrio and the uncertain economic outlook, is there a plan to reinvest these proceeds or reduce leverage on the balance sheet?
A: (Christian Oberbeck - CEO) The strategy involves continuously evaluating both asset opportunities and liability management. There is no specific plan for the Nutrio repayment proceeds, but options include repaying callable debt or reinvesting in new opportunities, depending on the quality of available investments and overall market conditions.
Q: How is the company handling the significant increase in undistributed taxable income and the related excise tax accruals?
A: (Christian Oberbeck - CEO) The approach to managing the undistributed taxable income (UTI) involves considering it as a low-cost capital source at a 4% excise tax rate, which is favorable in the current environment. Decisions on managing UTI, including potential distributions, will be made later in the summer, taking into account the need to balance shareholder rewards with strategic capital management.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
