Saratoga Investment Corp. (NYSE:SAR) Q4 2023 Earnings Call Transcript

Saratoga Investment Corp. (NYSE:SAR) Q4 2023 Earnings Call Transcript May 3, 2023

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.’s 2023 Fiscal Year End and Fourth 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 2023 fiscal year end and fourth 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 year-end and fourth quarter 2023 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 27% and 85% increases in adjusted net investment income per share as compared to last year and last year’s fourth quarter respectively, outpaced our recent and significant dividend increases and reflects the positive effects of rising rates on the 99% of our credit assets that are floating rates, which are 89% of total assets under management, the balance being equity. In contrast to the largely fixed interest rates paid on financing liabilities. Higher and rising interest rates and a general contraction of available credit are 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.

Saratoga’s credit structure, with largely interest only, covenant-free, long-duration debt, incorporating maturities two to 10 years out, positions us particularly well for rising and potentially higher for longer interest rate environment. Most importantly, at the foundation of our performance is the high-quality nature and resilience of our portfolio, reflected in an NAV per share decline in this challenging environment of just 0.5% since last year, demonstrating the strength of our underwriting and solid growing portfolio companies in sponsors and in well-selected industry segments. This portfolio resilience is evidenced by NAV per share increasing 3.3% from Q3 to $29.18. These positive effects are further manifested in our many record key performance indicators this past year and continuing since year end, including first, sequential quarterly adjusted NII per share increases of 33% in Q3, up from $0.58 to $0.77 per share, and 27% in Q4, up from $0.77 to $0.98 per share.

Second, current assets under management growing to over $1 billion. Third, dividend increases to $0.69 per share, up 33% from 53% in Q4 last year, and over earned by 42% as compared to this quarter’s $0.98 per share adjusted NII. Fourth, $301 million in long-term fixed rate, callable capital, recently raised in six offerings in volatile markets to support record growth, while maintaining our BBB+ investment grade rating, and since, receipt of our third SBIC license, providing $175 million of available debt capacity to further support our small business portfolio, consistent with the SBA’s mission. Our existing portfolio companies are generally performing well with our overall fair value 1% above cost. We continue to be highly discerning in terms of new commitments in the current environment, something we focused on extensively throughout the quarter.

Our pipeline remains robust with many actionable opportunities, and while our AUM decreased slightly this quarter to $973 million since quarter end, we have closed numerous investments, totaling approximately $119 million, including five new portfolio companies and 17 follow-on ones in existing portfolio companies with strong business models and balance sheets we know well. And with 82% of our investments at quarter end in first lien and generally supported by strong enterprise values and balance sheets, in industries that have historically performed well in stressed situations. We believe our portfolio is well structured from future economic conditions and uncertainty. Saratoga’s annualized fourth quarter dividend of $0.69 per share, and adjusted net investment income of $0.98 per share, imply an 11.3% dividend yield, and 16.1% earnings yield, based on its recent stock price of $24.38 per share on May 1, 2023.

The over-earning of the dividend by $0.29 this quarter or $1.16 annualized per share, increases NAV, supports the increased dividend level, and also provides a cushion against adverse events. To briefly recap the past quarter on slide two. First, we continue to strengthen our financial foundation on Q4 by maintaining a high level investment credit quality with 96% of our loan investments retaining our highest credit rating at quarter-end, and with only one investment on non-accrual; generating a return on equity of 7.2% on a trailing 12 month basis versus the industry average of 0.6%; recognizing $10.5 million in net unrealized appreciation with the poor BDC portfolio appreciating by $3.1 million and the remaining $7.4 million primary reflecting broadly syndicated loan market volatility in the CLO and JV, and registering a gross unlevered IRR of 11.6% on our total unrealized portfolio and a gross unlevered IRR of 15.7% on total realizations of $908 million.

Second, our assets under management increased to $973 million this quarter, a 19% increase from $818 million last year and a 1% decrease from $982 million as of last quarter. Subsequent to your end, we’ve added net originations of $109 million, bringing total AUM to close to $1.1 billion. 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. $347 million of mark-to-market equity, supporting $494 million of long-term covenant-free non-SBIC debt, $202 million of long-term covenant-free SBIC debentures and $32.5 million of long-term revolving borrowings. Our total committed undrawn lending and discretionary funding facilities outstanding to existing portfolio companies are $109 million, with $49 million committed and $60 million discretionary.

Our debt maturity schedule ranges 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. At February 28, 2023 we had $277 million of investment capacity available to support our portfolio companies, with $148 million available for a newly approved SBIC III fund, $32.5 million in our expanded revolving credit facility and $96 million in cash. And further expanding our liquidity base, subsequent to quarter-end, we issued $20 million of new private baby bonds and a new $57.5 million dollar public baby bond trading under the Ticker SAZ. Finally, based on our overall performance and liquidity, the Board of Directors declared a quarterly dividend of $0.69 per share for the quarter-ended February 28, 2023, an increase of $0.01 or 1.5% from last quarter, and our largest quarterly dividend ever, which was paid on March 30, 2023.

Saratoga Investment’s fourth quarter demonstrated strong performance within our key performance indicators as compared to the quarters ended February 28, 2022, and November 30, 2022. Our adjusted NII is $11.6 million dollars this quarter, up 82% from last year, and up 27% from last quarter. Our adjusted NII per share is $0.98 this quarter, up 85% from $0.53 last year and up 27% from $0.77 last quarter. Latest 12 months return on equity is 7.2%, down from 13.9% last year, and up from 4% last quarter, and our NAV per share is $29.18, down 0.5% from $29.33 last year, and up 3.3% from $28.25 last quarter. Comparing fiscal 2023 and 2022, our adjusted NII is up 33% from $25.7 million to $34.1 million, and adjusted NII per share is up 27% from $2.24 to $2.85, and we will provide more detail later.

