Saratoga Investment Corp. (NYSE:SAR) Q1 2024 Earnings Call Transcript

Saratoga Investment Corp. (NYSE:SAR) Q1 2024 Earnings Call Transcript July 11, 2023

Operator: Good morning, ladies, and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.’s 2024 Fiscal First Quarter 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’d like to turn the call over to Saratoga Investment Corp.’s Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Henri Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp.’s 2024 fiscal first quarter 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 first quarter 2024 shareholder presentation in the Events and Presentations 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. 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.

Christian Oberbeck: Thank you, Henri, and welcome, everyone. Saratoga’s 10% and 104% increases on adjusted net investment income per share, as compared to last quarter and last year’s first quarter respectively outpaced our recent and significant dividend increases and reflects growth in AUM and margin improvement from rising rates on our largely floating rate assets in contrast to the largely fixed rates paid on our financing liabilities. Higher and rising interest rates and a general contraction of available credit of producing higher margins on our portfolio and importantly an abundant flow of attractive investment opportunities from high quality sponsors at increasingly improving pricing, terms, and absolute rates. We believe Saratoga continued [Technical Difficulty] well positioned for potential future economic opportunities and challenges.

Saratoga’s credit structure with largely interest-only covenant free long duration debt, incorporating maturities, primarily two to 10-years out, positions us well, particularly well for rising and potentially higher for longer interest rate environment, coupled with market volatility. Most importantly, at the foundation of our performance is the high quality nature and resilience of our approximately $1.1 billion portfolio marked down just 0.9% overall. our core BDC portfolio, excluding our CLO and JV, is up 1.3% versus cost, reflecting the strength of our underwriting in our solid growing portfolio companies and sponsors in well selected industry segments. This quarter’s unrealized depreciation of $16.3 million reflects the interest rate, market, and economic volatility in the current environment across our diverse assets, including both our core and broadly syndicated loan portfolios with approximately two-thirds of the markdown in this BSL or broadly syndicated loan space.

As an example of the volatility in our markets, the unrealized reported losses in the BSL portfolio would be nearly one-third recovered if that portfolio were marked as of today. Our portfolio strength is further manifested in our many key performance indicators this past quarter, including: first, following sequential quarterly adjusted NII per share increases of 33% in Q3 and 27% in Q4, adjusted NII increased another 10% in Q1, almost doubling from $0.58 to $1.08 per share over the last three quarters. Second, current assets under management grew to approximately $1.1 billion. Third, dividend increases to $0.70 per share, up 32% from $0.53 per share in Q1 last year, up 1.4% from $0.69 per share last quarter and over earned by 54%, as compared to this quarter’s $1.8 per share adjusted NII.

And fourth, $77.5 million in long-term fixed rate callable capital recently raised in volatile markets to support record growth, while maintaining our BBB plus investment grade rating. While being increasingly discerning in terms of new commitments in the current environment, this quarter demonstrates a robust pipeline. We originated seven new portfolio company investments in this fiscal quarter and 20 follow-on investments in existing portfolio companies we know well with strong business models and balance sheets. Originations this quarter totaled at a $140 million with $11 million of repayments and amortization. Our credit quality for this quarter remained high at 96.5% of credits rated in our highest category with still only one credit on non-accrual.

With 85% of our investments at quarter end and first lien debt, and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stressed situations, we believe our portfolio and leverage is well structured for future economic conditions and uncertainty. Saratoga’s annualized first quarter dividend of $0.70 per share and adjusted net investment income of $1.08 per share imply a 10.2% dividend yield and a 15.7% earnings yield based on its recent stock price of $27.43 per share on July 7 2023. The over earning of the dividend by $0.38 this quarter or $1.52 annualized per share increases NAV, supports the increased dividend level and growth and provides a cushion against adverse events.

To summarize the past quarter on slide two. First we continue to strengthen our financial foundation this quarter and as indicated by our strong Q1 portfolio performance and credit quality, both this quarter and life to date since Saratoga took over the management of the BDC. Second, our assets under management increased to approximately $1.1 billion this quarter, a record level. Third, in volatile economic conditions such as we are currently experiencing, balance sheet strength, liquidity, and NAV preservation remain paramount for us. Our capital structure at year-end was strong. $337.5 million of mark-to-market equity supporting $571 million of long-term covenant free non-SBIC debt, $202 million of long-term covenant free SBIC debentures and $35 million long-term revolving borrowings.

