Saratoga Investment Corp Stock

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp. Fiscal Second Quarter 2027 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Second Quarter 2027 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 second quarter 2027 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.

For everyone new to our story, please note that our fiscal year ended February 28, so any reference to Q2 results reflects our August 31 quarter end period. 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.

Thank you, Henri, and welcome, everyone. Before discussing our results, I would like to take a moment to recognize Henri's transition that was recently announced. Henri will be stepping down from his executive roles on October 31 for health reasons. Henri has been an invaluable member of our team, has made significant contributions to Saratoga over his almost 13 years with us. While we are sad to see him step away from his day-to-day roles, we fully support his decision to prioritize his health. We are grateful that he will remain a member of our Board and the CFO of the SBICs and continue to support the company in a consulting capacity. On behalf of the Board and the entire Saratoga team, I want to thank Henri for his leadership, judgment and dedication to the company and our shareholders.

This quarter had numerous highlights and subsequent to the quarter, including net positive originations of $37.1 million, including 2 new non-software portfolio companies originated in the quarter and sustained high-quality AUM growth with AUM growing 2.1% during the quarter and reaching a record level of $1.15 billion. Issuance of the $85 million SAX baby bond, which subsequent to quarter end increased to $120.8 million through the exercise of the greenshoe and reopening of the issuance. This allowed for the refinancing of the $105.5 million SAT baby bond due early 2027 last month, reducing refinancing risk for next year. This baby bond was opportunistically issued prior to Labor Day and subsequent increases in interest rates and competitive offerings.

Stable adjusted NII of $0.46 per share, inclusive of the cost of our recently refinanced capital structure, repurchasing approximately 444,000 shares at a discount to NAV, which was accretive to NAV by $0.09 per share, taking advantage of robust refinancing environment to reset our legacy CLO at $350 million at lower rates, resulting in new 3-year reinvestment period and ensuring future BDC management fees and significant interest income; continuation of significant Zollege investment appreciation and the sale of both our Pepper Palace and CLO F-Note investments subsequent to quarter end, resulting in the resolution of our remaining nonaccrual investments.

Our core BDC portfolio fair value remains within 1.6% of cost, demonstrating solid overall credit quality in a challenging and volatile macroeconomic environment. and our nonaccruals are now 0 following the above resolutions, significantly lower than the industry's 3.5% of cost average. Some of the headwinds experienced this quarter included the balance sheet refinancing resulting in additional interest expense from higher cost debt, while spreads on assets have not yet widened. See the base rate increases, which will benefit interest income with every 25 basis points increasing interest income by $0.033 per quarter.

Our NAV per share declined, including $0.82 per share specifically related to company performance in 3 distinct credits and $0.30 per share related to dividend distributions exceeding net investment income, offset by $0.09 per share appreciation from share repurchases. And $13.3 million of $25.9 million NAV decline from accretive share repurchases being 32% of the change and excess dividend distribution of previously undistributed earnings being 19% of the change, which reduces the company's spillover obligation.

Continuing our track record of strong dividend distributions, we recently announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the third quarter of fiscal 2027, which when annualized, represents an 18.1% yield based on the stock price of $16.61 as of October 5, 2026, offering strong current income. Originations and AUM growth during the quarter contributed to adjusted NII of $0.46 per share compared to $0.47 per share last quarter. The modest sequential decline reflected higher interest income from portfolio growth, including new originations and BB and BBB and CLO debt investments, offset by the full period impact of our recently -- our recent refinancing activity.

Investment activity remained healthy during the quarter, supported by the continued expansion of our business development capabilities and sponsor relationships. Market dynamics continue to be very competitive during the quarter. Despite this, we originated $76.1 million of investments, including investments in 2 new software -- 2 new non-software portfolio companies and 9 follow-on investments compared with $39 million of repayments, resulting in $37.1 million of originations. Approximately $9.2 million of the quarter's originations consisted of BB and BBB CLO debt investments.

Our strong reputation, differentiated market positioning and the ongoing development of sponsor relationships continue to create attractive investment opportunities from high-quality sponsors. Investment activity continues post quarter end with $35 million of originations, including 1 new portfolio company, offset by $2 million of repayments. While the competition remains significant and sentiment across the private credit -- across private credit continues to be cautious, we remain highly selective and disciplined in evaluating opportunities, given the uncertain operating environment.

Our total $1.15 billion portfolio was marked down $14.4 million during the quarter, including net depreciation of $15.4 million in the non-CLO core portfolio, driven primarily by $13.1 million of markdowns in Madison Logic, Exigo and Chronus, reflecting company performance adjustments. And the equity conversions of Gen4 and Modis that resulted in a $1.5 million reversal of previously recognized unrealized appreciation. Other marks reflected a combination of lower equity market multiples and changes in market spreads, partially offset by $4.5 million of unrealized appreciation in Zollege.

The CLO 1's F-Note remained at 0 fair value. The JV was written down $1.1 million after paying a $0.8 million dividend to the BDC, and the BB and BBB portfolio was relatively flat. We also recognized $2.1 million of realized gains, primarily from the Gen4 and Modis Dental equity conversions. As of quarter end, our core non-CLO portfolio was 1.6% below cost with our total portfolio valuation 4.9% below cost.

During the second quarter, our core BDC net interest margin increased to $13.6 million from $13.4 million last quarter. This was driven primarily by a 1.2% increase in average core assets and the average SOFR rate used in the portfolio increasing by 5 basis points from last quarter. This was partially offset by spreads on originations this quarter being 220 basis points lower than the repayments they replaced and increased interest expense on the changes in our capital structure.

As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $211 million of investment capacity to support our portfolio companies with $121 million available through our existing SBIC III license, including the recent SBA approval of the $75 million upsize and $90 million from our 2 revolving credit facilities. All quarter end cash was used to repay the SAT baby bond in September.

As we enter the back half of the fiscal year 2027, the operating environment remains uneven as geopolitical uncertainty, persistent inflation, interest rate volatility and concerns regarding AI-related disruption within the software sector continue to affect borrowers and valuations. These conditions have contributed to higher default activity, declining NAVs across the industry and dividend reductions by several BDCs. At Saratoga, however, the NAV decline this quarter, in addition to it being due to the significant share repurchases that were accretive to NAV per share was concentrated in a limited number of portfolio-specific situations, does not appear to reflect broad-based deterioration across the portfolio.

At the same time, strong BDC debt issuance, firmer values for higher-quality loans and slightly improving M&A activity point to a market that appears to be stabilizing and increasingly differentiated among managers. We remain confident that our disciplined senior secured first lien focused underwriting and well-structured balance sheet position positions Saratoga to navigate this environment.

Moving on to Saratoga Investment's fiscal 2027 second quarter key performance indicators as compared to the quarters ended May 31, 2026, and August 31, 2025. Our quarter end NAV was $6 million, down 6.8% from $378.5 million last quarter and 14.1% from $410.5 million last year, with $8.4 million of the charge being due to share repurchases. Our NAV per share was $22.15, down from $23.23 last quarter and $25.61 last year. Of the $1.08 sequential quarter reduction, $0.30 or 28% was due to the underearning of the dividend. This excess distribution represents previously undistributed NII profits from prior years.

Our adjusted NII was $7.4 million this quarter, down 2.6% from last quarter and down 18.7% from last year. Our adjusted NII per share was $0.46 this quarter, down 2.1% from last quarter and 20.7% from last year. Adjusted NII yield was 8.1% this quarter, up from 7.8% last quarter and down from 9% last year. And latest 12 months return on equity was negative 1.1%, down from 4% last quarter and down from 9.1% last year. This is currently below the industry average of 2.2%.

Slide 3 illustrates how our combined portfolio and financial results have delivered an ROE of negative 1.1% for the last 12 months, below the industry average of 2.2%. However, our long-term average return on equity over the past 12 years of 9.2% is almost 1.5x above the BDC industry average of 6.4%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 9 of the past 12 years while remaining positive every year.

As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 16 years ago, despite a slight pullback in fiscal 2025, reflecting significant repayments. As of the end of the quarter, our assets under management reached a record level of $1.15 billion, in part due to this quarter's originations again outpacing repayments, resulting in a meaningful increase in AUM as compared to the previous quarter. Our overall credit quality for this quarter decreased slightly to 96% of credits rated in our highest category, reflecting the addition of Chronus and Madison Logic to our yellow category.

We remain proud of the overall portfolio given the current headwinds in the industry while recognizing the credit markdowns as discussed. Both nonaccrual investments have now been sold. With 81.5% of our investments at quarter end in first lien debt, generally supported by strong enterprise values and resilient balance sheets in industries that have historically performed well in stressed situations. We believe our portfolio composition and leverage profile are well structured to handle a wide range of economic conditions and uncertainty.

Our management team is working diligently to continue this positive AUM long-term growth trend as we deploy our available capital into our pipeline while remaining appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was 16.2 million, decreasing from 16.3 million and 15.8 million shares for last quarter and last year's second quarter, respectively. Adjusted NII was $7.4 million this quarter, down 18.7% from last year and 2.6% from last quarter.

The modest decrease from last quarter primarily reflected the impact of the recent changes to the capital structure, increasing our interest expense as well as slight decreases in other income from lower structuring, advisory and prepayment fees and higher base management fees from higher AUM. The weighted average interest rate on the core BDC portfolio was 10.6% this quarter compared to 11.3% as of last year and up from 10.5% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets.

Total expenses for the quarter, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes were $2.9 million as compared to $2.5 million last year and $2.7 million last quarter. This represented 0.9% of average total assets on an annualized basis, unchanged from last quarter and up from 0.8% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added KPI Slides 26 through 29 in the appendix at the end of the presentation.

And Slide 30 compares our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 1.3% of cost representing 2 investments is 2.5x lower than the industry average of 3.4%. This highlights the current strength of our core BDC portfolio's overall credit quality. Moving on to Slide 6. NAV has declined from last year and last quarter. The sequential decline represent both the Q2 markdowns discussed earlier and the current underearning of the dividend as well as the $8.4 million share repurchases this quarter. This chart also includes our historical NAV per share, which we'll cover on the next slide.

On Slide 7, 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, adjusted NII per share was down $0.01 in Q2 with multiple small changes, as you can see on the slide. On the lower half of the slide, NAV per share decreased by $1.08 primarily due to the $0.75 aggregate quarterly dividend exceeding the $0.45 GAAP NII, plus the $0.90 of net realized gains and unrealized depreciation recognized in Q2 with $0.82 of that in 3 discrete credits, partially offset by a $0.09 accretion from share repurchases.

Slide 8 outlines the dry powder available to us as of quarter end, which totaled $211 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 18% without the need for external financing. Of note, in May, legislation amending the Small Business Investment Act of 1958 increased the individual SBIC leverage limit and family of funds limit in each case, subject to SBA approvals.

On September 4 this year, the company received notification from the SBA that SBIC III's individual leverage limit was increased to $250 million, providing an additional $75 million of long-term capital in the form of SBA-guaranteed debentures, which we have included in available leverage liquidity on this slide. We did not include any cash here as on September 18, we redeemed in full $105.5 million aggregate principal amount of the issued and outstanding 6.00% 2027 notes using all this cash as well as the subsequent proceeds received from the greenshoe on the SAX baby bond we closed in August. This refinancing helped us reduce our near-term refinancing risk.

Subsequent to quarter end, we issued a further $23.1 million SAX baby bonds through a reopening, bringing the total principal amount issued to approximately $120.8 million. 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 and the long-term nature of most of our debt. Also, our debt is structured in such a way that we have no material BDC covenants that can be stressed during volatile times, which is especially important in the current economic environment.

Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.15 billion of AUM at fair value, and this is invested in 50 portfolio companies, 1 CLO fund, 1 joint venture and 32 distinct BB and BBB CLO debt investments. Our first lien percentage is 81.5% of our total investments, of which 21.2% is in first lien last-out positions.

On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, including this past year, reflecting the recent decreases to base interest rates and tightening spreads. This quarter, our core BDC yield increased slightly to 10.6%, consistent with base rate increases starting again this quarter. The CLO yield decreased to 10.9% from 11.0% last quarter.

Subsequent to quarter end, on September 17, we completed the sixth refinancing of the Saratoga CLO. This transaction extended the reinvestment period through October 2029, extended the legal maturity to October 2037 and established a non-call period through April 2028. The refinanced CLO has approximately $350 million of assets and benefits from lower financing rates. As part of the transaction, we invested an additional $16.2 million in newly issued subordinated notes and purchased $2.6 million of Class E-2-R5 notes at par. The extended reinvestment period is expected to support future BDC management fees and interest income.

Slide 11 shows how our investments are diversified primarily across the U.S. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 44 distinct industries in addition to our investments in the CLO JV and BB and BBB CLO debt securities, which are all included as structured finance securities.

Moving on to Slide 13. 7.1% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 14 fiscal years, we had a combined $47.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. During the second quarter, we generated $2.1 million in net realized gains. This long-term realized gain performance highlights our portfolio credit quality has helped grow our NAV over time and is reflected in our healthy long-term ROE.

Now before I turn the call over to David, I would like to say a few words personally. It has been a privilege to serve Saratoga, our Board, our shareholders and the entire team over the past 13 years. I'm proud of the progress we have made and what we have built together. While I'm stepping away from my executive responsibilities, I remain fully committed to Saratoga's long-term success and look forward to continuing to support the company as a director and in a limited consulting capacity.

I would also like to recognize Christine Ramdihal, who has been promoted to Chief Accounting Officer and Treasurer. Christine served as Controller of the BDC and brings significant accounting, financial reporting and audit experience to her expanded role. I have worked closely with Christine for almost 10 years and have great confidence in her knowledge of our business, her commitment and her ability to help provide continuity through this transition. I know she looks forward to working with everyone on this call in the shareholder and analyst community. That concludes my financial and portfolio review. Our Chief Operating Officer, David DeSantis, will now provide an overview of the investment market.

Thank you, Henri. Today, I will give an update on the market since we last spoke in July and then comment on our current portfolio performance and investment strategy. Our deal flow has primarily increased due to the success we are having with our business development efforts as seen by the fact that 5 of the 13 new platform companies that we have closed in the past 12 months are with new relationships. However, the combination of historically low M&A volume in the lower middle market for an extended period of time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially the higher quality credits.

Market dynamics generally remain at their most competitive levels since the pandemic, although we are seeing some signs of spread widening. We've also experienced repayment activity from some of our lower leverage loans, which have been refinanced on more favorable terms. Historically, as a management team, we have successfully navigated through numerous credit cycles and have learned to stay laser-focused on the things we can control.

In summary, those are: first, to be highly disciplined on credit selection; second, to expand our business development efforts in a market that is still largely underpenetrated by us; and third, to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, gives us confidence in our ability to achieve healthy and steady portfolio growth in a manner that we expect to be accretive to our shareholders in the long run.

Software does continue to get a lot of attention in the market. And for us, the hurdle is very high to do new software deals. We expect to see a substantial shift away from the software in our deal flow and ultimately within our portfolio. By way of example, we closed 2 new platforms in Q2, neither of which were software-related businesses. Our existing software portfolio continues to have strong credit metrics with loan-to-value or LTV of 43% and 85% of those positions are first lien with an additional 6% in equity securities.

Now I'd like to shift to highlight the key elements of the lower middle market where we operate. We continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we are able to perform when evaluating an investment is much more robust, and the capital structure are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documentation are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater.

As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns and our track record of realized returns reflect this. Our underwriting bar remains very high as usual in a very difficult market, yet we continue to find opportunities to thoughtfully deploy capital. As seen on Slide 14, though providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 35 follow-ons in the first 3 quarters of 2026, we have also invested in 9 new platform investments in this period, already surpassing last year's full year origination effort.