As you can see on Slide 3, 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.

Henri Steenkamp: Thank you, Chris. Slide 4 highlights our key performance metrics for the fiscal fourth quarter ended February 28, 2023. When adjusting for the incentive fee accrual related to net capital gains, adjusted NII of $11.6 million was up 27.0% from last quarter, and up 82.4% from last year’s Q4. Adjusted NII per share was $0.98, up $0.21 from $0.77 per share last quarter, and up $0.45 from $0.53 per share last year. Across the three quarters shown on the slide, weighted average common shares outstanding were relatively unchanged. There was zero accretion or dilution due to share repurchases and DRIP issuances this quarter. Adjusted NII increased significantly as compared with last year, with the 70.3% increase in investment income resulting primarily from a 19.0% increase in AUM.

The increase in the current coupon on non-CLO BDC investments from 9.5% to 12.1%, including both base rate and some spread increases, and an increase in other income that included $3.0 million dividend and redemption fee income generated from the Artemis Wax equity sale this quarter. This all was partially offset by increased base management fees and interest expense resulting from the various new notes and SBA debentures issued during the past year and quarter. The full benefit of higher rates on AUM is still not yet fully reflected in interest income. Sequential quarter changes reflect the same factors as year-over-year, with the increase in current coupon from 11.7% to 12.1%. Adjusted NII yield was 13.6%. This yield is up from 10.8% last quarter and 7.3% last year.

For this fourth quarter, we experienced a net gain on investments of $9.9 million or $0.84 per weighted average share, resulting in a total increase in net assets from operations of $19.2 million or $1.62 per share. The $9.9 million net gain on investments was primarily comprised of $10.5 million in net unrealized appreciation on investments, offset by a $0.4 million loss on extinguishment of borrowings resulting from the repayment of $40.7 million of our SBIC I debentures, as we continue to wind down our first SBIC fund. The $10.5 million in net realized appreciation primarily reflects, first, the $7.4 million unrealized appreciation on the company’s CLO and JV equity investments, reflecting the volatility in the broadly syndicated loan market as of quarter end.

Two, the $0.9 million unrealized appreciation on each of the company’s Procurement Partners and Vector Controls investments, and the $0.6 million and $0.5 million unrealized appreciation on the company’s Altvia Midco and Axero Holdings Investments respectively, all primarily reflecting company performance. And three, approximately $0.2 million net unrealized appreciation across the remainder of the portfolio. Return on equity remains a very important indicator for us, performance indicator for us, which includes both realized and unrealized gains. Our return on equity was 7.2% for the last 12 months, beating the industry average of 0.6%. Total expenses for Q4, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes was $2.3 million, as compared to $1.8 million for Q4 last year and $2.1 million for last quarter.

This represented 0.9% of average total assets on an annualized basis, unchanged from 0.9% last year and slightly up from 0.8% last quarter. Also, we have again added the KPI Slides 29 through 32 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. A particular note is Slide 32, highlighting how our net interest margin run rate has continued to increase and has more than quadrupled since Saratoga took over management of the BDC and also increased by 55% the last 12 months, while still not yet receiving the full period benefit of putting to work the significant amount of Q4 cash, nor the full impact of the current rising rate environment.

Slide 5 highlights the same key performance metrics for the full 2023 fiscal year. And moving on to Slide 6, NAV was $347.0 million as of quarter end, an $11.2 million increase from last quarter and an $8.8 million decrease from the same quarter last year. This quarter, the main drivers were $10.5 million of net realized gains and unrealized appreciation and $9.6 million of net investment income, partially offset by $8.1 million of dividends declared. In addition, during Q4, $1.3 million of stock dividend distributions were made through the company’s DRIP plan, offset by $1.2 million of shares repurchased at an average price of $25.19. NAV per share was $29.18 as of quarter end, down from $29.33 12 months ago and up from $28.25 last quarter.

This chart also includes our historical NAV per share, which highlights this has increased 16 of the past 20 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 7, you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share increased from $0.77 to $0.98 per share. Main drivers were a $0.05 increase in non-CLO net interest income from the partial impact of higher AUM and interest rates, and a $0.25 increase in other income, primarily from the Artemis Wax dividend and redemption fees received.

The main offset was a $0.07 decrease due to excise taxes incurred for the 2022 calendar year. Moving on to the lower half of the slide, this reconciles the $0.93 NAV per share increase for the quarter. $0.81 of GAAP NII and $0.90 of net realized gains of unrealized appreciation was primarily offset by the $0.68 dividend paid in Q4. On Slide 8 you will see the same reconciliation, but now on a sequential annual basis. Starting at the top, adjusted NII per share increased from $2.24 per share last year to $2.85 per share this year. The primary drivers were $1.17 increase in non-CLO net interest income reflecting higher AUM and interest rates, offset mainly by a $0.23 decrease in CLO net interest income and a $0.31 decrease from higher base management fees.

On the lower half of the slide, this reconciles the $0.15 NAV per share decrease for the year. $2.94 of GAAP NII was primarily offset by $0.65 of net realized gains and unrealized depreciation on investments and the $2.28 dividend paid during the year. There was a $0.06 net accretion from the share repurchases and DRIP plan issuances in fiscal 2023. Slide 9 outlines the dry powder available to us as of quarter end, which totaled $276.6 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 28% without the need for external financing, with $96.1 million of 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.