Our total committed undrawn lending and discretionary funding facilities outstanding to existing portfolio companies are $143 million with $84 million committed and $59 million discretionary. Our debt maturity schedule ranges primarily from two to 10-years out, providing a solid credit structure at a fixed cost and with favorable terms positioning us well for both a rising rate environment or should overall economic challenges arise. And at quarter end, we had $231 million of investment capacity available to support our portfolio companies with $148 million available through our newly approved SBIC III fund. $30 million from our expanded revolving facility and $53 million in cash. Finally, based on our overall performance and liquidity, the Board of Directors most recently declared quarterly dividend of $0.70 per share, which was paid on June 29, 2023 was our largest quarterly dividend ever.

Saratoga investments first quarter demonstrated strong performance in our key performance indicators, as compared to the quarters ended May 31, 2022 and February 28, 2023. Our adjusted NII is $12.8 million this quarter, up 101% from last year and up 11% from last quarter. Our adjusted NII per share was $1.08 this quarter, up 104% from $0.53 last year and up 10% from $0.98 last quarter. Latest 12-months return on equity is 7.2%, up from 6.9% last year and unchanged from 7.2% last quarter and beating the industry average of 1.5% and our NAV per share is $28.48, down 0.7% from $28.69 last year and down 2.4% from $29.18 last quarter and substantially ahead of the latest 12-months industry average of a negative 7.3%. Henri will provide more detail later.

As you can see on slide three, our assets under management have steadily and consistently risen since we took over the BDC almost 13-years ago, and the quality of our credits remains high with only one credit on non-accrual, the same as last quarter. 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 volatile and 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.

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Henri Steenkamp: Thank you, Chris. Slide four highlights our key performance metrics for the fiscal first quarter ended May 31, 2023, most of which Chris already highlighted. Of note, across the three quarters shown on the slide, weighted average common shares outstanding were relatively unchanged, so per share numbers are comparable. Adjusted NII increased significantly this quarter, up 85.4% from last year and up 7.2% from last quarter, primarily from: first, the impact of higher interest rates both base rates and spreads with a weighted average current coupon on non-CLO BDC investment increasing from 8.5% to 12.7% year-over-year and from 12.1% last quarter; second, average non-CLO BDC assets increasing by 22.2% year-over-year and by 5.7% since last quarter; and third, other income this quarter including both the structuring and advisory fees generated from the higher level of Q1 originations, as well as a $1.8 million dividend received from the Saratoga joint venture.

This was partially offset by increased base and incentive management fees generated from higher AUM and earnings, and increased interest expense resulting from the various new notes and SBA debentures issued during the past quarter and year. Adjusted NII yield was 15.0%. This yield is up from 13.6% last quarter and 7.3% last year. Total expenses this quarter, excluding interest and debt financing expenses, base management and incentive fees, and income and excise taxes, increased from $2.0 million to $2.3 million, as compared to last year’s Q1 and remained unchanged from Q4. This represented 0.8% of average total assets on an annualized basis, down from 0.9% at Q1 last year, and unchanged from last quarter. Also, we have again added the KPI slides 27 through 30 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, including a 52% increase in net interest margin over the past year.

Moving on to slide five, NAV was $337.5 million as of this quarter end, a $9.5 million decrease from last quarter and a $7.7 million decrease from the same quarter last year. This quarter, the main drivers were $60 million of net investment income, offset by $16.3 million of net realized and unrealized losses and $8.2 million of dividends declared. In addition, during Q1, $1.1 million of stock dividend distributions were made through the company’s DRIP plan offset by $2.2 million of shares repurchased at an average price of $24.36. This chart also includes our historical NAV per share, which highlights how this important metric has increased 16 of the past 21 quarters. Over the long-term, our net asset value has steadily increased since 2011, and this growth has 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 six, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, the primary driver of the $0.10 increase in adjusted NII is the $0.15 increase in non-CLO net interest income. While on the lower half of the slide, NAV per share decreased by $0.70, primarily due to the $0.69 dividend recognized in the quarter with GAAP NII and unrealized depreciation basically offsetting each other. Slide nine outlines the dry powder available to us as of quarter end, which totaled $231.2 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 21% without the need for external financing with $53 million of pro forma quarter end cash available, and thus fully accretive to NII when deployed and $148 million of available SBA debentures with its low cost pricing also very accretive. 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 almost no non-SBIC debt maturing within the next two years. And importantly, that almost all our debt is fixed rate in this rising rate environment.