Overall, our deal flow is increasing as our business development efforts show continued success. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams.

We ended the quarter with still just 1 core BDC investment on nonaccrual status in Pepper Palace in addition to our CLO's F-Note, which was placed on nonaccrual 2 quarters ago. This F-Note realized at 0 value as part of the CLO reset in September. And additionally, Pepper Palace was sold for a nominal amount post quarter end. We, therefore, have no nonaccruals today within our portfolio. Together, as of quarter end, these 2 investments represented 0.0% of the portfolio at fair value and 1.3% at cost.

In general, our portfolio companies are very healthy and the fair value of our core BDC portfolio is only 1.6% below its cost. Given the recent sale of Pepper Palace, although -- fully written off already, excuse me, most of the unrealized depreciation will now be realized in Q3. Three core BDC investments had notable write-downs this quarter due to performance. They were Exigo, Chronus and Madison Logic.

We recognized unrealized depreciation of $8.7 million on our debt investment in Exigo in Q2 as it is experiencing continued weakness due to a challenging end market. Despite having a dominant position in this industry, the company's customers are facing significant competitive pressures from alternative sales channels, which is causing the end market to shrink as well as reducing customer churn. As a result of this, our investment in Exigo remained red at the end of the quarter, though it kept its accrual status as interest continued to be paid. Subsequent to quarter end, we fully exited the Exigo investment close to our quarter end mark, resulting in a negative 6.1% IRR over the life of the investment.

Our Chronus debt and preferred equity investment was written down by $2.5 million, reflecting declining customer retention and slower new customer acquisition due to broader softness in the company's end market. The deal team is actively engaged with the sponsor on the deal and recently completed an amendment, which included sponsor credit support and an extension. Our Madison Logic first lien debt investment was written down by $1.9 million, reflecting declining sales and market softness in the company's end market. The deal team is also actively engaged with management on that credit.

Chronus and Madison Logic remain on accrual with sufficient cash balances. The rest of the portfolio markdowns this quarter reflect a combination of company performance and market conditions. The key recurring themes driving market markdowns are: 1, comparable market multiples have driven reductions; and 2, the impact of recent general market spreads in our valuations. In addition, our JV and BB and BBB CLO debt portfolio were marked down by $1.1 million, showing slight portfolio performance decreases from last quarter.

81.5% 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. Looking at leverage on the same slide, you can see that industry debt multiples recently increased to the 6x range, while the total leverage for our portfolio decreased to 4.7x, excluding Pepper Palace, reflecting the new investments originated at much lower leverage levels.

Turning to Slide 15. That provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase is a result of our recent business development initiatives. Overall, 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.

Our originations this fiscal quarter totaled $76.1 million, consisting of 2 new investments totaling $54 million, 9 follow-ons totaling $12.9 million and 4 BB and BBB CLO debt investments of $9.2 million in aggregate. As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. Our team remains focused on deploying capital in strong business models where we are confident that under all reasonable scenarios, the enterprise value of the business will sustainably exceed the last dollar of our investment.

Our approach in underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together almost 16 years ago, we've invested $2.66 billion in 134 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 90 of those investments, achieving gross unlevered realized returns of 14.9% on $1.41 billion of realizations. Taking into account recent negative events and market turbulence, our combined unlevered realized and unrealized returns on all capital investment is 13.1%. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital. And our long-term performance remains strong as seen by our track record on this slide.

Moving on to Slide 17. You can see our second SBIC license is fully funded and deployed, and we have been ramping up our SBIC III license with $46 million of lower cost undrawn debentures still available at the end of Q2, allowing us to continue to support U.S. small businesses, both new and existing. As Henri noted previously, the change in SBA rules will allow us to receive an additional $75 million of long-term capital in the form of SBA-guaranteed debentures, increasing available debentures to $121 million. This concludes my review of the market, and I'd like to turn the call back over to our CEO, Chris.

Thank you, David. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended August 31, 2026, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended November 30, 2026, marking the seventh quarter of our new dividend payment structure. 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 current interest rate, macro environment impact on our earnings and spillover levels.

Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, generated total returns of negative 16%, below the BDC index's negative 6%. Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 3-year and 5-year total returns all place us in line with the BDC index. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 700% has been more than 2.5x the industry's 270%.

On Slide 21, you can further see our last 12 months of performance placed in the context of the broader BDC 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 and coverage, all of which reflect the value our shareholders are receiving. The recent reduction in our NAV per share is accounted for as a combination of the payment of previously undistributed profits as well as the markdowns of discrete credits this quarter, partially offset by the quarter's share repurchases well below NAV.

The NII yield and dividend coverage metrics reflect the long-term impact of reduced rates and undeployed levels of cash as well as more recently, our increased cost of capital. In this volatile macro environment, we will continue to deploy our available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be 1 of the few BDCs to have grown NAV accretively over the long term and have a consistently healthy return on equity significantly beating the industry with our long-term return on equity at roughly 1.5x the industry average.

Moving on to Slide 22. 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 in this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiated characteristics, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 11.5%, ensuring we are strongly aligned with our shareholders.

Looking ahead, we expect the macroeconomic backdrop to remain mixed. Persistent inflation and uncertain interest rate environment, geopolitical uncertainty and developments within the software sector continue to place pressure on certain borrowers and valuations. Although the broader BDC industry has experienced higher defaults, NAV declines and dividend reductions, Valuation changes in our portfolio this quarter were concentrated in a small number of investments rather than reflecting broad-based deterioration.

At the same time, we are seeing several constructive indicators, the recent wave of BDC bond issuances, the rebound in higher quality loan values and early signs of improving transaction activity, all pointing towards a market that appears to be improving. And recent increased rate base market rates are very positive for us with our variable rate asset base, primarily fixed rate debt structure. As always, we will continue to focus on disciplined underwriting, senior secured first lien investments and diligent balance sheet management. With a diversified funding base, available liquidity and a strong pipeline, we believe Saratoga is well positioned to continue delivering durable risk-adjusted returns to our shareholders over the long term. In closing, I would like to thank all of our shareholders for their ongoing support, and I'd like to now open the call for questions.

[Operator Instructions] And our first question will come from the line of Erik Zwick of Lucid Capital Markets.

Can you update us on the amount of spillover per share at the end of the quarter?

Sure. Thanks so much, Erik, for that, and it's been a pleasure working with you as well. So as of the end of August, our spillover that has been reducing is down to about $1 per share as of 8/31.

Okay. And then next, Christian, I wanted to kind of follow up on the discussion from last quarter, maybe kind of a 2-part question. When we spoke last quarter, you mentioned maybe kind of a rough outlook for a 4- to 5-quarter kind of path back to bridging the gap between NII and the dividend, a couple of factors kind of pointing towards that trend, 1, market stability, healthy pipeline, outlook for portfolio growth, some slight widening in spreads plus base rates. So I guess, has anything materially changed in your view to kind of bridging that gap? And the second part of the question kind of related is, how do you prioritize the importance of maintaining the dividend versus NAV stability?

Well, obviously, that's a really important question and something that we are considering constantly at our Board level and at the management company at all times. I think you kind of outlined the kind of the spectrum of considerations. I think 1 of the things we've all experienced in our history at the BDC is that when market conditions change, they don't necessarily all adjust at the same kind of same rate.

And we, at Saratoga and also the BDC industry, if you look at a lot of the debt that's been refinanced, we had debt that was issued 5 years ago at many hundred basis points less than the markets are today. And so the liability side of our structure has basically increased substantially relative to the change in long-term interest rates.

And on the other side, the spread picture and the competitive dynamics in our industry has not changed at that same rate. I think what we're starting to see, and this is consistent with the past is that all these things will kind of readjust, and we're starting to see the beginnings of widening spreads, a little better terms on loans. I think there's a lot of pressure on private equity to start more realizations. There's a lot of maturities coming up in private equity companies that have to be refinanced. There's a lot of demands for credit out there. I think the everyone talks about the AI explosion of construction, and that's absorbing a lot of debt.

So on a macro basis, the picture is changing from a very substantial abundance of private credit availability to less. Now we're not predicting that it's going to change radically in the very near term, but we think the whole system is adjusting to a different level of rates. And fortunately, the liability side has adjusted sooner than the asset side. But we think the asset side is coming around. In addition, in particular, for example, the SBIC debt, the incremental $75 million, I mean, that's very favorably financed both in terms of the absolute rate relative to what we're seeing for new originations, but also the structure of that debt, I think, is really interesting and important to consider.

And basically, every 1 of those debentures is a 10-year facility with a bullet maturity. So none of those debts come due for 10 years, and they pay a fixed interest rate, and there's no covenants. And so this is a very stable source of credit, and it's been -- the SBIC has been a very important program for us historically. And that allows us to invest and reinvest during that 10-year period very substantially. And so with all that said, I think we believe our pipeline and deployment is working well. We think that the reset of the CLO is very important. It's going to have incremental management fee income and higher interest income.

And the debt structure of that is radically different than it was, and that was done opportunistically and very well financed. I think we've taken a lot of the refinancing risk off the table for next year by the bond offering that we did and then the resources credit-wise, we have for refinancing for next year. So I think the things that we can -- we have control over, I think we've done a pretty good job of executing, growing our portfolio, et cetera, a lot of the things we've talked about on this call. The things we can't control are industry spreads and the absolute cost of capital. But I think the market is going to come around and adjust to that somewhat.

So we are -- we feel good about our credit portfolio. I think as we've discussed at length on this call, we don't have any nonaccruals in our -- anymore and as a result of activities. And so we think our portfolio is solid at this time. And we also think that our earnings are in the process of being ready to increase. You mentioned spillover. I think Henri mentioned we still have $1 of spillover to go. And every quarter that we pay incremental dividends to our earnings, we reduce that spillover obligation of the company. And so we're whittling that obligation down and setting the stage for, we think, a better earnings picture going forward.

Dave, you addressed Slide 15 in the prepared remarks. And just looking at that, there's roughly even split between the sourcing between deals via PE sponsors versus private companies without sponsors. And when I look down at the currently issued term sheets, it's 88% in favor of PE sponsor. So just kind of curious, bigger picture, over the longer term, is that pretty typical that you'll transact more with the PE sponsors just kind of given the structure and the support you get from them? Or is there something more specific today that has tipped the scales more in that direction?

Thank you. Great question. Typically, just taking a step back, having a traditional private equity sponsor that has a committed fund is advantageous, just given additional credit support for a transaction, both at the outset as well as from an ongoing perspective. And the level of sophistication that they provide is obviously attractive to us, especially now in a -- as we've talked about a few times today in a fairly volatile and somewhat uncertain environment.

So as we navigate the current environment, we want to have more protections as opposed to less and be more conservatively underwriting things as opposed to more aggressively. And so having those private equity sponsors there provides just an added layer of security through not only their sophistication, but most importantly, their capital. And then secondly, finding transactions through the traditional private equity channels is a little more efficient for us than the direct and what I'll say, independent sponsor channel. So I think they're also seeing a bit of that dynamic coming through in those figures as well.

And our next question will be coming from the line of Jason Stewart of Compass Point.

A question on leverage and the share repurchase program. If you could just give us a little bit more color, especially with where the stock is trading and how you're thinking about the share repurchase program in the context of balance sheet leverage.

Well, I think, again, that's an important question that we consider quite seriously at all times. There is a balance there to maintaining the equity. Every share repurchase reduces our equity and obviously increases our leverage. And so that's something that we watch very carefully. But when our stock trades at the type of discounts that we're seeing, we also feel it's important at the margin, not in a very large way, but to take advantage of that. And so it's a balance between the 2.

But at the levels of discount we're trading at, the return on repurchasing our stock is quite substantial. And so we're trying to balance those 2 things. And as you see, we were pretty -- 9% for the amount of stock we repurchased, that's a pretty sizable level of anti-dilution. So we're weighing all those things at the same time. And again, I think as we've discussed many times on our calls, the structure of our leverage, there's a certain amount of leverage, which is a number, and then there's the structure of the leverage, which is when does it come due? And we've always had a very sort of laddered long-term maturity structure. And so I think that has helped to ameliorate perhaps -- and then it's fixed rate so that in a rising rate environment, which we appear to be in, we think that is somewhat of a tailwind that helps us on our earnings front.

Okay. And on that front, with your conversations with the rating agencies, do they appreciate your structure of leverage? Or are they looking simply at a number?

Yes. I mean that's part of -- Henri, do you want to talk about that?

Yes, yes, sure. I mean it's obviously a combination. I think when the rating agencies look at debt and they look at leverage, they have multiple metrics that each rating agency assesses and each one assesses it differently. So it's a really great question. I think when we deal with them and we talk to them, we obviously highlight to them the structure because we really do believe structure is a very differentiating factor for us in our balance sheet.

Our balance sheet looks a lot different than other BDCs. Our credit facilities, as we've said in the past, have no recourse to the BDC and are very well protected from a structure perspective. So it's something we obviously clearly highlight to the rating agencies when we go through it with them. But they obviously have multiple factors that they consider and each rating agency looks at things a little differently. So it's something that I think they factor in, but definitely something that we highlight, not just to the rating agencies, but I think to all our constituents because we do feel like although our leverage is higher, the structure of it is a differentiating factor for us.

That's helpful. One quick earnings model question. Can you remind me how the management fees on the CLO worked during the ramp-up period or the non-call period? And I think we saw a pretty big drop quarter-to-quarter, but just how that ramps back up going forward?

Sure. Yes. No. So the management fees are 50 basis points on average assets. And obviously, as the assets have ramped down, obviously, the management fee has come down. But also in addition to just being a management fee issue -- or sorry, a bps issue, it's also a case of are you in compliance. And the last couple of quarters, we were not in compliance anymore just because of the fact that we were so deep outside of our reinvestment period.

Now that we've refinanced it, we'll be back into compliance, obviously, immediately and also be earning full management fees on the $350 million of assets. So it's going to be around -- I think it's around $450,000 on a quarterly basis, obviously, down from previously because it was a $650 million CLO at that point in time, but up then significantly from what you've seen in the last couple of quarters.

And then also -- and I know, Jason, you haven't been around that long, but about 2 years ago, when we were still in compliance with our CLO, we were also earning interest income as well. So in addition to the management fee income, the BDC is also going to be earning interest income. And that's generally based on the valuation of the CLO, you then do an effective interest rate method. And then a portion of the equity distributions that gets paid every quarter is allocated to interest income that goes into NII. So you can expect to see some interest income then on the subordinated debt of the CLO going forward from a modeling perspective. And then also, obviously, the E-Note that we're also invested in will be -- that's a fixed rate note, and we'll be receiving interest on that as well.

And our next question will be coming from the line of Christopher Nolan of Ladenburg Thalmann & Company. Your line is open, Christopher.

On the incremental SBA leverage, what percentage of your deal flow is SBIC compliant?

Yes, I can jump in there. I think, David, correct me if you disagree. But from the actual deals that we see, probably about 85% to 90% of all the deals we see are SBIC eligible. So our pipeline is really structured in such a way that most of the deals that flow in and that we receive qualify for the SBIC. So that's obviously a huge positive in the context of receiving additional capacity now from the SBA with the upsized program.

And will we -- should we expect most of the incremental deal flow within the next couple of quarters or so to be going to the SBIC?

I mean, generally, yes, the SBIC debt is our cheapest form of capital. And so obviously, once cash is used up on our balance sheet sort of in the order of priority, SBIC financing is our most important because it's by far the 1 where we get the highest margin.

Great. And then final question on SBIC. Given all the rule changes, will you guys have any further opportunities to get additional SBIC licenses?