In January, we also entered into the first amendment to the credit agreement within Encina Capital in order to achieve a number of important improvements to this agreement. First, we increased borrowings available from $50 million to $65 million. Second, we changed the underlying benchmark used to compute interest from LIBOR to Term SOFR for a one-month tenor plus a 10 bps credit spread adjustment and increased the applicable effective margin rate on borrowings from 4% to 4.25%. And importantly, we extended the revolving period to January 2026. As we’ve mentioned before, we’ve made a number of important additions to our available liquidity since year end. We have issued baby bonds totaling $77.5 million for net proceeds of $75.0 million, including a new $57.5 million, 8.5% 2028 public baby bond trading under the ticker SAZ.

The net proceeds of these offerings are being used to repay a portion of outstanding undebtedness under the credit facility, make investments in middle market companies in accordance with our investment objective and strategies, including investments made through SBIC III and for general corporate purposes. 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 2.5 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 10 through 14 and review the composition and yield of our investment portfolio. Slide 10 highlights that we now have $973 million of AUM at fair value or $966 million at cost, invested in 49 portfolio companies, one CLO fund and one joint venture. Our first lien percentage is 82% of our total investments, of which 26% is in first lien last out positions. On Slide 11, you can see how the yield on our core BDC assets, excluding our CLO has changed over time, especially the past quarter. After an extended period of low rates and tightening spreads, we are seeing both those trends reverse.

We have already seen much benefit in Q3 and Q4 with our core BDC portfolio yield increasing to 12.1% from 9.5% last year and from 11.7% last quarter. Total yield has increased to 10.7% from 7.7% last year and 10.4% last quarter. But the full impact of the rising rate environment through today is still not yet reflected fully in our earnings. In addition, we are seeing spreads widening, with 99% of our interest-earning portfolio being variable rate, all of our investments being above their floors and rates continuing to rise since year end, we expect to benefit going forward from the earnings impact of rising rates to our NII, as you can see on the next slide. The CLO yield stayed unchanged at 7.4% versus last quarter, reflecting current market performance.

The CLO is performing and current. Slide 12 shows how at the end of Q4, the average three month LIBOR used in our portfolio was 466 basis points versus at quarter end when three month LIBOR closed at 497 basis points and versus today at approximately 525. With 99% of our interest-earning assets using variable rates, earnings will benefit from this additional increase in Q1 and Q2, while all but $52.5 million of our quarter end borrowing is fixed rate and will not be impacted by these increases in base rates. The increase in SOFR base rates are similar. 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 of this dynamic has on our earnings due to timing of rate resets and invoicing terms.

Slide 13 shows how our investments are diversified throughout the U.S. And on Slide 14 you can see the industry breadth and diversity that our portfolio represents. Our investments are spread over 38 distinct industries with a large focus on healthcare and education software, HVAC services and sales and IT, real estate, education, consumer and healthcare services, in addition to our investments in the CLO and JV, which are included as structured finance securities. Of our total investment portfolio, 10.0% now consists of equity interest, which remain an important part of our overall investment strategy. For the past 11 fiscal years, we had a combined $81.5 million of net realized gains from the sale of equity interest or sale or early redemption of other investments.

And two-thirds of these historical total gains were fully accretive to NAV due to the unused capital loss carry-forwards that were carried over from when Saratoga took over management of the BDC. We continue to have a $1.6 million capital loss as of year-end for tax purposes. 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: Thanks, 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. Since our last update in January, lenders have become marginally less aggressive, though competition for premium quality credits persists. The recent high-profile crisis surrounding Silicon Valley and signature banks has led to a macro decline in deal volume that has only served to exacerbate markets already bearish due to prevailing market factors. Liquidity remains abundant after the large-scale fundraisings of last year, but lenders and especially banks are being 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 value, and in some cases have reduced their pace of deployment, as well as their hold positions. All of 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 where we are seeing greater movement is on the rate side, as Henry mentioned a couple of slides ago. Absolute yields are growing significantly as LIBOR and SOFR have increased another 100 basis points since last quarter. In addition, spreads are continuing to widen in the lower middle market where up to recently it had mainly been happening in the broader syndicated markets and capital markets.

In a mature and competitive financing market, investors continue to differentiate themselves in other ways, such as accelerated timing to close and looser covenant restrictions. That said, 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 a 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 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.

Our natural focus currently is on supporting our existing portfolio companies through follow-ons. As was seen this quarter where it comprised nearly all of our capital deployment. We have confidence in our strong position entering a changing credit and rate environment. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital as we will discuss shortly. Calendar year of 2022 was a very strong deployment environment for us, with a strong pace of originations, and we see that trend and pace continue into 2023. Follow-on investments in existing borrowers with strong business models and balance sheets continue to be an important avenue of capital deployment, as demonstrated with 53 follow-ons last year and 23 follow-ons in the first quarter of calendar 2023, including delayed draws.

In addition, we have invested in nine new platform investments this past calendar year, and in another four new platforms in Q1. 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 market environment. All of our loans in our portfolio are paying according to their payment terms, except for our Nolan investment that remains on nonaccrual, as we have moved to pick interest for a period of time. Nolan is our only nonaccrual investment across our portfolio. After recognizing the unrealized appreciation, primarily from performance on our overall portfolio this quarter, Saratoga’s overall assets are now 1% above cost basis.

We believe this strong performance reflects certain attributes of our portfolio that bolster its overall durability. 82% 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 portfolio is comprised of 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 16, 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 and cost.

We are one of only 14 BDCs that have had a positive number over the past three years. Now this strong underwriting culture remains paramount at Saratoga. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to peer as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics. We always have sought durable businesses, invested capital with the objective of producing the best risk adjusted and accretive returns for our shareholders over the long term. Our internal credit quality rating reflects the impact of current market volatility and shows 96% 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 in the equity upside potential. This equity co-investment strategy has not only served as yield protection for our portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated on the slide and the previous one, and we intend to continue this strategy. Looking at leverage on Slide 17, you can see that industry debt multiples have come down slightly at year end from their historically high levels. Total leverage for our overall portfolio was 4.63x, excluding Nolan and Pepper Palace, while the industry now is around 5x leverage. Through past volatility, we’ve been able to maintain a relatively modest risk profile throughout.