Also, our debt is structured in such a way that we have no BDC covenants that can be stressed. And with available call options in the next two years on the debt with higher coupons important during such volatile times. Now, I would like to move on to slides eight through 12 and review the composition and yield of our investment portfolio. Slide eight highlights that we now have $1.1 billion of AUM at fair value and this is invested in 56 portfolio companies, up by seven from last quarter, one CLO fund and one joint venture. Our first lean percentage is 85% of total investments, of which 29% is in first lien lost out positions. On slide nine, you can see how the yield on our core BDC assets, excluding our CLO, has changed over time especially this past year.

This quarter, our core BDC yield was up another 60 basis points to 12.7%. And the full impact of the rising rate environment through today is still not yet fully reflected in our earnings, as you will see on the next slide. The CLO yield decreased further to 6.5% from 7.4% last quarter, reflecting current market performance. The CLO is performing and current. Slide 10 shows how at the end of Q1, the average three months SOFR used in our portfolio was 498 basis points versus at quarter end when three months SOFR closed at 529 basis points and versus today at approximately 528 basis points. Despite the small decrease recently, with 99% of our interest earning assets using variable rates earnings will continue to benefit from these higher rate levels in Q2 and Q3, while all but $35 million of our borrowings is fixed rate and will not be impacted by these increases in base rates.

There is uncertainty about the future of rates, but we stand to continue to gain as rates rise. That said, there will be a lag in the effect this dynamic has on our earnings due to timing, up rate resets and invoicing terms. Slide 11 shows how our investments are diversified through the U.S. And on slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 42 distinct industries, in addition to our investments in the CLO and JV, which are included a structured finance securities. Of our total investment portfolio 8.9% consists of equity interest which remain an important part of our overall investment strategy. For the past 11 fiscal years we had a combined $81.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments.

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.

Michael Grisius: Thank you, Henri. I’ll take a few minutes to describe our perspective on the current state of the market and then comment on our current portfolio performance and investment strategy. Not too much has changed since our recent update in May. For the most part, lenders are staying cautious though competition for premium quality credits persists. Liquidity continues to remain abundant after the large scale fund raisings of last year, but lenders and especially banks remain more risk sensitive backing off historically volatile sectors and taking a harder stance on the use of capital. Lenders are requiring greater equity capitalizations regardless of the enterprise multiple and in some cases have reduced their pace of deployment, as well as their hold positions.

All these factors are positive for us as we have been seeing more attractive opportunities come our way and have a very actionable deal pipeline. Leverage levels appear to have come down at the margin, but remain full for strong credits. Absolute yields continue to grow with SOFR increasing another approximately 30 basis points during our first fiscal quarter and have remained there. The spread widening we have been experiencing in recent quarters appears to have stabilized and for highly desirable credits, we have seen some lenders offer tighter spreads to win mandates. Lenders in our market remain wary of thinly capitalized deals and for the most part are staying disciplined in terms of minimum aggregate base levels of equity and requiring reasonable covenants, particularly given the concerns around potential economic recession.

The Saratoga management team has successfully managed through a number of credit cycles and that experience has made us particularly aware of the importance of: first, being disciplined when in making investment decisions; and second, being proactive in managing our portfolio. We’re keeping a very watchful eye on how continued inflationary pressures and labor costs, supply chain issues, rising rates, and slowing growth could affect both prospective and existing portfolio companies. A natural focus currently is on supporting our existing portfolio companies through follow-ons. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital. First-half of calendar year 2023 was a very strong deployment environment for us.

Follow on investments in existing borrowers with strong business models and balance sheets continued to be a healthy avenue of capital deployment as demonstrated with 39 follow on so far this calendar 2023, including delayed draws. In addition, we have invested in nine new platform investments this past calendar year and in another eight new investment platforms so far this 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, especially in this volatile environment. All of our loans in our portfolio are paying according to their payment terms except for our Nolan investment that remains on non-accrual. As we have moved to pick interest for a period of time.

Nolan is our only non-accrual investment across our portfolio. After recognizing the unrealized depreciation on our overall portfolio this quarter, Saratoga’s overall assets are now slightly less than 1% below cost basis with our core non-CLO portfolio 1.3% above cost. We believe our strong performance reflects certain attributes of our portfolio that bolster its overall durability. 85% of our portfolio is in first 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 portfolios comprise the 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 14, 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 portfolio at cost. We are one of only 14 BDCs that have had a positive number over the past three years, currently fifth overall. Our internal credit quality rating reflects the impact of current market volatility and shows 96.5% of our portfolio at our highest 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 the equity upside potential. This equity co-investment strategy has not only served as yield protection for our overall portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated on this slide and a previous one.

