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SARATOGA INVESTMENT CORP. (SAR)·Q3 2025 Earnings Summary

Executive Summary

  • Fiscal Q3 2025 results reflected strong liquidity and portfolio quality amid outsized repayments; adjusted NII per share was $0.90, and management emphasized a 1.1% sequential increase versus Q2 when normalizing for the Knowland one-time interest reserve reversal, while total investment income declined sequentially on lower base rates and timing of repayments .
  • Base dividend of $0.74 was maintained and a special $0.35 was paid to fulfill fiscal 2024 requirements; dividend coverage remained robust with continued over-earning, supported by $250.2M cash and $473.7M total dry powder .
  • Portfolio composition remained conservative (86.8% first lien; nonaccruals limited to Pepper Palace and Zollege at just ~0.6% of fair value combined), while originations accelerated ($84.5M) but were eclipsed by $160.4M repayments tied to lower-middle-market M&A and aggressive refinancing terms by competitors .
  • Management is evaluating prospective calls of >$300M baby bonds to protect net interest margin in a declining rate environment; leverage viewed as structurally safe given long-duration, covenant-light liabilities and SBIC debentures .
  • Post-print catalysts: potential baby bond calls, redeployment of cash into robust pipeline, and M&A normalization; no formal revenue/EPS guidance was provided, and Wall Street consensus (S&P Global) was unavailable due to system limits this cycle.

What Went Well and What Went Wrong

What Went Well

  • Robust liquidity and dry powder: quarter-end cash of $250.2M and total undrawn capacity of $473.7M support accretive redeployment and margin protection in lower rates .
  • Dividend coverage and shareholder distributions: maintained $0.74 base dividend and paid $0.35 special; management reiterated substantial over-earning and confidence in dividend sustainability (“substantial overearning… supports current level of dividends”) .
  • Portfolio quality and risk containment: 99.7% of credits in highest category; only Pepper Palace and Zollege on nonaccrual and successfully restructured, combined just ~0.6% of fair value .
    • Quote: “Our overall credit quality… remained steady at 99.7% of credits rated in our highest category… the two investments remaining on non-accrual status being Zollege and Pepper Palace… representing only 0.3% and 0.3% of fair value” .

What Went Wrong

  • Sequential revenue/NII headwinds: total investment income fell to $35.9M (-16.6% q/q), reflecting lower SOFR/base rates and timing of repayments; adjusted NII per share down to $0.90 from $1.33 in Q2 due to Knowland one-time normalization and rate reset lag .
  • AUM decline and marks: AUM decreased to $960.1M (from $1.041B in Q2); CLO/JV experienced $4.0M unrealized depreciation and core non-CLO marked down $1.4M (offset by net realized gains) .
  • Aggressive refinancing competition: outsized repayments partly driven by lenders offering “extremely aggressive pricing” on low-leverage assets; tightening spreads and full leverage remain market headwinds in lower middle market .
    • Analyst concern: potential under-earning risk if rates decline further; management aims to avoid under-earning but acknowledges external factors and redeployment pace uncertainties .

Financial Results

MetricQ1 2025Q2 2025Q3 2025
Total Investment Income ($USD Millions)$38.678 $43.003 $35.879
GAAP EPS ($)$0.48 $0.97 $0.64
Net Investment Income (NII) per share ($)$1.05 $1.33 $0.90
Adjusted NII per share ($)$1.05 $1.33 $0.90
NII Yield (% of Avg NAV)15.5% 19.7% 13.3%
NAV per Share ($)$26.85 $27.07 $26.95
Return on Equity – LTM (%)4.4% 5.8% 9.2%

Segment mix (% of fair value):

SegmentQ1 2025Q2 2025Q3 2025
First Lien Term Loans86.3% 85.2% 86.8%
Second Lien Term Loans1.7% 2.5% 0.6%
Unsecured Term Loans1.4% 1.6% 1.7%
Structured Finance (CLO/JV)2.2% 2.2% 1.9%
Equity Interests8.4% 8.5% 9.0%

Key performance indicators:

KPIQ1 2025Q2 2025Q3 2025
AUM ($USD Millions)$1,095.6 $1,040.7 $960.1
Originations ($USD Thousands)$39,301 $2,584 $84,490
Repayments ($USD Thousands)$75,703 $60,140 $160,404
Cash and Cash Equivalents ($USD Millions)$93.3 $162.0 $250.2
Total Undrawn Capacity ($USD Millions)$162.8 $385.5 $473.7
Nonaccrual Investments (#)3 2 2
Nonaccrual Fair Value (% of total)1.6% (Q1; all nonaccruals) ~0.3% each PP/Zollege ~0.6% combined
Core BDC Portfolio Yield (%)12.6% 12.6% 11.8%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Dividend per Share (Base)Q3 2025$0.74 (Q2 2025) $0.74 Maintained
Special Dividend per ShareQ3 2025None $0.35 (paid Dec 19, 2024) Introduced
Baby Bonds CallabilityNear-term (0–4 months)Callable status ongoing ~$321M “6%+” debt callable now/soon; evaluating calls Ongoing evaluation
Formal Financial Guidance (Revenue/EPS)Q3 2025NoneNoneNo formal guidance