Although we never consider leverage in isolation, rather focusing on investing in credits with attractive risk return profiles and exceptionally strong business models, where we are confident the enterprise value of the businesses will sustainably exceed the last dollar of our investment. In addition, this slide illustrates the strengths 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 first calendar quarter, we added four new portfolio companies and made 23 follow-on investments and are already well ahead of last year’s pace. 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’s sake.

In the face of this uncertain macroeconomic 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. Moving on to Slide 18, our team’s skill set, experience and relationships continue to mature and our significant focus on business development has led to multiple strategic relationships that have become sources of new deals. What is especially pleasing to us is six of the 11 new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts.

Our top line number of deals sourced remains robust, but has dropped in the past two years, initially due to COVID, but more recently reflecting our efforts to focus on attracting a higher percentage of quality opportunities. Most notably, the number of deals executed during the recent months is markedly up from last year’s pace, demonstrating that this more focused strategy is yielding results. In addition to our growth this past year, since fiscal quarter end, we have executed approximately $119 million of new originations in five new portfolio companies and 17 follow-ons, including delayed draws, and had $10 million in one repayment for a net increase in investments of $109 million. As you can see on Slide 19, our overall portfolio credit quality remains solid.

The gross unleveraged IRR unrealized investments made by the Saratoga Investment Management Team is 15.7% on $908 million of realizations. On the chart on the right, you can see the total gross unlevered IRR on our $947 million of combined weighted SBIC and BDC unrealized investments is 11.6%. As of this quarter we continue to have two yellow rated investments, still only being our Nolan and Pepper Palace investments. Nolan has been yellow for a while now since COVID, being more dependent on in-person business interaction and was also added to nonaccrual status earlier this year. There was no significant change to the mark at Q4. 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 no significant change to the mark, leaving the total depreciation at approximately $9.8 million since investment on our first mean term loan and equity investments. This markdown reflects the current performance of the company, but they continue to pay interest. We are working closely with the company and the sponsor as they work to improve performance. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital. Moving on to slide 20, you can see our first and second SBIC licenses are fully funded and deployed with $4.8 million of cash and $22.3 million of cash available for distribution to the BDC in SBIC 1 and SBIC 2 respectively.

We are also pleased to have received approval for our third SBIC license this year, which means we practically have access to another $148 million of low-cost SBA ventures currently, allowing us to continue to support U.S. small businesses. To summarize the quarter, the way the portfolio has proven itself to be both durable and resilient against the impact of COVID-19 and the subsequent calendar 2022 and early 2023 market adjustments and volatility really underscores the strength of our team, platform and portfolio, and our overall underwriting and due diligence procedures. Credit quality remains our primary focus and new investment opportunities have a higher bar, especially at times with such increased activity levels for premium credits as we are seeing now.

And while the world is in continuous flux, we remain intensely focused on preserving asset value and remain confident in our team and the future for Saratoga. This concludes my review of the market. I’d like to turn the call back over to our CEO. Chris?

Christian Oberbeck: Thank you, Mike. As outlined on Slide 21, our latest dividend of $0.69 per share for the quarter ended February 28, 2023 was paid on March 30, 2023. This is the largest quarterly dividend in our history. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors, including the near-term impact of rising base rates and increased spreads on our earnings. Recognizing the divergence of opinions on the future direction of interest rate levels and overall economic performance, Saratoga’s Q4 over-earning of its dividend by 42% or $0.98 versus $0.69 this quarter provides substantial cushion should economic conditions deteriorate or base rates decline.

Moving to Slide 22, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of negative 6%, slightly outperforming the BDC index of negative 8% for the same period. This performance reflects the current market volatility impacting both us and the industry. Our longer term performance is outlined on our next slide. 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 127% return exceeded the average index return of 84%. While over the past five years, our 75% return more than doubled the index’s average of 31%. Since Saratoga took over the management of the BDC in 2010, our total return has been 571% versus the industry’s 179%.

On Slide 24, 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. NAV per share increased 3.3% this quarter, and we continue to be one of the few BDCs to have grown NAV over the long term, and we have done it accretively by also growing NAV per share 16 of the last 20 quarters. Year-over-year, our NAV per share is only down 0.5% versus the industry that is down 8.7%. And our latest 12 months return on equity is 7.2%, significantly beats the industry’s 0.6% average. Moving on to Slide 25, all of our initiatives discussed in 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. Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 14%; access to cost-effective and long-term liquidity with which to support our portfolio and make accretive investments, recently demonstrated with our SPIC3 license approval and new baby bond raises last year and subsequent to year end. A BBB+ investment grade rating and active public and private bond issuances; solid historic earnings per share and NII yield, benefiting from the rising rate environment with 99% of our credit AUM floating rate or 95% of our debt is fixed rate.

Strong industry leading long-term return on equity accompanied by growing NAV and NAV per share, putting us at the top of the industry over the long term; high quality expansion of AUM and an attractive risk reward profile. In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry. We were made 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 and would now like to open the call for questions.

Q&A Session

Operator: And our first question is from Bryce Rowe of B. Riley. Your line is open.

Bryce Rowe: Great, thanks. Good afternoon. Let’s see, I wanted to maybe start and this question gets asked on most of the conference calls. I wanted to start with balance sheet leverage and how you feel operating at these levels, and maybe how to think about where, if there is a target from a balance sheet and leverage perspective, especially given the fact that you have as much SBA capacity as you do.