Yes. Well, that's sort of the next step 1 goes into. So the first step is the upsize program and obviously putting that capital to work. And then sort of as you get sort of towards the end of that, you then approach a new licensing phase. So it's sort of a sequential thing that 1 goes through, but no update yet at this point in time on that.

And our next question is a follow-up from Erik Zwick of Lucid Capital Markets.

Just 1 quick follow-up on the unrealized depreciation in the quarter, I guess, specifically, you talked a little bit about Madison Logic and Chronus, and those are both software companies, and you mentioned some challenges with nonrenewals of customer contracts and slower new customer acquisition. I guess, to your sense of their business models and the challenges they're facing, is that at all related to AI? Or is it other things driving those challenges today with those companies?

No. Taking them in turn, from a Chronus perspective, AI continues to actually be incorporated into their products. And so the embedded advantage that the company has today has -- we haven't seen any meaningful impact of AI from a competitive standpoint. If anything, it's been accretive for that 1. In Madison Logic, no, I mean, it's related to demand generation in display services for B2B marketers, and it helps with that lead generation.

Generally, we haven't seen a big impact or any impact for that matter on AI on that business. And just generally, as we look at our portfolio every day, every week and certainly formally every quarter, we're looking at the impact of AI across every 1 of our borrowers to understand if the risk is high, low, medium or hopefully nonexistent depending on the company.

So it's something we're laser-focused on in today's environment, given the resources that have been obtained by AI generally and the players within that promote AI. So -- but no, on those 2 investments, particularly, generally, there has not been any meaningful impact from AI.

[Operator Instructions] I would now like to hand the call back to Christian for closing remarks.

We'd like to thank everyone for joining us today, and we look forward to speaking with you next quarter.

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

Thank you. Good morning ladies and gentlemen and thank you for standing by. Welcome to Saratoga Investment Corp's fiscal first quarter 2027 financial results conference call. Please note that today's call is being recorded. During today's presentation, all parties will be in listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investments Corp. Chief Financial Chief Compliance Officer, Mr.

Henry Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal first quarter 2027 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 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 2027 shareholder presentation in the events and presentation section of our investor relations website. A link to our IR page is in the earnings press release distributed last night.

For everyone new to our story, please note that our fiscal year end is February 28. So any reference to Q1 results reflects our May 31 quarter end period. 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.

Thank you, Henry, and welcome, everyone. Saratoga Investment Corp's highlights this quarter include net positive originations of $31 million, including two new portfolio companies originated in the quarter, sustained long-term AUM growth, with AUM growing 1.6% during the quarter and reaching close to a record level of $1.126 billion. Latest 12 months return on equity of 4%, continuing to beat the BDC industry average of 2.4%, and importantly, continued overall solid performance from the core BDC portfolio in a challenging and volatile macro environment. with core BDC portfolio fair value remaining within 0.2% of cost, demonstrating solid overall credit quality in a challenging and volatile macroeconomic environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of 25 cents per share or 75 cents per share in aggregate for the second quarter of fiscal 2027, which when annualized represents a 14% yield based on the stock price of $21.42 as of July 6th. offering strong current income. Originations and AUM growth during the quarter contributed to adjusted NII of 47 cents per share compared to 53 cents per share last quarter. Overall, our adjusted NII continues to reflect the impact of significantly lower short-term interest rates and tightening spreads on our largely floating rate asset base, as well as a period impact of the recent changes to our growing capital structure. During the quarter, deal activity remained robust, reflecting the impact of our recent business development efforts despite persistent sector headwinds and cautious sentiment across the broader private credit sector.

Market dynamics continue to be very competitive, and while our portfolios saw multiple debt repayments in Q1, our strong origination activity more than offset those exits, resulting in net originations of $31 million for the quarter, from $79 million in new originations across two new investments and 10 follow-ons, including including $11 million in new BBB and BBB CLO debt investments. Our strong reputation, differentiated market positioning, and the ongoing development of sponsor relationships continue to create attractive investment opportunities from high-quality sponsors. Investment activity continues post-quarter end with $47 million of follow-ons already closed, offset by $31 million of repayments. We remain prudent and discerning in our underwriting approach, particularly in light of the current volatile and uncertain environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. Our total $1.126 billion portfolio was marked down $15.2 million during the quarter, including net depreciation of $18.3 million in the non-CLO core portfolio, partially offset by a write-up of $2.9 million in the JV and $.3 million in the BBB and BBB CLO debt portfolio. Of the non-CLO core BDC portfolio depreciation, Pepper Palace, which has been written down to zero, together with a handful of credits, primarily Exego and Cronus, represented $9.9 million, or 54% of the total reduction, reflecting company performance adjustments.

A further $6 million. or 33%, reflected broad market adjustments to comparable market multiples across many industries on equity positions held at or above cost. The remaining 13% reflected the impact of general changes in market spreads across valuations. As of quarter end, our core non-CLO portfolio was 0.2% below cost, with our total portfolio valuation 3.6% below cost. This quarter's results reflect a combination of portfolio company performance and market impacts on our overall portfolio, with both Pepper Palace, now carried at zero, and the and Exego carried at $17.3 million, or 70 cents of its own total cost, on red watch list status, indicating potential risk of loss of capital. During the first quarter, our core BDC net interest margin increased to $13.4 million from $13 million last quarter. This was driven primarily by a 4.8% increase in average core assets, which was partly offset by the average SOFR rate used in the portfolio decreasing by five basis points from last quarter. Spreads on originations this quarter being almost 50 basis points lower than on the repayments they replaced, and the relative timing of originations and repayments this quarter.

As always, and particularly in the current uncertain environment, balance sheet strength, liquidity, and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $197 million of investment capacity to support our portfolio companies, with $46 million available to our existing SBI III license, $90 million from our two revolving credit facilities, and $61 million in cash. As we begin fiscal 2027, the operating backdrop remains challenging with geopolitical uncertainty shifting U.S. tariff policy, continued scrutiny of AI and software exposure, and an unsettled interest rate environment all contributing to volatility across the credit markets. These factors have also weighed on public BDC sentiment and credit spreads. We continue to believe the negative perceptions reflected in the public market are not fully aligned with the current conditions in the broader private credit market where performance remains more measured, differentiated by manager discipline, portfolio construction, and credit selection. Moving on to Saratoga Investments Fiscal 2027 First Quarter Key Performance Indicators as compared to the quarters ended February 28, 2026 and May 31, 2025. quarter-end NAV was $378.5 million, down 4.5% from $396.2 million last quarter and $396.4 million last year. Our NAV per share was $23.23, down from $24.42 last quarter and $25.52 last year.

Of the $1.19 sequential quarter reduction, 28 cents or 24% was due to the under-earning of the dividend. This excess distribution represents previously undistributed NII profits from prior years. adjusted NII was $7.6 million this quarter, down 11% from last quarter, and down 25.1% from last year. Our adjusted NII per share was 47 cents this quarter, down 11.3 percent from last quarter and 28.8 percent from last year. Adjusted NII yield was 7.8% this quarter, down from 8.4% last quarter, and down from 10.3% last year. And latest 12 months return on equity was 4%, down from 9.1% last quarter, down from 9.3% last year, and above the industry average of 2.4%. Slide 3 illustrates how our combined portfolio and financial results delivered an ROE of 4% for the last 12 months, above the industry average of 2.4%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.7%.

Our long-term return on equity has remained strong over the past decade plus, beating the industry nine of the past 12 years while remaining positive every year. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback in fiscal 2025 reflecting significant repayments. As of the end of the quarter, our assets under management reached an almost record level of $1.126 billion, in part due to this quarter's originations, again outpacing repayments, resulting in a meaningful increase in AUM as compared to the previous quarter. Overall credit quality for this quarter increased to 98.3% of credits rated in our highest category, a result we are proud of given the current headwinds in the industry, while recognizing the credit markdowns discussed. We have two investments on non-accrual status, Pepper Palace, which has been restructured in our CLO's F note that was written off and placed on non-accrual last quarter, representing 0.0% of fair value and 1.2% of cost, well below the industry average of 3.7%. With 81.7% of our investments at quarter end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that we have historically performed well in stressed situations, we believe our portfolio composition and leverage profile are well structured for the future economic conditions and uncertainty. Our management team is working diligently to continue this positive AUM growth long-term trend as we deploy our available capital into our pipeline, while remaining appropriately cautious in this evolving and volatile credit and economic environment.

With that, I would like to now turn the call over to Henry to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal first quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q1 was 16.3 million, increasing from 16.2 million and 15.3 million shares for last quarter and last year's first quarter, respectively. Adjusted NII was $7.6 million this quarter, down 25.1% from last year, and down 11.0% from last quarter. This decrease from comparable quarters, in addition to the above-mentioned interest income changes and the non-recurrence of last quarter's annual excise tax expense, primarily reflects the full period impact of the additional interest expense on the $50 million 7.25% private bond and the $100 million 7.5% public baby bond that were issued last quarter and used to repay the $175 million 4.37% 5% institutional bond at the end of February. The weighted average interest rate on the core BDC portfolio was 10.5% this quarter compared to 11.5% as of last year and 10.4% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for the quarter, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, is $2.7 million as compared to $2.8 million last year and $2.4 million last quarter.

This represented 0.9% of average total assets on an annualized basis up from 0.8% both last quarter and last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past two years, we have again added KPI slides 26 through 29 in the appendix at the end of the presentation. And slide 30 compares our non-accruals to the BDC industry. will see that our non-accrual rate of 1.2% of cost, representing two investments, is more than three times lower than the industry average of 3.7%. This highlights the current strength of our core BDC portfolio's overall credit quality. Moving on to slide 6, NAV was $378.5 million as of fiscal quarter end, a decrease of $17.9 million from last year and $17.7 million from last quarter. The decline represents both the Q1 markdowns discussed earlier as well as the current under-earning the dividend. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 35 quarters, with discrete reductions recently.

Over the long term, this metric has increased since 2011, growing by $1.26 per share, or 5.7% over the past 10 years, where not many BDCs have grown NAV per share long term. We'll cover the changes since last quarter on the next slide. On slide seven, you'll see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down 6 cents in Q1, primarily due to the decrease in other income from lower interest income on cash balances that have now been deployed and partially offset by the non-recurrence of our annual excise tax expense. On the lower half of the slide, NAV per share increased by $1.19 due to the 75-cent monthly dividend exceeding the 47-cent GAAP NII plus the 92 cents of net realized gains and unrealized depreciation recognized in Q1. Slide 8 outlines the dry powder available to us as of quarter end, which totalled $197 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities.

This quarter end level of available liquidity allows us to grow our assets by an additional 17% without the need for external financing. With $61 million of quarter end cash available and thus fully accretive to NII when deployed, and $46 million of available SBA debentures with a low cost pricing, also very accretive. In addition, $269.4 million of our baby bonds are 8% plus bonds and are callable now, providing us the option to refinance them and creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. Additionally, during the quarter, we issued a $25 million, 7.25% private note. 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 and the long-term nature of most of our debt. Also, a reminder that our debt is structured in such a way that we have no material BDC covenants that can be stressed during volatile times, which is especially important in the current economic environment.

Now, I would like to move on to slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.126 billion of AUM at fair value, and this is invested in 50 portfolio companies, one CLO fund, one joint venture, and numerous double B and triple B be CLO debt investments. Our first lien percentage is 81.7% of our total investments, of which 19.0% is in first lien lost out positions. On slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, including this past year, reflecting the recent decreases to base interest rates and tightening spreads. This quarter, our core BDC yield stayed relatively stable at 10.5 percent. The CLO yield decreased to 11.0% from 11.6% last quarter due to a higher fair value in Q1. Slide 11 shows how our investments are diversified primarily across the U.S.

And on slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 44 distinct industries in addition to our investments in the CLO, JV, and BBB and BBB CLO debt securities, which are all all included as structured finance securities. And moving on to slide 13, 7.2% of our investment portfolio consists of equity interests, which remain an important part of our overall investment strategy. This slide shows that for the past 14 fiscal years, we had a combined $45.5 million of net realized gain from the sale of equity interests. During the first quarter, we generated $0.2 million in net realized gains. This long-term realized gain performance highlights our portfolio credit quality, has helped grow our NAV over time and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. Our Chief Operating Officer, David DeSantis, will now provide an overview of the investment.

Thank you, Henry. Today I will give an update on the market since we last spoke in May and then comment on our current portfolio performance and investment strategy. We're not seeing a general pickup in M&A activity in the specific market we participate in, but our deal flow has increased due to the success we are having with our own business development efforts. as seen by the fact that four of the 11 new platform companies we have closed this past year are with new relationships. The combination of historically low M&A volume in the lower middle market for an extended period of time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premier issuers, being those with strong EBITDA profiles, diversified revenue streams, and higher quality credit characteristics. Market dynamics remain at their most competitive level since the pandemic, although we are seeing some signs of spread widening. We've also experienced repayment activity for some of our lower leveraged loans being refinanced on more favorable terms. As a management team, we've successfully navigated through numerous credit cycles in capital markets and have learned to stay laser focused on the things we can control. In summary, those are first, be disciplined on asset selection.

Second, to expand our business development efforts in a market that is still largely under-penetrated by us. And third, to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, with our ramped-up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run. Software continues to get a lot of attention in the market, and last quarter we spoke a lot about our approach to software as a service and the attributes we look at when reviewing deals in that space. Three months later, and our existing portfolio continues to have strong credit metrics with loan to value, or LTV, of 37% with a portfolio consisting of 89% first lien loans with an additional 5.7% in equity securities, and with our overall portfolio fair value currently just 0.9% below cost. As to future investments, we do believe there will remain select opportunities for Saratoga to invest in exceptional software businesses, where we have confidence that our capital is well protected by the sustainable enterprise values and unique value propositions of the underlying businesses. However, I'd like to emphasize that Saratoga is seeing significantly fewer software-related investments that meet our strict underwriting requirements than in previous years.

As a result, we expect to see a substantial shift away from software in our deal flow and ultimately within our portfolio. By way of example, we've closed two new platforms in Q1, none of which were software-related businesses. Now, I'd like to shift to highlight key elements of the lower middle market where we operate. We continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. Capital structures are generally more conservative with less leverage and more equity, and the legal protections and covenant features in our documents are considerably stronger. and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As such, we continue to believe that the lower middle market offers the best risk-adjusted returns and our track record of realized returns reflect this.

Our underwriting bar remains high, as usual, in a very tough market, yet we continue to find opportunities to deploy capital. As seen on slide 14, providing additional capital to existing portfolios continues to be an asset deployment means for us, with 25 follow-ons in the first two calendar quarters of 2026. We have also invested in seven new platform investments in this period, already matching last year's full-year origination effort. Overall, our deal flow is increasing as our business development efforts show continued success. Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics. is Astrolio management is critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with still just one core BDC investment on non-accrual status, Pepper Palace, in addition to our CLO's F note, which was placed on non-accrual last quarter. Together, these two investments represented 0% of the portfolio at fair value and 1.2% at cost.

In general, our portfolio Our portfolio companies are healthy, and the fair value of our core BDC portfolio is only 0.2% below cost. Additionally, two core BDC investments that had notable write-downs this quarter due to performance are Exego and Kronos. We recognize unrealized depreciation of $3.4 million on our debt and equity investments in Exego as it is experiencing continued weakness due to a challenging end market. The company's customers are relying on consumer purchasing, which is softening due to competitive and economic pressures, despite the company being the market leader. As a result of this, our investment in Exego was moved from yellow to red during the quarter, though it remains on accrual as interest continues to be paid. The lending group is actively working with management and the sponsor to explore options, to stabilize, and to improve performance. Our Kronos debt and preferred equity investment was written down by $1.5 million, reflecting declining customer retention and slower new customer acquisitions due to broader softness in the companies on market.