And we intend to continue this strategy. Now looking at leverage on slide 15, you can see that industry debt multiples have come down this year from their historically high levels. Total leverage for our overall portfolio is 4.9 times excluding Nolan and Pepper Palace, while the industry is now around 5 times leverage. In addition, this slide illustrates the strength of our deal flow and our consistent ability to generate new investments over the long-term, despite ever changing and increasingly competitive market dynamics. During the second calendar quarter, we added another four new portfolio companies and made 20 follow-on investments. Despite the success we’re having investing in highly attractive businesses and growing our portfolio, and the increased deal flow we are seeing, it is important to emphasize that as always we’re not aiming to grow simply for growth sake.

In the face of this uncertain macro environment, we’re keenly focused on investing in durable businesses with limited exposure to inflationary and cyclical pressures. Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment will be accretive to our shareholders. Slide 16 provides more data on our deal flow previously discussed demonstrating how our team’s skill set, experience and relationships continue to mature and our significant focus on business development has led to multiple new strategic relationships that have become sources of new deals. What is especially pleasing to us is seven of the 13 new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts.

The significant progress we’ve made in building broader and deeper relationships in the marketplace is noteworthy, because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments. As you can see on slide 17, our overall portfolio credit quality remains solid. The gross unleveraged IRR unrealized investments made by the Saratoga Investment Management team is 15.6% on $908 million of realizations. On the chart on the right you can see the total gross unlevered IRR on our $1.1 billion of combined weighted SBIC and BDC unrealized investments is 11%. As of this quarter, we continue to have two yellow rated investments, still only being Nolan Group and Pepper Palace investments.

Nolan has been yellow for a while now since COVID being more dependent on in-person business interaction and has been on non-accrual status since last year. There was no significant change to the market Q1. The current unrealized depreciation reflects the current performance of the company, but does not change our view of the fundamental long-term prospects for the business. The other yellow investment is Pepper Palace. In this quarter, there was an additional $1.1 million unrealized write-down to the mark, leaving the total depreciation of approximately $11 million since investment on our first lien term loan and equity investments. And this markdown reflects the current performance of the company, but they continued to pay interest. We are working closely with the company and the sponsor as they work to improve performance.

This quarter’s $16.3 million net unrealized depreciation can be divided into three primary buckets: first a $11 million of unrealized depreciation on the companies CLO and JV equity investments, reflecting both the volatility in the broadly syndicated loan markets as of quarter end, as well as the reduction in value of certain defaulted assets in the CLO portfolio. Second $3.3 million of unrealized depreciation on the company’s Netreo equity investment, reflecting increased company leverage, reducing the investments total net unrealized appreciation to $5 million. And third, approximately $2 million of net unrealized depreciation across the remainder of the portfolio, most of which reflects current market spreads. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital.

Moving on to slide 18, you can see our first and second SBIC licenses are fully funded and employed with $3.5 million and $6.5 million of cash available for distributions to the BDC and SBIC I and SBIC II respectively. We are currently ramping up our new SBIC III license with $19 million of cash and $148 million of lower cost undrawn debentures available, allowing us to continue to support U.S. small businesses. This concludes my review of the market. And I’d like to turn the call back over to our CEO. Chris?

Christian Oberbeck: Thank you, Mike. As outlined on slide 19, our latest dividend of $0.70 per share for the quarter ended May 31, 2023 was paid on June 29, 2023. This is the largest quarterly dividend in our history and reflects a 59% and 32% increase over the past two years and by this latest 12-months respectively. The Board of Directors will continue to evaluate the dividend level, at least a quarterly basis, [Technical Difficulty] both the company and general economic factors, including the near-term impact of rising base rates and increased spreads on our earnings. We’re recognizing the divergence of opinions on the future direction of interest rate levels and overall economic performance. Saratoga’s Q1 over earning of its dividend by 53% or $1.08 versus $0.70 per share this quarter provides substantial cushion to the economic conditions deteriorate or base rates decline.