Christian Oberbeck: I’ll start with that. This is Chris. Thank you, Bryce. I think we talked over – really over the last many, many, many years, our approach to leverage and I think as sort of long term participants in both the lending and borrowing industry, we developed a perspective on how we want to structure our liabilities relative to our assets, nearly in everything we do, including the loans and investments that we make. And in looking at the BDC, one of the things conventionally you want to do is, you want to sort of have your durations of your liabilities consistent with the duration of your assets, and I think in our case we’ve accomplished that. Our maturity schedule is two to ten years and depending on how loans go, generally we initiated our six year type of term and usually they don’t go to term, they can be financed or they get sold or something like that, so the duration is somewhat shorter than that, but our liabilities are not coming due before our assets mature and so that’s an important balancing element.

The other thing which we have paid a higher price for if you will, is we’ve had long term interest-only credit structure and that’s manifested both in the baby bonds, which are generally speaking five years interest only bullet maturity, so there’s not – not principal payments and no covenants. You know even in very adverse circumstances there’s not going to be sort of a demand to repay any of that that debt. We also, the SPIC debt, which are generally when we draw our debentures, those are ten years interest-only bullet maturities and generally speaking, those debentures are paid off when – down the road when investments are realized, and so – and then we have our Encina facility, which is a revolving credit facility, which we’ve used generally as kind of a swing line, to sort of balance our cash flow needs.

And that generally has remained outstanding, but in relatively small amounts, relative to our overall borrowings and that ebbs and flows depending on what our cash position is relative to our investments. So putting all this together, we have a debt structure that all we have to do is pay interest on the debt structure and our interest rate is super low compared to our income, our asset side, and our asset side are highly diversified assets. So we feel extraordinarily comfortable with our debt structure. And in contrast, other companies, other BDCs have an asset-based kind of more traditional bank lending structures that often have one or two year or three year investment periods, and maybe two or three, four year maturity structures, which are basically inside the duration of the assets, especially if you were in a difficult environment.

And they also have advanced rates and diversification requirements for what your loans need to look like and so if you get some markdowns in certain elements of the loan, you could wind up in default and they can also change the advanced rates. And we’ve seen some adverse circumstances right after COVID. There’s some very prominent industry players that had to come up with a tremendous amount of equity to reset the asset-based loans that were outstanding at the time. So we essentially don’t really have that type of exposure at all and we have it slightly in our Encina facility, but we think that’s very well over collateralized. So we don’t anticipate that as being a problem. So again, overall our debt structure is very solid and long dated maturities.

We say two to 10 years, but the bulk of its four to six years, and then you contrast that with our earnings right now. I mean our earnings levels are very substantial relative to history, relative to our portfolio, very high yield and all that. So I think if you put all that package together, I think we’re in a very good position and I think that’s been supported by our continuing investment grade rating that we’re getting, because I think it’s recognized that the combination of everything makes this a very solid situation. So that’s our perspective on leverage. Obviously there’s a lot of, inside that we can talk about different elements of it. And then the other piece of leverage of course is the assets, right. What are we investing in and how diversified are we and how solid are our investments?

And I think, as you can see, our credit quality has been very high. We feel like we’re investing in a segment of the economy that we are able to do too. And we don’t invest in cyclical elements, that we’re in secular growing, generally secular growing aspects, areas of the economy, where we have first lien positions and we’re often the sole lender or the sole senior lender. And we’ve got covenants and we’ve got all sorts of things that, we can get to the table before our problems get too out of hand and exercise some level of influence on the direction of these companies and how they might modify their business plans in the face of any problems that might arise. So I think the combination of all of this, we feel very comfortable with how we are structured.

And we also feel very gratified that our structure is proving out to be very well suited for a very troubled environment like we’re in today. And here we are, recognizing record earnings in the face of that.

Bryce Rowe: That’s, helpful perspective, Chris. Maybe one follow-up for me, and highlighting that record performance, especially relative to the dividend. How should we think about you kind of balancing that higher level of earnings versus a dividend and some of the maybe macro challenges or some of the unknowns that are out there from either an asset quality perspective or from an interest rate perspective.

Christian Oberbeck: Well, clearly Bryce, that’s a very good question. That’s something that we wrestle with and talk about every day. I mean I think if you look at the dot plot of what the market thinks, the forward interest rate curve is, they are expecting cuts later this year right. And I would also point out the dot plot has been pretty consistently wrong for a while. I think the Fed has sort of said what they are going to do and that dot plot sort of telling they are going to break and go and cut rates. They’ve been saying that for quite a while and then I think if you had a stop action, a montage of all the predictions and the realities, I think those people might have some job security issues in terms of what exactly they’ve been saying is going to be predicting.

However, they might be right this time. I mean, at some point they may be right, who knows? We don’t know. And so what we’ve done is we’ve raised our dividend to a level substantially higher than it was, 30% higher than it was a year ago. However, it is consistent with this negative dot plot outlook. If that proves to be the case, we believe this is a dividend that’s sustainable if rates kind of go back to that level. Not that we’re economists and not that we try to forecast anything. We just think the reality is probably closer to where the Fed is than where the market is, but we just don’t know that. And so we’ve structured our dividend to be in a position where we don’t have to predict who’s right or wrong. We think we’re going to be in reasonable shape should that prove out.

The other side of it of course is economy, recession. I mean, I think we have the most predicted recession of all time and people keep constantly saying it’s coming, but they keep pushing out when it’s coming. I mean that’s not for us to determine. There’s tons of people with PhDs and all that kind of stuff out there that can forecast that. But the question is, are we structured for that should it occur? And I think we are. We’re structured both in the asset side and in terms of the quality of our credits and we’re structured on the liability side. Either way, if rates go up a lot more, inflation continues, we’re very well structured. If things go badly and the world turns into a very bad place, our fixed charge coverage is enormous, so we can get through that.