The DILT team is also actively engaged with the sponsor on the deal, given the near-term maturity. Both of these investments, Exego and Kronos, remain unaccrual with healthy cash balances. Our Pepper Palace investment, which was previously restructured and we've spoken about for a couple of years now, was written off to zero this quarter. Business continues to face operational challenges, and while there have been new revenue channels opened in recent months, the company's primary revenue channel of retail stores continues to see year-over-year traffic declines. This overall retail softness and its current cost base have caused profitability to decline further in the quarter, resulting in a full write-down. We are actively engaged with the company's management team and continue to explore numerous strategic options for the company. The rest of the portfolio markdowns this quarter reflect market conditions.

The two key recurring themes, Driving market markdowns are first, reduce comparable market multiples, which primarily affect the equity valuations. These have driven reductions in that portfolio. Generally, however, our positions still remain above or close to cost. Second, the impact of lower market spreads on our valuations. Recent decreases to base interest rates and tightening spreads on our valuations have seen this impact. Offsetting these markdowns, however, our JV and BBB and BBB sale low debt portfolio were marked up by 3.2 million, showing portfolio performance improvement from last quarter. 81.7% 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. no direct energy or commodities exposure. Looking at leverage on this same slide, you can see that industry debt multiples recently increased to the mid-five times, while the total leverage for our overall portfolio decreased to 4.8 times, excluding Pepper Palace. collecting the new investments originated at much lower leverage levels.

Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024 and has steadily increased since then. This recent increase is the result of our recent business development initiatives with 21 of the 107 term sheets issued over the last 12 months being for deals that came from new relationships. Overall, 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. Our originations this fiscal quarter totaled $79.2 million, consisting of two new investments totaling $34.1 million, and 10 follow-ons totaling $34.1 million, and six BBB and BBB sale load debt investments of $11 million. As you can see on slide 16, our overall portfolio credit quality and returns remain solid. Our team remains focused on deploying capital and strong business models, where we are confident that, under all reasonable scenarios, the enterprise value of the business will sustainably exceed the last dollar of our investment.

Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together almost 16 years ago, we've invested $2.6 billion in 132 portfolio companies and have had just three realized economic losses on these investments. Over that same timeframe, we've successfully exited 88 of those investments, achieving gross unlevered realized returns of 14.9% on $1.37 billion of realizations. Taking into account recent negative events and market turbulence are combined to unlevered realized returns. and unrealized returns on all capital invested is 13.3%. Our overall investment approach has yielded exceptional realized returns and recovery of our investment capital, and our long-term performance remains strong, as seen by our track record on this slide. Moving on to slide 17, you can see our second SBIC license is fully funded and deployed, and we have been ramping up our SBIC 3 license with $46 million of lower cost, undrawn debentures still available, allowing us to continue to support U.S. small businesses, both new and This concludes my review of the market, and I'd like to turn the call back over to our CEO, Chris. Thank you, Dave.

As outlined on slide 18, our latest dividend of 75 cents per share in aggregate for the quarter ended May 31, 2026, was paid in three monthly increments of 25 cents. Recently, we declared that same level of 75 cents for the quarter ended August 31, 2026, marking the sixth quarter of our new dividend payment structure. 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 current interest rate and macro environment's impact on our earnings and spillover levels. Moving on to slide 19, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 6%, meaningfully outperforming the BDC index's negative 13%. This places us in the top five of all BDCs for the latest 12 months, June 2026. Our longer-term performance is outlined on the next slide, slide 20, which shows that our one-year, three-year, and five-year total returns all place us well above the BDC index. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 871% has been more than three times the industry's 250%.

On slide 21, you can further see our last 12 months' performance placed in the context of the broader BDC 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 and coverage, all of which reflect the value our shareholders are receiving. The recent reduction in our NAV per share has accounted for as a combination of the payment of previously undistributed profits as well as the markdowns this quarter. The NII yield and dividend coverage metrics reflect the long-term impact of reduced rates and undeployed levels of cash as well as more recently our increased cost of capital. macroeconomic environment, we will continue to deploy our available capital to strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be one of the BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity, significantly beating the industry with our long term return on equity at roughly 1.5 times the industry average. And latest 12 months return on equity almost doubled the average. Moving on to slide 22, 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. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 11%, ensuring we are strongly aligned with our shareholders. Looking ahead, the macroeconomic environment remains complex, shaped by geopolitical tensions, elevated inflation, and continued concerns about AI and software. These dynamics, combined with an uncertain interest rate environment, have driven a measurable rise in default rates and broad valuation pressure across the sector, with industry NAVs declining and a number of BDCs agencies recently producing their base dividends. This quarter's credit-related NAV pipeline reflects credit-specific situations and does not appear indicative of a broader trend in our portfolio. In the recent wave of BDC bond issuances, the rebound in higher quality loan values and anticipated improving M&A activity point to a market that appears to be improving and differentiating among managers, and we are confident that our disciplined underwriting, conservative balance sheet, and strong investment pipeline position Saratoga to this environment and continue delivering durable risk-adjusted returns to our shareholders over the 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.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Eric Swiss of Lucid Capital Markets. Your line is now open.

I mentioned that spreads on originations in the most recent quarter came in about 50 basis points lower than the repayments they replaced. David, in your comments, you mentioned that you're starting to see some spread widening again. So, I guess, have you been able to kind of close that gap yet, or are they still seeing new origination spreads coming in with what's rolling off at this point.

Yes, the new deals we're seeing have shown elevated spreads relative to recent quarters. As far as what's rolling off, some of those are higher-priced assets. with interest rates above 6% on the applicable margin. So we're catching up, but not quite there yet. Most of the deals we're originating now that are true first lien are Unitronch loans have elevated from recent quarters, but they're usually in the 550 to 600 range. However, we're seeing a number of attractive opportunities where we can play in a first lien asset with a small first out in front of us that allows us to replace those assets at a premium to what they're coming off on, but obviously it's a dynamic situation. And most importantly to us is the protection of our capital at all costs. And looking for the protection of that capital is primary.

And then secondary is obviously driving the highest yield we can on the investments,.

that we're evaluating and closing. Thanks for the commentary there. And second question, maybe for Henry, do you happen to have the bill over for share as of May 31st, that value?.

Yes, as of May 31st, it was about $1.75. We've obviously paid a dividend since then, so it's around $1.50 at the moment.

Eric. Okay, thank you. So kind of maybe putting those past two questions together, it seems like there's still maybe a little bit of pressure on the portfolio yield, however you're, you know, very nice pipeline and seems to be kind of growing AUM and growing the portfolio at this point. So a little bit of offset there. And you still have maybe call it five or so quarters of spillover to support the kind of current run rate of NII per share being below the dividend, kind of at that 28% level. So I guess, is there a kind of near to midterm path of getting NII? I.I. back in line with the dividend in your mind at this point? Can you do that with growth? Is there potentially any equity realizations that you see over the next quarter or two? Just trying to understand how you think about that and what goes into the decision to maintain the dividend at the current level.

Well, Eric, I think that's a very important question and something that we consider actively, essentially at all times. Just going back to fundamentals, I think the most important thing, as Dave just mentioned, is credit quality and our portfolio. And I think that our credit quality remains very high. and then the new investments we're making meet our credit standards. And so we feel that we are growing our portfolio consistent with our credit standards. So that's number one. Number two, there's been kind of several trends that have kind of gone against us on the pricing front, right, the cost of liabilities. the shape of the yield curve, spread compression. You know, a number of these elements have sort of gone against us from a pricing and a yield standpoint, but fundamentally, our credit standards and our credit performance is as solid as ever. I think, again, as Dave mentioned, we're starting to see some improvement in spreads.

We think that we're starting to see, we have a very robust pipeline. We're actually turning down deals for some because of pricing and some because of credit. So we feel... that the moment we're in right now is not the most favorable from a pricing standpoint. However, it's getting better, as we see it, from a portfolio development build standpoint. And we think some of these elements may shake out over this four- to five-quarter period. horizon we have. And so with all that said, you know, with the amount of spillover we have and the, you know, the prospects we see in our pipeline, we think it's, you know, we think it's fairly early to make a hard call on what to do in terms of of sort of closing that gap. We think that gap will close, and the question is how quickly it closes, and we're working very hard to do that.

Thanks, Chris. I appreciate your comments. That's all for me right now. Thanks.

Thank you. Thanks, Eric. Thank you. One moment for our next question. Our next question comes from the line of Robert Dodd of Raymond James. Your line is now open.

Hi guys. Just thinking about the available capital you have obviously between SBIC, the revolvers, the cash. Is it your expectation to grow, to utilize some of that debt on the revolvers, et cetera? to grow the portfolio. I mean, obviously it depends on a lot of variables, but all other things being equal. I mean, obviously in the near term, with the dividend not reaching, sorry, with earnings not reaching the dividend, your NAV, all other things being equal, will tend to decline. So if you grow the portfolio with a declining NAV, Leverage is obviously going to go up. So how are you balancing, you know, what's your thought process on balancing all of those things? Obviously, you want to grow AUM. That's been a long-held position. But that probably right now comes with rising leverage, which is already well above the industry.

So what are your thoughts there?.

Well, I think, you know, as you've been following us for many years, we've had a lot of discussions on leverage. So, you know, at the risk of repeating things we've already said to you in the past, you know, there's, you know, there's the absolute leverage number, and then there's the structure of the leverage. And I think we have been historically very careful in how we have financed ourselves, largely with fixed rates. a long-term amortizing debt that has no covenants. And so, you know, we're not at a – you know, we have a lot of control over our leverage situation, and we don't have a lot of covenants that can come back to bite us. if you will. And so that's been important. Now, that is a slightly more expensive capital structure than it would have been if we were mostly floating rate, for example, but it is safer. And that's the structure we've been in. And that structure has kind of gone against us a little bit, earnings-wise, in a declining rate environment. and with the yield curve the shape that it is, because we're financed out the yield curve, and obviously we're pricing on the front end of the yield curve, and those are some of the pricing challenges.

However, I think, you know, Consistent with our long-term strategy, we have a very strong credit quality in the assets we're putting onto our books. We have a very high percentage of first lien credit. And so we think the credit quality is a very important ingredient. combination with the structure of our of our leverage and so we We absolutely watch the points you make, which is that as you grow the portfolio, there is an increase in the leverage. However, we believe that is mitigated by the quality of the assets we're putting on the books and the structure of the underlying leverage that we have. We also believe that we're going to see better, better pricing going forward than we're having right now. And so as we put these on, we think we're going to be earning more. As to the decline in the NAV, again, I think as Henry pointed out earlier, I think it's very important to recognize that We had a period of time where we over-earned our dividend substantially, and on these calls, a lot of the questions were, are you going to raise your dividend because you're over-earning it by so much? And now, with, again, some trends, we don't think they're indicative of the quality of the credits we're putting on our books, but more reflective of market trends. friends, we're under-earning our dividend.

But we think that's going to shake out, and we're in the position to take steps to address it if it doesn't.

I think one other thing, Robert, one other thing also, you know, as you mentioned, we've got that available capital of $200 million. Flexibility remains extremely important for us in everything we do, like, for example, our debt structure and that. But $100 million of that $200 million available capital can be used either to do more assets or to do more money. or does not impact our leverage when used because it's either cash or it's SBIC debentures that don't count towards the regulatory leverage. So that at least gives us $100 million of flexibility as we sort of, you know, consider, you know, on every single asset we do, the credit quality, et cetera, what the next thing is to do.

Got it, got it. Thank you. Yes, understood. And yes, I've asked this question many, many times, Christian, but thank you for humoring me. On the the philo part of the book, I think David in his comments said, yes, you do a little small philo ahead of you and you can get a you can get onboarding yields functionally higher. than than repayments and get some some nai accretion and i mean it's already it's 19 i said you said of the of the 81 uh first liens how how much of that would you be willing to do so i mean so 20 25 percent of your first lien assets uh a philo Would you be willing to go to 50 to kind of give a little bit of an NII boost? To your point, it does produce functionally net spreads that might be a little higher than the market is doing on a pure gasoline today. Okay.

Well, I think it's, you know, obviously we would take that, you know, that thinking, that consideration sort of one deal at a time. But I think when we do these, these Filos, I think, you know, we aren't just looking at the yield, right? We're looking at the total first lien position. And I think Dave mentioned a small Filo. So I think, you know, you want to be careful in doing this that your Filo isn't, you know, your first out isn't so large that, you know, we aren't in a position where we could take it out if we needed to, if we got into some kind of trouble or something like that. so we can control the credit. So we view it as kind of a yield enhancement inside of a credit that fits our criteria. And so the answer is, would we be willing to go higher than the levels we're at now? Yes. How much higher? We don't have a target for that, and it would be essentially sort of an investment-by-investment decision-making process with all the credit characteristics being considered.

Got it. Thank you. And if I can, one more quick one on Exego. I think David mentioned it is paying, but it's now red. Do you actually expect to collect or, you know, obviously hard to call, but all the principle and interest on that thing over the rest of the life of the asset, or are restructuring discussions in progress where you expect equity might have to make adjustments to the capital structure and maybe not collect all the part on that.

Yes, I think, Robert, I think one of the reasons we put it on red this quarter is because we feel like as an asset, some of the principal is definitely at risk there. interest is paying currently and they have cash, but I think that's, you know, the move we made in the coloring sort of indicates, you know, that we feel like there is some principal at risk there. Yes, certainly a dynamic situation where the outcome isn't certain. We're obviously fighting for a full recovery and...

you know, you know, certainly have some belief that that's certainly possible, but, but given the debts marked it, you know, 72.8, I believe, um, Obviously, it inspires the probability of an outcome that's less than par. But the jury's still out, and we're working it actively, and today evaluating strategic alternatives and a variety of different measures with the company in our active management of the position.

Thank you. Thank you. One moment for our next question. And our next question comes from the line of Jason Stewart of Compass Point. Your line is now open.

Hey, good morning. Thank you. So in these discussions, how are you weighing share repurchases in terms of thinking about allocating capital and maybe with respect to the liquidity you hold? How are you weighing those two?.

Again, that's a very good question and that's something we discuss actively, particularly if the stock starts to trend. down the priced NAV scale. We have repurchased stock at different times in our past. And I think it's just a dynamic case-by-case situation. I think when the stock's trading in the high 80s to 90s, it's one consideration. If it might trade below that, it becomes another. Again, that's sort of a situational decision-making, but again, something we have done in the past on numerous occasions.

Okay, and I'm assuming that with your comments around liquidity, it would be liquidity feels substantial enough to be able to make those decisions if the price.

gets to a level where it's interesting. Yes, I think in terms of liquidity, I think, as Henry mentioned, we have this $60 million of cash, but we also have, you know, over $60 million in liquid securities. securities elsewhere as well as credit facilities and all that. So, I mean, we have, you know, At the moment, we've got a good amount of liquidity to make the type of decisions that make the most sense at the time.

Okay, got it. And then on the question on the new relationships and on the origination side, are these new relationships sourcing deals in new sectors that are outside of software, or are you going back to time-tested sponsors for new sectors, and how is that deal flow shaping up in terms of sector and new sponsors?.

or sourcing? Yes, generally, most, the vast majority of the deal flow has been non-software related. We're certainly seeing some deals in that space, but, you know, as we mentioned in our comments, you know, significantly reduced. And, you know, the deals, the non-software that we're seeing, which is the vast majority of what we're seeing, have been across all different industries. And we don't see essentially a trend of what we're seeing in any one concentrated sector. and we're certainly not attacking sponsors in one particular sector or another. So it's really diverse, and it's across a variety of end markets and types.