Moving on to slide 20, our total return for the last 12-months, which includes both capital appreciation and dividends has generated total returns of 30%, outperforming the BDC index of 18% for that same period. Our longer term performance is outlined on our next slide 21. Our three and five year returns place us in the top quartile of all BDCs for both time horizons. Over the past three years, our 113% return exceeded the average index return of 61%, while over the past five years, our 67% return more than doubled the index’s average of 30%. Since Saratoga took over the management of the BDC in 2010, our total return has been 695% versus the industry’s 197%. On slide 22, you can further see our performance 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, NAV per share, NII yield and dividend growth, which reflects the growing value our shareholders are receiving. While NAV per share decreased [Technical Difficulty] 2.4% this quarter, we are only down 0.7% year-over-year, while the BDC industry is down 7.3%. We continue to be one of the few BDCs of grown NAV over the long-term and we have done it accretively, but also growing NAV per share 16 of the last 21 quarters. And our latest 12 months return on equity of 7.2% significantly beats the industry’s 1.5% average. Moving on to slide 23, all of our initiatives discussed on this call are designed to make Saratoga Investment, a leading 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. These differentiating characteristics, most of which have been previously discussed, include the maintaining of one of the highest levels of management ownership in the industry at 14%, ensuring we are aligned with our shareholders. Looking ahead on slide 24, we remain confident that our reputation, experienced management team, historically strong underwriting standards, and time and market tested investment strategy will serve us well in navigating through the challenges and uncovering opportunities in the current and future environment and that our balance sheet, capital structure and liquidity will benefit Saratoga shareholders in the near and long-term.

In closing, I would again like to thank all of our shareholders for their ongoing support. I would like to now open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Mickey Schleien from Ladenburg. Your line is open.

Mickey Schleien: Yes. Good morning. Couple of questions today, the $1.8 million of dividend income from the senior loan fund implies over a 40% ROE on your equity investment in that funded cost, which is obviously really high. I’d like to understand what drove that dividend and what is your target ROE on that investment?

Christian Oberbeck: Well, Henri, you can take that.

Henri Steenkamp: Yes. Mickey, yes, you’re right. So that was let me start with what drove the dividend, obviously, as you know, our joint venture owns CLO investment. And so therefore, the returns are driven by the equity distributions that we received by the CLO into the joint venture. And then the joint venture dividended out some of the return to its partners of which is us and one other partner in a joint venture structure. The accounting is that’s dividend income and so that was our first dividend that we’ve received on that investment. I’m trying to think how best to think of this as a future return. It’s obviously a really strong return, but we continue — we definitely do think of the joint venture return as more similar to our CLO in general, which is high-teen digits or higher.

Mickey Schleien: Okay. So Henri, was there some sort of a catch up in the quarter given that it was the first distribution?

Henri Steenkamp: That dividend represented a three month period. So no real specific catch up, but you’ll always see that the first waterfall distribution is quite a fulsome distribution.

Mickey Schleien: Right, okay. My follow-up question is, I see that the portfolios leverage has increased by almost a full turn over the last year to almost 5 times, as Mike described. So I’d like to ask how your portfolio companies are doing in terms of their revenues and EBITDA. And is it declines in EBITDA that’s driving that increase or is it the market terms that’s driving the increase or a little bit of both?

Michael Grisius: Good morning, Mickey. This is Mike. So it’s a good question. It is not underperformance that’s driving the increase in leverage, it’s really reflecting some of the newer portfolio companies that we feel really good about that have a bit higher leverage profile. And then in terms of the overall portfolio performance, the vast majority of our portfolio is performing very well and we’re watching it very carefully. But at this juncture, the vast majority of our portfolio is up quarter-over-quarter and up at the same quarter over last year.

Mickey Schleien: And Mike, just to follow-up, is the more recent investment activity into perhaps larger companies than you’ve historically done, which may include higher leverage multiples?

Michael Grisius: Well, it’s less about size and I think it’s more about durability of the portfolio companies. So and we always say this right? When we’re looking at the lower end of the middle market, we’re seeking companies that have, kind of, large company characteristics i.e., lots of durability, really strong management teams, et cetera. So for instance, if you do a support and I’ll just use an example of business that’s in the franchising space. It’s a franchisor, not a franchisee. It may not be a terribly big business. It’s not a worldwide name, but it can be a business that has 100 of locations, very successful, real durable cash flow stream, et cetera. That would be a business that would typically command a more fulsome leverage just reflective of the much lower risk profile and the lower volatility that, that is associated with that business.