So again, overall we feel like we’re – the dividend is well-structured. In terms of technically there’s spillover, right. And we’re at a very good position relative to spillover. So we can over-earn our dividend and not have to make a special tax payment or a special dividend payment if we don’t have to, if we don’t want to, for at least 18 months and depending how things shake out maybe longer. So we do have the ability to over earn our dividend for a while, while we have a chance to look and watch and try and understand what the direction of interest rates are, the direction of the economy is, and also react and adjust to the tremendous high quality deal flow that we’re experiencing. So again, we feel cautious about being too optimistic okay, but we are enjoying some of the best performance we’ve ever had right now, and we don’t see that changing in the very near term and hopefully not in the long-term.

Bryce Rowe: That’s great color. Thanks for the time today.

Christian Oberbeck: Thank you.

Henri Steenkamp: Thanks Bryce.

Operator: One moment for our next question. And our next question is from Mickey Schleien with Ladenburg. Your line is open.

Mickey Schleien : Yes. Good afternoon, everyone. Your prepared remarks were very thorough, so I only have a couple of questions. There’s obviously been a lot of discussion of commercial banks retrenching following the recent failures that we’ve seen, but those have been more amongst the regional banks. And we’ve seen a long-term disintermediation of large banks, focusing on larger lenders, but now we have this new trend and I’m curious whether you’re seeing at the margin, increased inquiries as through regional banks retrench.

Christian Oberbeck: I’ll start. And yes, we have. I think, for example, I mean we’ve had a lot of banks that have won deals from us in the last 12 to 18 months by going much deeper into a credit than they have historically and that’s reversed, and we’re even getting calls from banks that kind of – either the company’s growing, they need some more capital and the banks are drawing a much harder line than they used to in terms of advancing more capital. And this is for high quality growing companies. So we are seeing a tremendous opportunity arising from the bank sort of moving back against, tightening up their credit criteria in very good companies. We have picked up business from Silicon Valley Bank. They actually had won deals away from us and in one instance we got it back. And so yes, this is providing opportunity for us. Mike, would you like to maybe comment on some more on that?

Michael Grisius: Yeah, let me expound on a little bit Mickey. So if you think about the market in general, as we talked about in the prepared remarks, the market is – I think the way you’d characterize the market is its cautious and that’s for all the reasons that everybody’s looking at in terms of concern about where the macro economy is going to go. So you used to see where you would see competitors being awfully aggressive and we particularly saw this coming out of COVID. You saw people kind of giving money away if you will, really pricing deals super competitively, not doing a whole lot of diligence and just putting money out, hand over fist. What we’ve seen in this market is much more caution. People are raising the bar in their underwriting, their hold positions, and they’re expanding their pricing pretty considerably.

So we’ve kind of had the – been having that experience let’s say for the last six months or so. And that certainly has been positive to your question of receiving more inquiries. Yes, people that are seeking capital are going out to more folks to make sure that they can secure the capital that they are looking for. And then the second thing would be what Chris just referenced, which would be that, that that general trend has been further accelerated by the retreat of the banks in deal. So I mentioned for instance that we’ve closed since quarter end five new portfolio companies. And two of those I would say we’re directly related to not M&A activity, but really solid businesses that are growing at a healthy clip. But the ownership groups weren’t really feeling comfortable that their existing banks were going to be supportive enough of their balance sheet, so we entered into both of those deals.

So it’s a confluence of factors, but yes, we are receiving more inquiries in this market for sure.

Mickey Schleien : I appreciate that Mike. And just one follow-on to that. Given what you just said, but also considering how much private equity and debt capital has been raised over the last few years, I’m sort of scratching my head as to the trajectory of spreads. They’ve expanded recently. But as you’ve mentioned on this call, yields, all in yields are extremely attractive. So if you look at those two dynamics, what’s your gut telling you about the market’s willingness to maintain these wider spreads and also the lower multiples that we’ve been seeing on deals?

Michael Grisius: Yeah, I can’t make a prediction. I wish I could, but I can’t make a prediction in terms of where spreads are going to go and I certainly think your question is a good one, recognizing that there certainly is capital out there. But what I can tell you is that what we’re seeing right now is a lot of discipline. We saw spreads widen pretty considerably over the last couple of quarters. There’s probably even a little bit more widening with the Silicon Valley Bank experience and that hasn’t really changed. We’ve seen those wider spreads persist. I think the way we look at pricing our deals, we’re always looking at them to make sure that we’re getting the right risk adjusted returns. And I don’t think we changed anything in our underwriting.

What’s happened that’s allowed us to accelerate our deployment in this last couple of months or so is that the market’s kind of come our way. We are being as cautious as ever, but other people are finally starting to be that way as well.

Mickey Schleien : That’s really helpful. Thanks for that, Mike. And thank you for taking my questions today. That’s it from me.

Christian Oberbeck: Thanks Mickey.

Operator: One moment for our next question. Our next question is from Casey Alexander with Compass Point Research & Trading. Your line is open.

Casey Alexander: Hi! A couple of pretty simple questions here. One is, on Artemis Wax, sort of a dividend on the sale of a company is kind of just curious. Is that like a success fee or an end of term payment or how would you characterize that? It’s just a little different than what we normally see.