Okay, alright, thank you Thank you, I'm showing all further questions at this time I'll now turn it back to Christian Oberbeck for closing remarks.

Okay, we want to thank you everyone for joining us today. We appreciate your support and interest in Saratoga and we look forward to speaking with you next quarter. Thank you very much.

Thank you for your participation in today's conference. This is the inclusive program. You may now disconnect.

[Call has ended.]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.'s Fiscal Year-End and Fourth Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp.'s Chief Financial and Chief Compliance Officer; Mr. Henri Steenkamp. Please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's Fiscal Year-End and Fourth Quarter 2026 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 2026 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. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to Q4 results reflects our February 28 quarter and year-end period.

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.

Thank you, Henri, and welcome, everyone. Saratoga Investment Corp. highlights this quarter include net positive originations generated from our strong pipeline, including five new portfolio companies originated in the quarter, sustained long-term AUM growth, a strong 9.1% latest 12-month return on equity, beating our prior year and more than double the industry and importantly, continued solid performance from the core BDC portfolio in a challenging and volatile macro environment.

Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 a share in aggregate for the first quarter of fiscal 2027, which when annualized, represents a 12.6% yield based on the stock price of $23.89 as of May 4, 2026, offering strong current income from an investment value standpoint.

Originations and AUM growth were strong during the quarter, contributing to adjusted NII of $0.53 per share, including the impact of a $1.7 million excise tax expense.

Adjusted for this excise tax, NII was $0.61 per share, consistent with the prior quarter. Overall, our adjusted NII continues to reflect the impact of declining short-term interest rates and tightening spreads on our largely floating rate asset base.

During the quarter, we saw a meaningful increase in deal activity, reflecting our own business development activities despite persistent sector headwinds and the cautious sentiment that has taken hold across the broader private credit sector.

Market dynamics continue to be very competitive. While our portfolio saw multiple debt repayments in Q4, our strong origination activity more than offset those exits, resulting in net originations of $101.1 million for the quarter from $135.1 million in new originations across five new investments and 15 follow-ons.

Our strong reputation, differentiated market positioning and the ongoing development of sponsor relationships continue to create attractive investment opportunities from high-quality sponsors. Investment activity continues post quarter end with one new portfolio company investment and multiple follow-ons already closed. We remain prudent in discerning in our underwriting approach, particularly in light of the current volatile and uncertain environment.

We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. Our total $1.109 billion portfolio was marked down 1% or $9.6 million during the quarter, including net depreciation of $3.1 million in the non-CLO core portfolio and unrealized depreciation of $5.5 million in the CLO and JV.

Our investment in Zollege that previously had been restructured and written off continues to perform strongly with $3.3 million of unrealized appreciation recognized in this quarter.

As of quarter end, our core non-CLO portfolio remains 1.6% above cost with our total portfolio valuation 2.4% below cost. These results reflect the quality of our direct lending underwriting, the strength of our portfolio companies and their sponsors and our focus on well-selected industry segments with favorable risk-adjusted returns.

During the fourth quarter, our core BDC net interest margin decreased by 4% from $13.5 million last quarter to $13 million. This was driven primarily by the average SOFR rate used in the portfolio decreasing by 12 basis points from last quarter, accelerated OID of $0.9 million on the sale of the JV CLOs e-note from last quarter, not repeating.

Spreads on originations this quarter being almost 200 basis points lower than on the repayments they replaced and the timing of originations and repayments in Q4, partially offset by the 5.6% increase in average core assets.

Our overall credit quality for this quarter decreased slightly to 96.8% of credits rated in our highest category. We have just two investments on nonaccrual status. Pepper Palace, which has been restructured and our CLO's F note that has been put on nonaccrual for the first time this quarter, representing 0.2% of fair value and 1.2% of cost, well below the industry average of 3.3%.

With 82.1% 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 stress situations, we believe our portfolio composition and leverage profile are well structured for future economic conditions and uncertainty. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us.

At quarter end, we maintained a substantial $211 million investment capacity to support our portfolio companies with $99 million available through our existing SBIC III license, $90 million from our two revolving credit facilities and $21.8 million in cash.

Our quarter end cash position decreased meaningfully from $169.6 million last quarter, due in large part to strong origination activity and the refinancing of the $175 million institutional note.

The refinancing of this debt included the issuance of $150 million of new bonds, and our regulatory leverage remained unchanged at 168.4% quarter-over-quarter.

As we kick off our fiscal year 2027, the macro environment remains complex, shaped by geopolitical tensions, evolving U.S. tariff policies and concerns about AI and software. All of these aspects, combined with an uncertain interest rate environment, combined to create elevated volatility and continued uncertainty on credit spreads across the private credit sector.

While negative press and sentiment weighs on the public BDC market, at this time, it appears that these very negative perceptions are not commensurate with the current market performance in the broader private credit market.

As we continue to focus on underwriting strong credit and long-term growth, we continue to grow our team having added three new associates and two new Managing Director hires this year, including most recently, David DeSantis, who joined Saratoga as Chief Operating Officer and Senior Managing Director.

David brings a wealth of private credit experience and organizational leadership, significantly expanding our C-suite resources to further enhance Saratoga's performance and growth opportunities. David will be making his debut presentation today addressing the market and Saratoga's portfolio.

Moving on to Saratoga Investments fiscal 2026 fourth quarter key performance indicators as compared to the quarters ended February 28, 2025 and November 30, 2025, our quarter end NAV was $396.2 million, up 0.9% from $392.7 million last year and down 4.1% from $413.2 million last quarter.

Our NAV per share was $24.42 down from $25.86 last year and $25.59 last quarter. Year-over-year NAV per share is down $1.44 with total NII of $2.32 versus total dividend distributions of $3.74.

The $1.42 of distributions in excess of NII approximates the entire $1.44 of 12-month reduction in NAV per share. This excess distribution represents previously undistributed NII profits from prior years. Our adjusted NII was $8.5 million this quarter, up 6.2% from last year and down 12.8% from last quarter. Our adjusted NII per share was $0.53 this quarter, down 5.4% from last year and 13.1% from last quarter.

Excluding the excise tax, adjusted NII for Q4 was $0.61, unchanged from last quarter. Adjusted NII yield was 8.4% this quarter, unchanged from 8.4% last year and down from 9.5% last quarter and latest 12 months return on equity was 9.1% up from 7.5% last year, down from 9.7% last quarter and above the industry average of 4.3%.

This past year, we saw a $5 million overall net realized and unrealized gain for the year, and Slide 3 illustrates how these combined portfolio and financial results have delivered a return on equity of 9.1% for the last 12 months, above the industry average of 4.3%.

Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.7%. Our long-term return on equity has remained strong over the past decade plus beating the industry 9 of the past 12 years and consistently positive every year.

As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback in fiscal 2025, reflecting significant repayments. This quarter saw significant originations again outpacing repayments, resulting in a meaningful increase in AUM as compared to the previous quarter.

The quality of our credits remains solid with just two investments on nonaccrual, Pepper Palace, which has been restructured and our CLO's F note that has been put on nonaccrual for the first time this quarter.

Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment.

With that, I'd like to turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for Q4, and Slide 6 highlights our key performance metrics for the year, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q4 was 16.2 million, increasing from 16.1 million and 14.5 million shares for last quarter and last year's fourth quarter, respectively.

Adjusted NII was $8.5 million this quarter, up 6.2% from last year and down 12.8% from last quarter. For the year, adjusted NII was $57.5 million down 29.2% from full year 2025.

This quarter's decrease in adjusted NII as compared to the prior quarter was largely due to the impact of the $1.7 million excise tax paid during this quarter while the increase from last year primarily relates to higher other income, such as structuring and advisory fees, reflecting the increased origination activity this year.

The weighted average interest rate on the core BDC portfolio of 10.4% this quarter compares to 11.5% as of last year and 10.6% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets.

Total expenses for the year, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes increased by $1.7 million to $11.0 million as compared to $9.3 million in fiscal year '25. These same expenses for Q4 increased by $1.0 million to $2.4 million as compared to $1.4 million last year and decreased by $0.9 million from $3.3 million last quarter.

These all represented 0.8% of average total assets on an annualized basis, unchanged from both last quarter and last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 28 through 31 in the appendix at the end of the presentation.

And Slide 32 compares our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 1.2% of cost updated for the CLO F note that is now on nonaccrual is still almost 3x lower than the industry average of 3.3%.

This highlights the current strength in credit quality of our core BDC portfolio. Moving on to Slide 7. NAV was $396.2 million as of fiscal quarter end, an increase of $3.5 million from last year and a decrease of $17.0 million from last quarter.

During this year, $19.3 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 34 quarters.

Over the long term, this metric has increased since 2011 and grown by $2.45 per share or 11.1% over the past 9 years, where not many BDCs have grown NAV per share long term. We'll cover the changes since last quarter on the next slide.

On Slide 8, 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, adjusted NII per share was down $0.08 in Q4, primarily due to the impact of annual excise tax expense of $0.09. Excluding this, adjusted NII per share would be $0.61 per share, consistent with last quarter.

On the lower half of the slide, NAV per share decreased by $1.17, primarily due to the $0.75 monthly and $0.25 special dividend exceeding the $0.48 GAAP NII plus the $0.60 unrealized depreciation recognized in Q4 with almost 2/3 of that being from the JV equity position.

Now Slide 9 shows the same reconciliations for the year. And starting at the top again, adjusted NII per share was down $1.44 per share for the year, largely due to a decrease of $1.15 in non-CLO net interest income, reflecting lower base rates and tighter spreads and $0.46 per share due to dilution from the DRIP and ATM programs additional shares. On the lower half of the slide, NAV per share is down $1.44 per share with total NII of $2.32 and a total dividend distribution of $3.74.

The $1.42 of distributions in excess of NII approximates the entire 12-month reduction in NAV per share. This excess distribution represents previously undistributed NII profits from prior years.

Slide 10 outlines the dry powder available to us as of quarter end, which totaled $210.8 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities.

This quarter end level of available liquidity allows us to grow our assets by an additional 19% without the need for external financing, with $21.8 million of quarter end cash available and thus fully accretive to NII when deployed, and $99 million of available SBA debentures with its low-cost pricing, also very accretive.

In addition, $269 million of our baby bonds with 2/3 being 8% plus are callable now, providing us the option to refinance them, and creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed. These calls are also available to be used prospectively to reduce current debt.

You will also see that this quarter, we did repay our $175 million, 4.375% 2026 notes that matured at the end of February and issued $150 million of new notes at around 7.5% with maturities between 4 and 5 years.

Additionally, subsequent to quarter end, we also issued a $25 million 7.25% private note. 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 and that most of our debt is long term in nature.

Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment.

Now we'd like to move on to Slides 11 through 14 and review the composition and yield of our investment portfolio. Slide 11 highlights that we have $1.109 billion of AUM at fair value and that is invested in 49 portfolio companies, 1 CLO fund, 1 joint venture and numerous new BB and BBB CLO debt investments.

Our first lien percentage is 82.1% of our total investments, of which 53.1% of that is in first lien last out positions.

On Slide 12, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, including this past year, reflecting the recent decreases to base interest rates and tightening spreads.

This quarter, our core BDC yield decreased to 10.4% from last quarter's 10.6%, with most of the decrease reflecting further core base rate reductions and rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets.

The CLO yield increased to 11.6% from 10.0% last quarter due to a lower fair value. Slide 13 shows how our investments are diversified through primarily the U.S. And on Slide 14, you can see the industry breadth and diversity that our portfolio represents. Spread over 43 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are all included as structured finance securities.

We do have Software-as-a-Service assets that Dave will touch on shortly. Moving on to Slide 15. 7.6% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 14 fiscal years, we had a combined $45.4 million of net realized gains from the sale of equity interest or sale or early redemption of other investments.

This year alone, we have generated $5.7 million in net realized gains. This long-term 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. Our Chief Operating Officer and Senior Managing Director, David DeSantis, will now provide an overview of the investment market.

Thank you, Henri, and good to meet all of you for the first time. So today, I will give an update on the market since Saratoga's last call in January, and then comment on our current portfolio performance and investment strategy.

Generally, we are not seeing a pickup in M&A activity in the specific market we participate in, but our deal flow has increased due to the success we're having with our own business development efforts.

As seen by the fact that 6 of the 10 new platform companies, we have closed this past year with new relationships. The combination of historically low M&A volume in the lower middle market for an extended period of time and an abundant supply of capital has kept spreads tight and leverage full that lenders compete to win new deals, especially on high-quality transactions. Market dynamics remain at their most competitive level since the pandemic, although we are seeing some signs of spread widening.

We've also experienced repayment activity for some of our lower loan-to-value loans being refinanced on more favorable terms. Saratoga management team has successfully navigated through numerous credit cycles and capital markets dislocations. Through it all, we have learned to stay laser focused on the things that we can control.

In summary, these are: number one, stay disciplined on asset selection, two, invest in and greatly expand our business development efforts, especially given that we feel the market is still largely underpenetrated by us; and thirdly, continue to support our existing healthy portfolio companies as they pursue growth.

The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, gives us confidence in our ability to achieve healthy and disciplined portfolio growth in a manner that we expect to be accretive to our shareholders.

Now I'd like to switch to a discussion of Software as a Service or SaaS companies, which have been getting a lot of press lately. Specific to SaaS companies in our SaaS portfolio, Saratoga does not view software generally as being a single industry.

The companies in Saratoga's portfolio that deliver their solutions through software platforms are highly diversified across a wide variety of industries, and end markets and thus do not follow a common pattern of industry or sector concentration.

Based on Saratoga's more than 13 years of investing in software-related businesses, Saratoga has found that the performance of each of these businesses is more affected by its position in the industry in specific end market within which it operates.

Key considerations for any business rather than by the fact that it's a service offering and is delivered through our software solution. While the SaaS market has been in the headlines this past quarter, it is important to avoid generalizations and to look through to individual investments and their specific attributes. Much of the market turmoil and not just related to software companies has driven -- has been driven by the accelerating emergence of AI as a potential disruptive force.

To add some perspective on the software underwriting approach we've taken over the years, as with all deals in all industries, we've always taken into account potential disruptive forces, whether they be stronger plays within a market, entrants from an adjacent market or a material change in product or future expectations.

Because our underwriting bar is so high, especially for software, we've turned down far more software deals than we've done over the years. The advent of AI has increased the chances for disruption, a fact we're accustomed to underwriting. And therefore, our underwriting bar has become higher still.

In recent times, we always evaluate not only how we believe AI could impact our existing and prospective portfolio companies. But more importantly, how these companies are actually integrating AI into their products and their offerings. The software businesses at Saratoga chooses to provide capital to must have several of the following positive attributes, enterprise software company is deeply ingrained in mission-critical aspects of company workflows and therefore, exceedingly valuable and difficult to replace, vertical software with a highly specialized and complex solution set that incorporates deep knowledge of a specific industry end market, systems of record that help administer highly proprietary, confidential or compliance-driven data that should not be exposed to broad AI applications where its confidentiality could be at risk, predominantly recurring revenue with strong gross and net dollar retention as a marker of stability, healthy historical revenue growth in expanding and durable end markets, high gross margins, up in 70% plus that bolster profit potential and signify high value add. Leading competitive position in an industry vertical and an ability to be run for cash versus growth, regular frequent and human -- regular and frequent human user activity and our decision-making is required in the workflows.

Because we're not tourists in the space and have been disciplined in the application of these underwriting guidelines, we've achieved such successful realizations on 35 software-related businesses, producing a gross unlevered IRR of 14.4% with zero economic losses over the last 13 years. This past fiscal year produced consistent outcomes with seven software company realizations producing a gross unlevered IRR of 14.2%.