Note: No quantitative guidance for revenue, margins, OpEx, OI&E, or tax rate was provided in Q3 materials .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2025)Previous Mentions (Q2 2025)Current Period (Q3 2025)Trend
Interest rates & NIMElevated NIMs; fixed long-term liabilities; baby bonds callable within next year NII boosted by Knowland; 25bps rate sensitivity ≈ $0.03/quarter; callable debt as margin protection Core BDC yield fell to 11.8% on lower SOFR; management evaluating calls to reduce debt cost Headwind near term; mitigation via calls
M&A/pipeline & repaymentsLimited new platforms; follow-ons dominate; add-on acquisition strategy Early signs of M&A uptick; outsized repayments possible from aggressive pricing Outsized repayments ($160.4M); originations $84.5M; pipeline solid; repayments lumpy Improving deal flow; repayments elevated
Portfolio credit quality & nonaccruals3 nonaccruals (Knowland, PP, Zollege); restructurings underway Reduced to 2 (PP/Zollege); total FV ~$3.6M; credit quality 99.7% highest category Still 2 nonaccruals (PP/Zollege); 99.7% highest category; combined ~0.6% FV Stable/positive
Liquidity & leverageNew $75M Live Oak facility; investment capacity $299M Dry powder $385.5M; baby bonds callable; asset coverage 159.6% Dry powder $473.7M; cash $250.2M; asset coverage 160.1%; effective net leverage lower after netting cash Strengthening
CLO/JV strategyCLO/JV markdowns; performing/current CLO/JV -$2.7M unrealized depreciation; no reset; runoff bias CLO/JV -$4.0M unrealized depreciation; CLO performing; continued caution Cautious/runoff
Spillover taxable income & distributionsBuilding; timing under review >$3 per share spillover developing in fiscal 2025 Fiscal 2024 spillover cleaned; current year spillover just over $3; excise tax viewed as low-cost financing Managed via specials/DRIP

Management Commentary

  • “The substantial over-earning of the dividend this quarter continues to support the current level of dividends, increases NAV, supports increased portfolio growth and provides a cushion against adverse events.” – CEO Christian Oberbeck .
  • “Our quarter end cash position grew to $250.2 million… repayments included the recognition of a $4.8 million realized gain on our Invita investment… improved our effective leverage…” – Management overview .
  • “We have $960.1 million of AUM… 86.8% first lien… CLO yield increased to 24.6% purely reflecting lower fair value; the CLO is performing and current.” – CFO Henri Steenkamp .
  • “The combination of historically low M&A volume and an abundant supply of capital is causing spreads to tighten… leading to lenders offering extremely aggressive pricing on some of our low-leverage assets.” – CIO Michael Grisius .
  • “$321 million of baby bond… callable, either now or within the next 4 months, creating a natural protection against potential… decreasing interest rates.” – CFO Henri Steenkamp .

Q&A Highlights

  • Repayments vs originations: repayments were unusually lumpy (Invita repayment accounted for ~half of $160M); origination pace expected to outpace repayments over time, but quarterly volatility remains .
  • Debt calls/refinancing: baby bonds and SBIC debentures callable windows assessed; SBIC II considerations hinge on reinvestment period and arbitrage vs cash yield; decisions evaluated in February/August cycles .
  • Dividend coverage risk: management does not anticipate under-earning the dividend but notes external unpredictability; pipeline and prospective M&A pickup should support earnings .
  • Spillover taxable income: fiscal 2024 cleaned; fiscal 2025 spillover just over $3 per share; excise tax (4%) viewed as relatively cheap financing vs baby bond rates .
  • Leverage vs peers: management highlighted long-duration, covenant-lite liabilities and SBIC structure as safer leverage; baby bonds add flexibility; leverage considered an asset with accretive cost relative to dividend yield .

Estimates Context

  • Wall Street consensus from S&P Global was unavailable due to system request limits during this session; therefore, estimate comparisons could not be provided. Values retrieved from S&P Global are unavailable this cycle.
  • Implications: Given lower core BDC yield (11.8% vs 12.6% Q2) and outsized repayments late in the quarter, near-term NII forecasts may drift lower; however, potential baby bond calls and redeployment of $250M cash into accretive SBIC/follow-ons can mitigate estimate pressure as base rates stabilize and M&A activity normalizes .

Key Takeaways for Investors

  • Liquidity is the standout: $250.2M cash and $473.7M total capacity enable rapid redeployment and targeted deleveraging via callable baby bonds to defend NIM if rates fall further .
  • Dividend durability: continued over-earning and special distribution execution underscore income stability; watch for Board actions on spillover and potential specials as fiscal 2025 progresses .
  • Earnings trajectory: Q3 softness is largely mechanical (Knowland one-time normalization, rate reset lag, late-month repayments); expect sequential stabilization as originations deploy and repayments normalize .
  • Credit risk contained: nonaccruals are small, restructured, and closely managed; portfolio remains predominantly first lien with strong underwriting and sponsor alignment .
  • Competitive dynamics: aggressive pricing by larger lenders can trigger payoffs; Saratoga’s lower-middle-market focus and deep sponsor ties support steady platform adds and bolt-ons over time .
  • Strategic optionality: CLO remains performing though marked lower; company favors liability optimization and patient equity deployment versus resets until market spreads improve .
  • Trading lens: Near-term catalysts include debt call announcements, originations redeploying cash, and any spillover-driven distribution decisions; longer-term, NAV accretion and ROE > industry average (LTM 9.2%) support valuation upside as rate headwinds moderate .