Michael Grisius: No, it’s a good question. And I think it can be a little confusing because I think we called it a sale of equity, which indeed it was. So that was not a change of control transaction. It’s actually a wonderful story for us. Kind of indicative of what we do, I think very well, is we backed a group of owners of that business a couple of years ago who were real bright individuals, had capital, kind of independent sponsor type transaction. The business had done exceedingly well and we lent them more capital over time to grow their enterprise value. Rather than selling the business entirely and experience a change of control, they brought in a minority equity investor who is a sponsor group that’s very experienced in that space or similar spaces and put money in at a really healthy enterprise value.

And as part of that, we received a dividend on our initial common equity. We also received a payoff of our preferred equity and those two resulted in nice return in that quarter. We also thankfully co-invested in the equity alongside the new sponsor as well. So our shareholders will get the benefit of continuing to own the original common equity at that valuation, participating in the hopefully future growth of the enterprise value with the new sponsors – minority sponsorship. And then we’re continuing to be a lender to that business and are excited to continue to support their growth.

Casey Alexander: What is that listed in the schedule of investments? I’m not picking it up.

Christian Oberbeck: There should be a senior loan. We could help you maybe off the call. There should be a senior loan that’s on our schedule of investments. And then there should be two, well there’s a preferred piece that was paid off and then there should be two equity investments that we have as well. They may have a preferred label on them, I believe, but one of them we view as common and the other one has kind of some more preferred features.

Henri Steenkamp: Then there’s two types of eyes on the schedule of investments

Casey Alexander: I got it. I got it. Look, we’ve had so many companies report at the same time. I was looking forward on somebody else’s schedule of investments, that’s what just happened. I wanted to start by saying good evening, because the presentation goes on a long time.

Christian Oberbeck: Busy time for you guys.

Casey Alexander: Yeah, one other question here, and this is just out of curiosity. In the press release it says that you issued $10 million and $10 million of eight and three quarters 2024 notes on March 31, 2023 and May 31, 2023. May 31 hasn’t happened yet. So is that a future sale that becomes active on May 31?

Christian Oberbeck: No, it’s supposed to be March 31 and May 1, which was yesterday. That might be a typo. Thank you. It was yesterday. It was a two tranche private baby bond. Yeah.

Casey Alexander: Now, we have seen some BDCs do a forward sale of debt, so I thought that might be it. Okay, thank you.

Operator: One moment for our next question. Our next question comes from Robert Dodd with Raymond James. Your line is open.

Robert Dodd : Hi guys, and congratulations on the quarter. At the risk of rehashing Bryce’s questions and your answers to that, I’m going to anyway. So if I can, on the leverage question, to your point, I mean the structure of leverage, the maturity ladder, the amount of unsecured, the structure itself is excellent. The question in my mind, is there just the absolute amount of it too much relative to your equity base, right? On a regulatory leverage basis, and all your unsecureds have a 40 leverage covenant in, on a regulatory leverage basis you’ve got to be after the deployment post-quarter end and the baby bonds and the private notes, You’ve got to be close to one-seven leverage right now. You don’t have maturities until 2025.

There’s a minimum borrowing on the Encina, so there’s not really a lot of room to pay down anything. Is one seven on a regulatory basis with the covenants, is that a comfortable level for you for the next two years, because your first debt maturity is not until 2025.

Henri Steenkamp: I think, the way we phrased it before is what we continue to believe that one-seven is a number, but I think one-seven in the context of structure is something different than absolute. I mean, as if we had a one-seven and it was all asset-based loans with two-year maturities, that would be one thing, but one-seven with the type of maturity schedule we have and the nature of the debt we have and the context of the earnings that’s coming off of our portfolio and the NAV growth and NAV stability that we have, we feel comfortable. And so I think our one-seven isn’t someone else’s one-seven.

Robert Dodd : I understand your point. I’m just obviously, there can be periods of market volatility, not that I’m forecasting another COVID. But if that were to happen, starting off at one-seven seems quite high. But anyway, moving on to the other part and you addressed this as well. The earnings…

Henri Steenkamp: Robert, I would just from a technical point, this is Henri. I would just add that there are a couple of the private bonds that are actually callable already. So none of the publics, but there are a couple of the privates, just from a technical point to your initial comment.

Michael Grisius: And just to emphasize one thing that Chris I think elaborated on very well in an earlier caller’s questions, but just to emphasize it again. I mean we’ve been doing this for an awfully long time. It’s interesting when we construct a balance sheet, well let me put it a different way. If we had a balance sheet that consisted of a fair amount of junior capital or we were lending to businesses in cyclical industries or businesses that really weren’t as strong business models in the industries that we’re investing in, and then we combine that with a leverage structure where they have hooks in us if you will, the covenant defaults, mark-to-markets, various things that can really go awry, that would not be a good thing, right?

We really think about that, and I would tell you that even a really low leverage balance sheet that’s constructed that way wouldn’t make a lot of sense. And so we think about our leverage in the context of an asset portfolio or investment portfolio that has we think some really durable assets, 82% first lien in industry end markets that are generally less cyclical, very recession resistant, businesses that have a lot of recurring revenue and free cash flow. And then we combine that with a debt structure that is very borrower friendly, really with no covenants whatsoever, other than the Encina facility, which is quite small and functions as a swing line. It doesn’t mean that we’re not paying very careful attention. I don’t want to be dismissive of the leverage, it’s a good question, but it’s something that we attend to.

But when we look at it, we look at it in that context.

Robert Dodd : Understood. Thank you for that. The next one kind of also goes back to partly to Chris. I mean, if I might and I read the 10-K, I mean you have just under $20 million in spillover, so it’s a $1.65 amount. You could easily over in your current dividend of $0.69 a quarter by $1 this year. That’s not my estimate yet, but call it that kind of ballpark, that would put you – a year from now, you could be in a situation where you have $2.60 or somewhere in the mid twos in spillovers, which kind of then maybe forces your hand a year later. It’s that to your point you don’t have to pay a supplemental for like the next 18 months, but your earnings power is really strong benefit from the high leverage. Is it – are you planning on waiting, but then you run the risk that your spillover goes to such a level that your hand is forced so to speak?