Our existing SaaS portfolio has strong credit metrics with loan-to-value or LTV of 31%, 93% of the software portfolio was first lien with an additional 6% in equity positions, which provides meaningful upside to our shareholders. Overall portfolio fair value exceeds cost by 2.5% within our software portfolio.

As to future investments, we do believe that there will remain select opportunities for Saratoga to invest in exceptional software businesses where we have confidence that our capital is well protected by the sustainable enterprise values and unique value propositions of the underlying businesses. However, I would like to emphasize that Saratoga is seeing significantly fewer software-related investments that meet our strict underwriting requirements than previous years.

As such, we do expect to see a substantial shift away from software in our deal flow and ultimately within our portfolio. By way of example, we've closed one new platform since the quarter end and have two more in closing, none of which are software-related businesses.

Now I'd like to shift to highlight the elements of the lower middle market where we operate. We continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence, we were able to perform when evaluated investment is much more robust, the capital structures are generally more conservative with less leverage and more equity.

The legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns in our track record of realized returns reflect just that.

Our underwriting bar remains high as usual, in a very tough market, yet we continue to find opportunities to deploy capital thoughtfully. As seen on Slide 16, although providing additional capital to additional -- excuse me, to existing portfolio companies continues to be an asset deployment means for us with 13 follow-ons in the first calendar quarter of 2026 alone.

We have also invested in five new platforms over the same period, reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics is a strength of ours.

Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just one core BDC investment on nonaccrual status. Pepper Palace, as Chris mentioned previously, and added our CLO's F Note, which has been put on nonaccrual for the first time. Together, these two investments only represents 0.2% of the portfolio at fair value and 1.2% at cost.

In general, our portfolio of companies are healthy and the fair value of our core BDC portfolio is 1.6% above its cost. Two core BDC investments that had notable write-downs this quarter are Exigo and Madison Logic. We recognized unrealized depreciation of $2.8 million on our debt and equity investments of Exigo as it is experiencing headwinds due to a challenging end market. The company's customers are direct selling businesses relying on consumer purchasing, which is softening due to competitive and economic pressures.

The lending group is actually working with management of the sponsor to explore options to stabilize and improve performance. Our Madison Logic debt investment was written down by $1.2 million, reflecting continued performance decline in different and difficult macroeconomic conditions. We are working with the lending group and sponsor to allow the company to execute on growth initiatives while increasing visibility into day-to-day performance. Both of these investments remain on accrual with healthy cash balances to service debt.

Offsetting these markdowns, Zollege investment continues to perform exceptionally well post restructuring, and we marked this up another $3.3 million this quarter.

Finally, the remaining markdowns in Q4 were primarily the $5.4 million write-down of our JV investments, reflecting both the individual CLO asset performance as well as general market conditions.

As a reminder, 82.1% 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. Additionally, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention.

Looking at leverage on the same slide, you can see that industry debt multiples were around 5.4x and total leverage for our overall portfolio was at 5.3x, excluding Pepper Palace.

Moving on to Slide 17. This provides more data on our deal flow. As you could see, the top of our deal pipeline is significantly up from the end of the calendar year 2024 and in line with last year.

This recent increase of deal sourced as a result of our recent business development initiatives with 22 of the 108 term sheets issued over the last 12 months paying for deals that came from new relationships formed this year.

Overall, 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 upon the best investments available to us.

Our originations this fiscal quarter totaled $135.1 million, consisting of five investments totaling $78.4 million with 15 follow-ons totaling $55.2 million and BBB and BBB CLO debt investments of $1.5 million.

For the fiscal year, originations totaled $309.5 million, consisting of nine new investments totaling $137.3 million. follow-ons totaling $125.5 million and BB and BBB CLO debt investments of $46.7 million. As you can see on Slide 18, our overall portfolio credit quality and returns remain solid.

As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch those credits we had over the past year, our team remains focused on deploying capital in strong business models, where we are confident that under all reasonable scenarios, the enterprise value of the business will sustainably exceed the last dollar of our investment. Our approach in underwriting strategy has always been focused on being thorough and cautious.

Since our management team began working together almost 16 years ago, we've invested $2.53 billion in 130 portfolio companies and have had just three realized economic losses on these investments.

But with that same time frame, we've successfully exited 87 of those investments, achieving gross unlevered realized returns of 14.9% on $1.37 billion of realizations. The weighted average return on our exit this quarter was 15.8%. And higher than our overall track record, even taking into account last year's write-downs of a few discrete credits, our combined unlevered realized and unrealized returns on all capital invested equaled 13.4%.

Total realized gains for fiscal year 2026 are $5.8 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide.

Moving on to Slide 19. You can see our second SBIC license is fully deployed and funded. We are currently ramping up our new SBIC III license with $99 million of lower cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back over to our CEO.

Chris?

Thank you, Dave. As outlined on Slide 20, our latest dividend of $0.75 per share in aggregate for the quarter ended February 28, 2026, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended May 31, 2026, marking the fifth quarter of our new dividend payment structure.

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 current interest rate and macro environment's impact on our earnings.

Moving to Slide 21. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 14%, vastly beating out the BDC indexes negative 1%.

This places us in the top 7 of all BDCs for latest 12 months April 2026. Our longer-term performance is outlined on the next slide, Slide 22, which shows that our 1-year, 3-year and 5-year total returns all place us well above the BDC Index.

Additionally, since Saratoga took over management of the BDC in 2010, our total return of 838% has been more than 3x the industry's 247%. On Slide 23, you can further see our last 12 months 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 and coverage, all of which reflect the value our shareholders are receiving. As mentioned earlier, the reduction in our NAV per share this year is almost completely accounted for by the payment previously undistributed profits. The NII yield and dividend coverage metrics reflect the long-term impact of reduced rates and undeployed levels of cash.

In this volatile macro environment, we will continue to deploy our available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term.

We also continue to be one of the few BDCs to have grown NAV accretively over the long term and have a consistent healthy return on equity significantly beating the industry with our long-term return on equity at roughly 1.5x the industry average and latest 12 months return on equity more than double the average.

Moving on to Slide 24. 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, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 11%, ensuring we are strongly aligned with our shareholders.

Looking ahead on Slide 25, while the geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in M&A activity across the market, which resulted in a meaningful increase in deal activity, and we continue to focus on expanding deal sourcing relationships.

At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards the private credit market has become increasingly cautious due to headwinds in the software sector and increasing caution across the market, we believe these issues are not indicative of broader credit market fundamentals.

Supported by our experienced management team, disciplined underwriting and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance and deliver compelling risk-adjusted returns for our shareholders over the 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.

[Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets.

I wanted to start with a question maybe for Henri, just as I think about the outlook for the portfolio yield and NII going forward. If I look at the Fed Funds future curve, it seems like there's no rate cuts priced into the market anymore. So hopefully, SOFR-based rates stay level so that, that pressure has gone. But just looking at what was added for new investments in the quarter coming on 200 basis points lower than, I guess, kind of the repayments, it seems like there's still potentially some pressure there. So I guess, is that right as we look at the next quarter or so, likely still some pressure on yields. And then is it kind of going to -- if I look at your #1 objective, expanding that at the asset base in a prudent manner or is that a way to potentially offset some of that pressure as I think about NII going forward?

Yes. Erik, yes, absolutely. I think firstly, it's obviously nice to see from an earnings perspective that the SOFR rate has definitely stabilized. And that if anything, we might see a drop of spread widening taking place, But sort of as we look ahead and look at our Q1 projections, Q2 definitely seeing a stabilization of base rates. And then the other variable, as you mentioned, is recycling of assets, and it's obviously always hard to predict repayments.

I would say that the assets that we repaid this past quarter that resulted in the 200 basis points was some of our higher-yielding assets. So I don't think one would expect that large a difference between the assets being repaid and new assets coming on.

But I think there definitely is still potential when you have repayments to have a little bit of squeeze happening there. To offset that, though, as the prepared remarks said, we're seeing some of the highest level of business development, pipeline type activities happening, reflecting everything that's been done over the last year or so.

And so that's helping us grow our asset base, which obviously does help offset some of that squeeze that we're seeing as assets repay.

Great. Great. That's helpful. And maybe just a bit of a follow-up there with kind of the success of the business development efforts. Has that changed? Is that kind of gradually changing the mix of the pipeline in terms of new versus follow-on activity?

Generally, that's not something we can control as you guys know. We obviously cover our portfolio companies and our portfolio has been a good source of repayments. But yes, we have a very active and very productive calling effort. And I think as Dave mentioned earlier, we're looking at a few relatively fewer software and relatively more other types of secular growing businesses, education, health care, those type of things.

Got it. And last one, apologies if I missed it in the prepared comments. What transpired during the quarter that led to the CLO F note being placed on nonaccural?

Yes. So we -- as you know, we have different tranches in our CLO, Erik, and so we obviously have the equity that leads to distributions of the equity. And then following the equity distribution, the F note is sort of the next tranche up and out of the cash that comes from distribution, the F note has to be paid. The interest has to be paid.

And there was just insufficient cash at the last CLO distribution to pay the note interest for half of the quarter. Now this is a test that gets done every quarter, right? So it'll obviously be reassessed at next quarter.

But based on what we know now and seeing as half of the interest couldn't be paid, we put that on nonaccural. Obviously, if next quarter, distributions are sufficient to cover that, we might reassess that. But as of this past quarter, half of it was unpaid and therefore put on nonaccrual.

Okay. And maybe one quick follow-up there. Are there any grouping of assets that were paying -- high distributions as they've been previously? Or what led to that shortfall?

It's really a function of sort of the remaining assets in the CLO that there is a group of assets that's been underperforming. And that's -- and they just continued to underperform. And as you have seen over the last couple of quarters, the F note had continuously been written down over the past couple of quarters.

And it was a big write-down in Q3. There were still about $120 million on the books, and then we fully wrote it down now in Q4. So it's just a function of sort of those underperforming assets, not generating sufficient cash flows anymore to cover the interest.

The next question comes from the line of Robert Dodd with Raymond James.

I've got several, but why don't I start with the F notes since that was -- on that point, it has been written down, and it's now carried at zero. I mean if we looked at a normal portfolio company for you guys, if something was on nonaccrual, been marked down, you'd be talking about the lender group getting together and the sponsor, et cetera, which obviously is not the situation here because you control the F note effectively.

Is there a path to recovery in value of the F note? I mean, obviously, there's -- is it cost recovery or anything? I mean, it's been written down to zero. But I mean is there a perspective where that can appreciate again? Because I mean, it has -- it's not like it's been a one-off this quarter to write it down, right? It has gradually attrited. Is that just the consequence of the structure? Or is there a way you could get value back out of that note to accrete to NAV?

Yes. That's a great question, Robert. And obviously, it's a much larger assessment because it's a tranche of debt within a structured finance product, right? So if you look at our existing CLO, it's an asset that the BDC has had for 15 -- I guess, 18 years since the start, has done exceptionally well, and it's generated. I think it's around $120 million of distributions plus all the management fees that it receives to the BDCs, the manager of the CLO as well.

So it's nothing that's done really, really well. But it's no longer in its reinvestment period at the moment. So the question to answer on the F note is the way you would get that value back is if you take a step back and you potentially refinance the CLO, which is something we're continuously assessing.

The assets of the CLO, which was $650 million has been obviously repaying because the way it works as CLO is when you're out of the reinvestment period, you use all the proceeds from repayments to start repaying the debt. So it's down to about $350 million of assets and so to a much smaller size, which also makes it easier to refinance.

So we're continuously sort of looking at the performance of the assets that remain in the CLO and also where market conditions are, where refinancing rates are, et cetera, to determine whether we want to refinance the CLO.

And then if you refinance the CLO, that will be sort of the first step to then recovering the value of the F note because you then start to reinvesting cash into new assets that will be generating new cash flows that will help the value of the F note. So it's a little bit of a larger process and a little bit of a larger consideration than as you said, individual portfolio companies. But it's tied to the refinancing of CLO that we're sort of assessing on a continuous basis.

Got it. What -- different topic there. On the outreach to your point, I mean, you've kind of outperformed -- certainly over the last couple of quarters, you've been onboarding new portfolio companies doing follow-ons, et cetera. spike broadly a pretty muted environment for a lot of competitors. So you're outreaching, establishing new relationships on the sponsor side has been paying off. How much further can you push that?

How much further can we push our originations?

Yes, yes, origination, the pipeline, adding more sponsors, et cetera, like how much -- I know you're underpenetrated, relatively speaking, where you'd like to be. But I mean, by how much? I mean how much could your pipeline capital being a different issue, right, whether you could take advantage of it. But how much could the pipeline...

Well, I think that's a very interesting question. I think the nature of what we do and then the smaller middle market, if there's a pyramid structure, right, and then the biggest deals, the multibillion dollar deals are at the top of the pyramid, and then the much smaller deals are at the bottom. It's a much wider base.

So we don't -- I mean we didn't even talk about what our market share is because it's really infatestimal compared to the opportunity set out there. And a lot of the transactions, as you recall, a lot of the things we do, sometimes there's the first institutional capital in a deal. And sometimes it's a founder either selling or looking at partnership to do something.

So it's not really driven by the exact same factors that drive the larger -- the middle market or the larger market that are really determined on M&A volumes and things like that.

This is -- there's a much broader mix of sourcing non-sponsor sourcing for the transactions. And obviously, there's a lot of sponsors going into those transactions. So really, there's no ceiling on how much more business we could generate, it's -- obviously, it's time and relationship building, right?

So that's really our constraint. We don't think the opportunity set is the constraint, but how many people we have applied to it, how efficient we are in addressing these, how fortunate we are for -- if people win the auctions, we are noticing, there are a fair amount of competition.

And sometimes we maybe backing several in a given process and some of those are harder to win. So the final sourcing and the closing of the deal is sort of not necessarily something we control so much, but generating new relationships there's really no -- there's no limit. It's really the limit, it's really ourselves, like how much time and effort can we apply.

And Robert, there's -- in addition to our quarterly presentation that's on the website, we also have an investor presentation, which is a separate presentation. And I'll point you that there's a Slide 27 and Slide 31 that -- and that section of the presentation gives a bit more color on our business development process and relationships and how we find deals, et cetera. And we talk there about how -- there's probably about 450 companies or firms or sponsors that we have on what's called a focus list of ours.

And then we tier them and there's probably a couple of hundred that we would view as sort of our more top-tier relationships that we are more actively pursuing. But then when you think of the deals we do, it's probably a handful of sponsor relationships that we have most of our deals in.

And so the population of sponsors and relationships out there is extremely broad. Obviously, you get finding more quality deals from a small handful of sponsors. But really, the opportunity is really, really large, as you spend more time on business development, which we really have been doing the team over the last 6 months and a year or so.

I'd also add that we spent a lot of time cultivating these different relationships over time, right? It's -- this is a multi -- oftentimes multiyear effort, right, and the sponsor universe is quite broad, depending on any metric, I don't know it's -- it could -- I read a lot of different sources, but it's somewhere between 1,500 and 4,000 sponsors.

So as we cultivate relationships with these guys and engender ourselves to them through the work that we do on deals, particularly those that don't close this is a multiyear effort that we're trying to become more successful and more ingrained, more credible and trusted by these sponsors, and we're starting to reap the fruits of that labor to date.

[Operator Instructions] Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Were there any particular industries that drove nonaccrual?

I don't know exactly off the top of my head, but it's really like a handful of assets. So I don't think it's there in one industry, but it's probably about five assets or so that drove most of the decline.

I think it's fair to say that it's less about a given asset group and kind of more about the structure because in the structure we're in now, a lot of the cash flows are going to pay down the more senior debt.