Christian Oberbeck: Well, I think that’s a very good – that’s something that we are very, very focused on. I think as we said, you look at the dot plot of the forward interest rate expectations coming down as soon as July. Some people are forecasting July, right. And then you have what the fed says, what the rates are going to be, and then you have this ongoing earnings that we’re experiencing. And so there’s a very, very huge, very, very large spread of predicted outcomes. And I think as we’ve said over and over again we’re not really in the prediction business. We’re in the business of investing in solid companies and structuring ourselves accordingly in all kinds of environments. And so, I think the short answer is, we’re not prepared to make a hard decision right now.

That’s why we raised our dividend by a penny, not by substantially more, and we’re wildly over-earning it right now. Obviously, as we settle into this next phase, we’re going to be considering this maybe not every day, but I mean we are considering this actively at all times to manage all that. I think the actual hard, spillover reconciliation date is November of 2024. And if you just take what’s happened in the last 18 months versus the next 18 months, there’s a lot of things that’s going to happen one way or another, and we’re going to adjust to and we believe they are going to be positive for us. So we’ll have to adjust it as we go. But as of this minute, we are where we are, right. We’re not increasing our dividend to our earnings levels, and we’re going to bank that over earning into our NAV and into our liquidity structure, and you have to do the very high quality business that we’re doing and sort of watch and be very carefully and be ready to react one way or the other.

Henri Steenkamp: Yeah. And I think what Chris just said Robert, is the really important thing, which is November next year is the, as you said the fourth to-date, right. But we are considering and making those decisions every single day, through that period. It’s not a case of just, you don’t got to make a decision now, you’ve got to make it in 18 months, right.

Robert Dodd : Understood. Thank you.

Robert Dodd : Yeah. Sorry, carry on. Yeah. The only reason that it’s considered, I mean your earnings power is just so strong is the point, your rate sensitivity is so pronounced and your earnings power is so strong that yours is building very quickly. I would just not like, your earnings this quarter were 50% or 45% higher than your dividend. That is not a normal situation for the rest of the space to be. It’s a great situation for you to have and for the investors and you to have, but it doesn’t mean it builds quickly relative to everybody else.

Christian Oberbeck: Yeah. And you know, we’re happy to be wrestling with this problem as you rightly point out.

Robert Dodd : Yeah. Thank you.

Operator: One moment for our next question. And our last question comes from Erik Zwick with Hovde Group. Your line is open.

Erik Zwick: Good afternoon. Just two questions for me. The first one just looking at the fair market value of the – your equity portfolio was up about 13% quarter-over-quarter, while the cost was down. So just curious what factors or drivers led to the devaluation marks in the quarter?

Christian Oberbeck: Primarily just performance of the underlying portfolio companies. One of the things that we’re delighted to see, as I mentioned in our prepared remarks, we’re really looking at carefully our portfolio. We always do, but we’re especially looking at the performance of our portfolio. The vast majority of our portfolio is up year-over-year in terms of its financial performance. And so the majority of the write-ups in valuation this quarter were just based on fundamental performance of the underlying portfolio.

Erik Zwick: Thanks. And then the last one for me, you addressed the pipeline several times during the call, and that it remains robust to many actual opportunities. I guess I’m maybe a little bit curious about the other kind of big factor and potential portfolio growth and repayments and sales were higher in the most recent quarter than they’d been in the prior quarters. And I guess that stands out to me a little bit just in terms of a slower M&A market. So one, I know it’s tough to have visibility, especially on sales, but maybe in terms of maturities, maybe it’s got a little bit more visibility there. So just curious from your perspective, what you’re expecting in terms of that repayment and sales potentially either offset or how that kind of dovetails with the opportunity for new originations.

Michael Grisius: Yeah, that’s a good question. And of course we can’t predict repayments. Rule of thumb that we often apply just as we think about our portfolio is that, on average it should in a normal market, about a third of our portfolio should pay off over time, at a faster clip than the maturity on our portfolio. Now we’re not necessarily in a normal time and so there’s two things that usually drive repayments. One, is that a company’s doing really well and the capital markets get real hot and we’re priced wider than somebody else might offer. And so you get recapitalized out of a balance sheet. We’re not seeing much of that in this environment. The other thing that typically drives repayments is M&A activity. So the company’s done real well.

The ownership group decides to sell themselves and while our portfolio is performing very well, I think most of the ownership groups are looking at right now as not being the best time to sell because valuations are down just in general. And so the combination of those two factors would, if I had to predict, would say they are probably not going to see as fast a payoff pace as you might see in a normal environment if you will, but very hard to predict in that respect. Now, in terms of opportunities to invest, we’ve spent a lot of time investing in relationships, building relationships over the years. And so those are always a healthy source of deals for us. In addition to that, we’ve invested in our business development team as well. And the combination of those things plus a market environment where lenders are being a lot more cautious, has put us in a position where we’re seeing lots of deal flow and we’re going to remain as selective as we ever have been.

But I would expect that we’ll continue to see plenty of good opportunities to invest capital.

Erik Zwick: Great. Thank you for taking my questions today.

Christian Oberbeck: Great. Thanks Erik.

Operator: Thank you. And I’m showing no further questions at this time. I would now like to turn the call back over to the CEO, Chris Oberbeck for closing remarks.

Christian Oberbeck : Well, again, we really appreciate all on this call and all of our shareholders for their ongoing support for Saratoga, and we look forward to speaking with you again next quarter. Thank you.

Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.