So the cost structure of the liabilities is moving. That's why we're very focused on finding a refinancing point for it that in essence, we're paying down a lot more of the senior debt. Some of it is also the cost structure of our liabilities, which, again, in a refinancing, as Henri mentioned earlier, that's the opportunity to reset.

And so we've got dialogues going at all times here and hopefully, we'll find an opportunity to reset it. And then at that point in time, we can reprice our liabilities, which are not perfectly priced to what we could get in the market. if we refinance right now.

Yes. And Chris, we also have significant disclosure on the CLO in our 10-K that we just filed. So you'll be able to see in the MD&A, you'll be able to see the split by industries and then also the weighting by the credit risk categories as well.

Is it fair to say that we should expect CLOs to run off as a percentage of your investment assets?

I'm sorry. Can you repeat that, Chris, sorry, you just broke up.

Yes. Should we expect CLOs to decrease as a percentage of the investment portfolio?

Well, I think they have decreased a fair amount at this point in time. I think I think the whole CLO business, as Henri mentioned earlier, we had tremendous success with CLOs for a long time. I think the last 4 to 5 years, the CLO industry has had a lot of negative developments, if you will. There have been some weakening of the covenants.

These LMEs, the liability management programs, you've had a change in interest rate structure and all that. So there's a big sort of digestion cycle for a lot of -- I don't know if I'd call them excesses, but a lot of the way the market operated several years ago is causing all the problems today. As we move forward, there's fewer LMEs. I think the documentation is getting a little better.

I think the companies are getting financed more appropriately for the current -- the interest rate environment is more stable than it was over the last several years. And so I think the underlying dynamic is stabilizing. I think the whole industry does suffer from the slowdown in M&A.

So a lot of what's going on in private equity and private credit is a lot of refinancings of existing companies and those are generally come at much tighter spreads, they're much more shopped, that type of thing where as the M&A environment comes back, those type of deals are generally have wider spreads to them, for a whole host of reasons.

And so we think sort of a cyclical, maybe slightly secular degradation in the quality of the market in CLOs, but we think there's a number of initiatives going on that's at a minimum stabilizing that, and then we think it's possible to even improve from here.

I'm showing no further questions at this time. So I would now like to turn it back to Christian Oberbeck for closing remarks.

Well, again, we thank all of our shareholders and analysts for following us and participating on this call, and we look forward to speaking with you next quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions]

At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please go ahead, sir.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's Fiscal Third Quarter 2026 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 third quarter 2026 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. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to Q3 results reflects our November 30 quarter end period. 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.

Thank you, Henri, and welcome, everyone. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year with stable NAV per share, an increase in NII of $0.03 per share from the previous quarter, a strong 13.5% return on equity, beating the industry, net originations of $17.2 million, including 3 new portfolio companies, and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment.

Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the fourth quarter of fiscal 2026, which when annualized, represents a 12.9% yield based on the stock price of $23.19 as of January 6, 2026, offering strong current income from an investment value standpoint. Though we did see an increase in adjusted NII of $0.03 per share from the previous quarter, our third quarter NII of $0.61 per share continues to reflect the impact of the last 12 months trend in decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets as well as continued high levels of repayments.

Strong originations outpaced repayments during the third quarter, which when coupled with the repayment of a $12 million baby bond resulted in our cash position at quarter end decreasing to $169.6 million, though we still have significant cash available to be deployed accretively in investments or to repay existing debt.

During the quarter, we began to see an increase in M&A activity despite continued competitive market dynamics. While our portfolio again saw multiple debt repayments in Q3, we had strong new originations, resulting in net originations of $17.2 million for the quarter. Specifically, we originated $72.1 million in 3 new investments and 9 follow-ons as well as closing on new investments in multiple BB and BBB structured credit securities.

Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create an attractive investment opportunities from high-quality sponsors, which is continuing post quarter end with 4 new portfolio company investments, either closed or closing in Q4 so far, which further improves our run rate earnings.

We continue to remain prudent and discerning in terms of new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our 1.016 billion portfolio with all 4 historically challenged portfolio company situations resolved.

Our current noncore CLO portfolio was marked up, including realized gains by $2.9 million this quarter, more than offsetting the CLO and JV markdown of $0.4 million, resulting in the fair value of the portfolio increasing by $2.5 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% above cost, while our core non-CLO portfolio remains 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflect strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments.

During the third quarter, our net interest margin increased from $13.1 million last quarter to $13.5 million driven primarily by a $0.5 million decrease in interest expense, reflecting the recent $12 million baby bond repayments. This quarter's interest income remained relatively unchanged, benefiting from first average non-CLO assets increasing by approximately 0.9% to $962 million. And second, this quarter's repayments resulting in various accelerated OID recognitions.

This was largely offset by 2 factors: First, the absolute yields of the core non-CLO BDC portfolio reducing from 11.3% to 10.6% due to SOFR rates resetting from earlier reductions, combined with the impact of lower yielding new originations during the quarter. And second, the timing of new originations and repayments in Q3.

In addition, the full period impact of the 0.5 million shares issued through the ATM program in Q2 and the partial impact of the additional 0.1 million shares issued in Q3, resulted in a $0.01 per share dilution to NII per share. Our overall credit quality for this quarter continued to improve to 99.8% of credits rated in our highest category. There's just one investment remaining on nonaccrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% of fair value and 0.4% of cost.

With 83.9% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty.

As we continue to navigate the challenges posed by the current geopolitical tensions and volatility in the broader underwriting, M&A and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure and disciplined underwriting standards to continue steadily increase the size, quality and investment performance of our portfolio over the long term and deliver compelling risk-adjusted returns to shareholders.

As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $396 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $90 million from our 2 revolving credit facilities and $169.6 million in cash. This level of cash improves our current regulatory leverage of 168.4% to 183.7% net leverage, netting available cash against outstanding debt.

Moving on to Saratoga Investments fiscal 2026 third quarter, key performance indicators as compared to the quarters ended November 30, 2024, and August 31, 2025. Our quarter end NAV was $413 million, up 10.2% from $375 million last year and up 0.7% from $410.5 million last quarter. Our NAV per share was $25.59, down from $26.95 last year and $25.61 last quarter. Our adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. Our adjusted NII per share was $0.61 this quarter, down 32.2% from last year and up 5.2% from last quarter.

Adjusted NII yield was 9.5% this quarter, down from 13.3% last year and up from 9% last quarter. And latest 12 months return on equity was 9.7%, up from 9.2% last year and 9.1% last quarter and above the industry average of 6.6%.

While last year, saw markdowns to a small number of credits in our core BDC -- our core BDC, Slide 3 illustrates how our recent results have delivered an ROE of 9.7% for the last 12 months above the industry average of 6.6%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.9%. Our long-term return on equity has remained strong over the past decade plus, beating the industry 9 in the past 12 years and consistently positive every year.

As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter, and we continue to expect long-term AUM growth. The quality of our credits remains strong with just 1 recently restructured investment remaining on nonaccrual Pepper Palace.

Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment.

With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2025, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q3 was 16.1 million, increasing from 15.8 million and 13.8 million shares for last quarter and last year's third quarter, respectively.

Adjusted NII was $9.8 million this quarter, down 21.3% from last year and up 7.8% from last quarter. This quarter's increase in adjusted NII as compared to the prior quarter was largely due to the net interest margin changes that Chris mentioned earlier. The decrease from the prior year reflects lower AUM and base interest rates, along with the recent repayment of certain well-performing investments.

The weighted average interest rate on the core BDC portfolio of 10.6% this quarter, compares to 11.8% as of last year and 11.3% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets.

Total expenses for Q3, excluding interest and debt financing expenses, base management and incentive fees and income and excise taxes increased by $0.5 million to $3.3 million as compared to $2.8 million last year, and increased by $0.8 million from $2.5 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and down from 0.9% last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past 2 years, we have again added the KPI Slides 26 through 29 in the appendix at the end of the presentation. Slide 50 is a new slide that we recently added comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.4% of cost is 8x lower than the industry average of 3.2%. This highlights the current strength and credit quality of our core BDC portfolio.

Moving on to Slide 6. NAV was $413.2 million as of fiscal quarter end, a $2.7 million increase from last quarter and a $38.3 million increase from the same quarter last year. In Q3, $1.5 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 53 quarters. Over the long term, this metric has increased since 2011 and grown by $3.62 per share or 16.5% over the past 8.5 years.

On Slide 7, 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, adjusted NII per share was up $0.03 in Q3. This is due to an increase in non-CLO net interest income during the quarter of $0.02, primarily driven by accelerated OID on repayments. The increase in BB investments interest income of $0.02 from higher assets and the increase in other income of $0.03 from both higher advisory fees on originations and prepayment penalties on redemptions. This was partially offset by an increase in operating expenses of $0.03, reflecting expenses related to the recent annual meeting and increased deal expenses and dilution from the increased DRIP and ATM program share count of $0.01.

On the lower half of the slide, NAV per share decreased by $0.02 with the $0.14 under earning of the dividend, fully offset by net realized gains and unrealized depreciation of $0.14, including deferred tax benefit. This leaves a $0.02 net dilution from the ATM and DRIP programs.

Slide 8 outlines the dry powder available to us as of quarter end, which totaled $395.6 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 39% without the need for external financing, with $170 million of quarter end cash available, and that's fully accretive to NII when deployed, and $136 million of available SBA debentures with its low-cost pricing, also very accretive.

In addition, all $269 million of our baby bonds, effectively all of our 6% plus debt is callable now, providing us the option to refinance them, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin, if needed. These calls are also available to be used prospectively to reduce current debt.

This quarter, we also repaid our $65 million in senior credit facility, refinancing it with the issuance of an upside $85 million credit facility with a group of banks led by Valley Bank. The terms of this facility are substantially the same while cutting the spread cost by approximately 150 basis points and extending the maturity to 3 years. We do have our $175 million, 4.375% 2026 notes maturing at the end of February 2026. We are currently assessing our existing liquidity and cash in addition to various capital markets options in determining the most optimal source to use to repay this.

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 and that most of our debt is long term in nature. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment.

Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio. Slide 9 highlights that we have $1.016 billion of AUM at fair value and this is invested in 46 portfolio companies, 1 CLO fund, 1 joint venture and numerous new BB and BBB CLO debt investments. Our first lien percentage is 83.9% of our total investments, of which 29.7% is in first lien last-out positions.

On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 10.6% from last quarter's 11.3%, with 3/5 of the decrease, reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield decreased to 10.0% from 11.8% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield of approximately 8% to 10%.

Slide 11 shows how our investments are diversified through primarily the United States. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 41 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are included as structured finance securities.

And finally, moving on to Slide 13. 8.3% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13-plus fiscal years, we had a combined $45.6 million of net realized gains from the sale of equity interests. This year alone, we have generated $6 million in net realized gains. This long-term 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. Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market.

Thank you, Henri. I'll give an update on the market since we last spoke in October and then comment on our current portfolio performance and investment strategy. We are starting to see a pickup in M&A activity in the market we participate in. But the biggest driver of our increased production is the success we are seeing in our own business development efforts. As seen by the fact that 5 of the 7 most recent new platform companies we have closed or are in process of closing are with new relationships.

The combination of historically low M&A volume in the lower middle market for an extended time and an abundant supply of capital has kept spreads tight and leverage full as lenders compete to win deals, especially premium ones. Market dynamics remain at their most competitive level since the pandemic. We've also experienced repayment activity from some of our lower leveraged loans being refinanced on more favorable terms. Although we are seeing some signs of a pickup in M&A volume, historically low deal volumes have made it more difficult to find quality new platform investments than in prior periods. Since we can't control M&A activity, we focus on the things that we can control.

In summary, to first stay disciplined on asset selection; second, invest in and generally expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace, combined with our ramped up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run.

Now before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity, the legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this.

Our underwriting bar remains high as usual, in a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 25 follow-ons in calendar year 2025. Notably, we have also invested in 7 new platform investments this calendar year, reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours.

Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams. We ended the quarter with just 1 investment still on nonaccrual status, Pepper Palace and now only 0.2% of the portfolio at fair value and 0.4% at cost are on nonaccrual status. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 2.1% above its cost. 84% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed 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.

Now looking at leverage on the same slide, you can see that industry debt multiples move closer to 6x with unitranche in the mid-5s. Total leverage for our overall portfolio is down to 5.05x, excluding Pepper Palace.

Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase of deal sourced is as a result of our recent business development initiatives, with 25 of the 79 term sheets issued over the last 12 months being for deals that came from new relationships. Overall, 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.

Our originations this fiscal quarter totaled $72.1 million, consisting of 3 new investments totaling $40.5 million, 9 follow-ons totaling $25.6 million, and BB and BBB CLO debt investments of $6 million. Two of the 3 new portfolio companies closed in the quarter are with new relationships.

Subsequent to quarter end, we closed or currently have been closing in our core BDC portfolio, approximately $89.3 million of new originations in 4 new portfolio companies and 6 follow-ons, including delayed draws, offset by $30.5 million of repayments. Three of these 4 new portfolio companies are with new relationships.

As you can see on Slide 16, our overall portfolio credit quality and returns remain solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise values of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious.

Since our management team began working together 15 years ago, we've invested $2.4 billion in 125 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 85 of those investments, achieving gross unlevered realized returns of 14.9% on $1.34 billion of realizations. The weighted average returns on our exits this quarter were consistent or even slightly higher than our overall track record at around 15.6%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equal 13.5%. Total realized gains within the quarter were $3.1 million across 2 portfolio companies and year-to-date were $6 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt.

As mentioned, we now have only 1 investment on nonaccrual, although Pepper Palace has been restructured, we are still classifying it as red with a fair value of $2 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall core non-CLO portfolio was marked up by $2.9 million, including realized gains, reflecting the strength of our overall portfolio.

Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide.

Moving on to Slide 17, you can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons, and we are currently ramping up our new SBIC III license with $136 million of lower cost, undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing.

This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris?

Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended November 30, 2025 was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended February 28, 2025, marking the fourth quarter of our new dividend payment structure. We also distributed a $0.25 per share special dividend, which was paid in December. Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the current interest rate and macro environment's impact on our earnings.

Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 11%, vastly beating out the BDC indexes negative 4%. This places us in the top 6 of all BDCs for calendar 2025.

Our longer-term performance is outlined on the next slide, Slide 20, which shows that our 5-year total return places us above the BDC index, and our 3-year return is in line with the industry. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 851%, has been almost 3x the industry's 283%.

On Slide 21, you can further see our last 12 months 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 and coverage, all of which reflect the value our shareholders are receiving. While NAV per share growth has lagged this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed.

With regards to NII yield and dividend coverage, the recent repayments of successful investments have reduced this fiscal year's NII, leaving a healthy level of cash available for future deployments. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards.

Our focus remains long term. We also continue to be 1 of the few BDCs to have grown NAV accretively over the long term and have a consistent, healthy return on equity with our long-term return on equity at roughly 1.5x the industry average, and latest 12 months return on equity also beating the industry by 310 basis points.

Moving on to Slide 22. 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, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 10.8%, ensuring that we are strongly aligned with our shareholders.

Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in the M&A activity across the market, and we continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform, and we remain encouraged by the resilience and strength of our pipeline. While broader sentiment towards private credit market has become increasingly cautious due to a few high-profile bankruptcies, we believe these issues are largely idiosyncratic and not indicative of the broader credit market fundamentals.

In addition to these companies not being representative of the lower end of the middle market that we participate in. Supported by our experienced management team, disciplined underwriting and strong balance sheet, we believe we are well positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance and deliver compelling risk-adjusted returns for our shareholders over the 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.

[Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets.

I wanted to start first, Chris, in your prepared comments, you mentioned that you saw an increase in M&A activity in the most recent quarter. And I'm curious if maybe you could just provide a little more color there in terms of whether that was fairly broad-based or has it been concentrated in a few industries. And do you expect that to continue into '26 here?

Well, I guess we're not really equipped to talk about the entire M&A marketplace. But I think, clearly, just take the large end of some mega, mega deals done last year, and that are fairly new to the market recently. So large M&A has picked up substantially. And then in the world that we're focused on, we're just seeing more deals, more -- more people are getting ready to transact on both sides, sellers and buyers. And I think as Mike mentioned in his remarks, and I'll turn it over to Mike to talk more -- more specifically, I think we're also seeing, even though the M&A is up, we're seeing a lot more competition. So there's just a lot of interest in all these M&A transactions. So we are hopeful that this is the beginning of a -- sort of back to more of a normalization of the level of M&A that we've seen in general that has been missing over the last couple of years. Mike?

Yes. Let me expound on that. So when we look at the deal flow that we're getting from our relationships that we've had for years, we view that as kind of more of an indicator of the M&A market moving because we're already seeing deal flow from that group. And if their deal flow is picking up, we view that as a good sign and probably reflective of M&A activity growing.

It's a little too early to say with certainty, but certainly, we do see a pickup there, and we're seeing more change of control transactions there and getting involved in more processes, which is great. One of the things that we like so much about being at our end of the market is that, we're not just beholden to the M&A market and having to just kind of wait for the tide to come in, if you will. At the lower end of the middle market, there's just thousands upon thousands of companies. And so if you put effort into getting deep into the various markets throughout the country and getting to know the different deal dealers and investors in these small end of the market, you can drive a lot more deal flow. And that deal flow doesn't necessarily move 1 to 1 with the larger M&A activity. Some of these businesses get -- involved in a change of control transaction because there's somebody is retiring and moving on and deciding to sell their business. It might be baby boomer activity, things of that nature.

And so we're in a position where certainly we're affected by M&A activity, and we are seeing a pickup there. But we also feel like our destinies in our own hands, which you see in the origination activity that we've been successful with. Recently, a lot of that's just based on us, doubling down on our outreach in the marketplace.

That's great color. And then moving to Slide 13, where you've outlaid kind of the historical trends for realized gains. It's nice to see over the past 3 quarters, you've returned to your longer-term trend of positive gains there. And I know it's hard to have too much of a forward-looking view there. But anything expected in the near term, either in the current quarter or maybe a quarter out where you might see some more realizations there?

As you can appreciate, we're not in control of that. And so it's hard for us to make a prediction. I mean there are some processes underway in some of our portfolio companies, but how they wind up is not something we're in a position to predict at this moment.

Yes, Erik, I would say just timing is hard to say, but what we are really happy about is that on the noncore -- sorry, our core non-CLO BDC business, our fair value is about 2% above our costs. So that's just from an overall perspective, which obviously we're happy to see.

Got it. And last one for me. Just thinking about the impact of lower short-term interest rates. You noted that several times during your comments, you've got a slide addressing that. I think that November cut probably has not been fully realized in the portfolio and not the December cut as well, and the futures market is looking at another 50 as well as spreads remaining tight. Henri, you mentioned the opportunity on the liability side to maybe bring out some cost savings there. So just trying to think about the earnings power from kind of the current level that you just reported, is holding the line there, would you consider that success kind of given the headwinds there? Or is the opportunity to put some of that liquidity to work that you've mentioned provides you the opportunity to potentially grow NII dollars over the next few quarters?

Well, I think you laid out pretty much a number of our considerations. One thing to add perhaps is capital deployment. I mean we've got a lot of capital that hasn't been deployed yet. We have a growing pipeline. And so I think the mix of all those things you've described, including incremental deployment, those are all the factors that we're looking at and working on them. I think our quarterly progression this year, we think this is very positive and sort of on all fronts. And so we're hopeful that, that will continue. We obviously can't predict it. We do have those headwinds, but we've had those headwinds all year and we're still to continue to make progress.

And we hope to -- again, I think that capital deployment is probably the place to look for. And I think also as the M&A market expands, we're hopeful that maybe the spread compression will go in other direction. I mean there's lots of -- there's AI, there's mega deals. There's all sorts of things happening in the M&A marketplace that hopefully are going to result in. And then maybe the private credit, the bloom is off the rose a little bit.

There's a bad press out there. So maybe the flow of money into it that isn't quite the magnitude that was before. So hopefully, the whole thing settles out to a much more normalized place. I mean we personally -- I think in our opinion, we think spreads are tighter than they should be relative to all the factors out there. And we think that's more of a temporary thing. And so -- as interest rates go down, spreads may widen as they have generally historically. So I think putting all that mix together, we feel are well equipped and well positioned to make the best of the opportunities ahead.

Our next question comes from the line of Casey Alexander with Compass Point Research & Trading.

Mike, this is for you. I probably heard 5 or 6 times during the prepared remarks about tighter spreads on new investments. And I'm interested, what's the trade-off to make sure that you're receiving an adequate risk-adjusted rate of return, right? Are you -- is the spreads allowing you to still capture the covenants? Is that a competitive aspect? Is it being the spread allowing you to capture a new relationship? Or is the spread allowing you to capture a little additional equity on the deal? How do we get comfortable with that you're still earning an adequate risk-adjusted rate of return when spreads get tight like this as they have been?

Well, I think the way I'd answer that question is that we don't necessarily look at it as a trade-off. The spreads are tightening. And the way we look at every deal is do we feel like the fundamental risks of the investment that we're making are level set. That is, are we getting a return where we feel like it's appropriate from a risk-adjusted standpoint. Do we feel like under almost all reasonable circumstances, we're going to get our capital back and we're going to earn a good return over time. And is that going to be accretive to our shareholders relative to our cost of capital. So we enjoy the benefit of the SBIC license, which gives us very favorable cost of capital. We certainly evaluate which deals fit in the SBIC and price those accordingly. But all the deals that we're doing, we're looking at as being from a standpoint of being accretive to our shareholders, for sure.

I would also point out one of the things that's really nice about being in our end of the market, which you don't see in the middle market so much is we referenced the 7 deals that we closed or have in closing right now, 6 of the 7 of those deals, we have an equity co-investment. And you also heard us reference the return that we've got on some of the exits this quarter, which were about 15%. Most of that delta between the current rate and that ultimate IRR are achieved through the equity co-investments, which is pretty core to our strategy and not something that the middle market or upper middle market enjoys.

Okay. My last question is, it seems like over the last 2 or 3 years that the majority of the new portfolio companies have come from new relationships. And while I understand that you want to broaden the platform, at the same point in time, there's value to the deals that you have from the existing relationships because you tend to know how they act when things get sideways. And so I just want to hear how you're balancing that risk because new relationships sometimes can surprise you when things go wrong, and so I want to get a feel for how you feel about that effort?

Yes. And that's a very fair question and something that we spend a lot of time thinking about as well. I would remind you that for us, what's so neat about our business model and our investment approach is that most quarters our follow-on activity exceeds our new origination new platform activity. So most of the investments that we're making, we're sort of coming in with a relatively small bite-size, and then we're watching the performance of the asset and then we're supporting their growth over time, and it gives us sort of option value, if you will.

And most of that historically has really been candidly with existing relationships. This progress that we've been making with new relationships is relatively new thing, and it's been a result of a lot of the business development efforts that the whole team has embarked upon, I'll call it, in the last year to 18 months. That -- the gestation period of getting a deal done with a new relationship is quite long. In a lot of ways, we wish it were shorter.

But ultimately, it's quite long, and it's one of the reasons you have some pretty healthy barriers to entry in developing new relationships. But typically, when we're cultivating a new relationship, we have a really good sense of the sponsorship's reputation in the marketplace. We have a really good sense of the portfolio that they've constructed, how it's performed. We have a really good sense of the key team members. We generally have been in the market for a long time. We do a lot of work trying to get comfortable that the ownership group is the right one for the asset that they're investing in and that we're supporting. So it is something that we take a lot of take into account.

And I would tell you, the bar is a bit higher as you correctly pointed out, when you know a group and you know exactly how they behave and what -- where they're really good, and maybe where they don't have as strong an investment perspective, it can make it easier to make investment decisions. When you don't have that history, you've got to do a lot more work, which is something that we have done and we'll continue to do.

The other thing I would add, Casey, is that is the opportunity side of this, which is these are -- these are new relationships for doing a deal. We've been courting these people for a long time. And so in many instances, we've been tracking them. So it's not like they're brand new parties. And if you look at how we grow and our market opportunity across the smaller middle market, each one of these new relationships can all of a sudden lead to, as Mike was describing, a series of investments with follow-ons and sort of a compounding growth effect in terms of the opportunity flow. And relatively, I'm not going to say proprietary because that might be too strong a word, but certainly preferred flow in our direction with us having a lot more control over our participation in the follow-ons and the new deals.

Our next question comes from the line of Heli Sheth with Raymond James.

So obviously, in the same tune as Erik and Casey, originations and repayments were elevated this quarter, and there seems to be a pickup in the M&A market. Any sort of shift in the mix of the kind of deals you're seeing in the pipeline in terms of sponsor versus nonsponsor, incumbent versus new borrowers or LTVs?

Really, really good question. Not a significant difference in that respect. We have developed a really strong expertise in SaaS lending. We continue to see, therefore, a lot of deals in that space and think that it's still a rich market for us to lend to and invest in. But I would say that we've also grown our relationships outside of that space, and we are seeing probably more deals outside of the software space than we have historically. So the majority of the deals that we've done or have been closing are non-software deals that are kind of core lower middle-market businesses generally.

Outside of that, I think the flavor is what it typically is, a mix of mostly sponsored deals, but also some deals where they're an independent sponsor or we're backing a management team directly. And that's been a core part of our business as well and has been an area where we've invested very successfully.

Alright. That's helpful. And you mentioned kind of also investing outside SaaS and tech. I know AI has been a concern when it comes to lending. So any ideas of what industries you would say are vulnerable to AI outside of tech?

That could be a much, much longer answer than I could give on this call. But I would say when we're looking at any business, we're always evaluating it from a perspective of what is it that AI brings to the table. And could AI change the business in a very significant way where it could get disrupted. And if the conclusion is that it's hard to say how the impact is going to be, we're going to steer away from those deals. So it's -- I think the AI development is relatively new, but it's something that we're highly attuned to and evaluating for every single deal that we look at.

I would say there's also some portfolio companies that we have, where they're incorporating AI and they're using it to improve their business in a way that is improving the credit profile of some of our portfolio companies as well. So it's -- it's a double-edged sword, but it's something that we're very much focused on.

And we're definitely staying away from taxi medallions.

Perfect. And then 1 last quick one. Could I get the spillover balance as of the end of the quarter?

Yes. And per share, Heli, it's probably around approximately $2 per share at the moment.

And I'm showing no further questions at this time, and I would like to hand the conference back over to Christian Oberbeck for closing remarks.

Well, I would like to thank everyone for their time and interest and support of our Saratoga Investment Corp., and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.'s First Fiscal Second Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. [Operator Instructions]

At this time, I would now like to turn the call over to Saratoga Investment Corp.'s Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Second Quarter 2026 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 second quarter 2026 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.

For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to Q2 results reflects our August 31 quarter-end period. 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.

Thank you, Henri, and welcome, everyone. Saratoga Investment Corp. highlights this quarter include continued NAV growth from the previous quarter and year and NAV per share growth from the previous quarter. A strong return on equity beating the industry, net originations of $22.4 million and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment, including the return of our Zollege investment to accrual status, thereby reducing our nonaccrual investments to just one, representing only 0.2% of portfolio fair value.

Continuing our historical strong dividend distribution history, we announced a base dividend of $0.25 per share per month or $0.75 per share in aggregate for the third quarter of fiscal 2026. Our annualized third-quarter dividend of $0.75 per share represents a 12.3% yield based on the stock price of $24.41 as of October 6, 2025, offering a strong current income from an investment value standpoint. Our Q2 adjusted NII of $0.58 per share continues to reflect the impact of the past 12-month trend of decreasing levels of short-term interest rates and spreads on Saratoga Investments largely floating rate assets and the continued effect of the recent repayments, which has contributed to the buildup of $201 million of cash as of quarter end available to be deployed accretively in investments or to repay existing debt.

During the quarter, we continue to see very competitive market dynamics. These macro factors, our portfolio again saw multiple debt repayments in Q2 in addition to solid new originations. We originated $52.2 million, including 3 follow-ons and new investments in multiple BB and BBB CLO debt securities.

Our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships continue to create attractive investment opportunities from high-quality sponsors, which continued post-quarter end with 3 new portfolio company investments either closed or in closing in Q3 so far.

We continue to remain prudent and discerning in terms of the new commitments in the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our $995.3 million portfolio in the current environment with all 4 historically challenged portfolio company situations resolved. One of these restructurings, Zollege, is seeing improved financial performance and has been returned to accrual status this quarter.

Our current core non-CLO portfolio was marked up by $3.9 million this quarter, and the CLO and JV were marked down by $0.3 million. We also had $0.2 million of net appreciation in our new BB and BBB CLO debt investments and a further net realized gains of $0.1 million from an escrow payment on our modern campus investment, resulting in fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter end, our total portfolio fair value was 1.7% below cost, while our core non-CLO portfolio was 2.1% above cost.

The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the second quarter, our net interest margin decreased from $15.1 million last quarter to $13.1 million, driven by a $2.1 million decrease in non-CLO interest income.

This decrease was due, first, average assets decreased approximately $11 million or 1.1% to $954 million. Second, the timing of originations and repayment closings during the current and previous quarter with repayments more fully reflected in earnings and the full impact of new originations still having to flow through. And third, the absolute yields on the non-CLO portfolio decreasing from 11.5% to 11.3% as a result of SOFR rates resetting from earlier reductions, combined with the impact of lower-yielding new originations during the quarter.

In addition, the full period impact of the 0.2 million shares issued through the ATM program in Q1 and the partial impact of the additional 0.4 million shares issued in Q2 resulted in a $0.02 per share dilution to NII per share. Our overall credit quality for this quarter remained steady at 99.7% of credits rated in our highest category with now just one investment remaining on nonaccrual status, Pepper Palace, which has been successfully restructured, representing only 0.2% and 0.3% of fair value and cost, respectively.

With 84.3% of our investments at quarter end in 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 company leverage is well structured for future economic conditions and uncertainty.

As we continue to navigate the challenges posed by the current geopolitical tensions and the volatility seen in the broader underwriting and macro environment, we remain confident in our experienced management team robust pipeline, strong leverage structure and disciplined underwriting standards to continue to steadily increase the size, quality and investment performance of our portfolio over the long term and deliver attractive risk-adjusted returns to shareholders.

As always, and particularly in the current uncertain environment, balance sheet strength, liquidity and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $407 million of investment capacity to support our portfolio companies with $136 million available through our existing SBIC III license, $70 million from our 2 revolving credit facilities and $201 million in cash. This level of cash improves our current regulatory leverage of 166.6% to 186.5% net leverage, netting available cash against outstanding debt.

Moving on to Saratoga Investment's fiscal 2026 second quarter. Key performance indicators as compared to the quarters ended August 31, 2024, and May 31, 2025 are: our quarter-end NAV was $410.5 million, up 10.3% from $372.1 million last year and up 3.6% from $396.4 million last quarter. Our NAV per share was $25.61, down from $27.07 last year and up from $25.52 last quarter.

Our adjusted NII was $9.1 million this quarter, down 50.1% from last year and down 10.5% from last quarter. Our adjusted NII per share was $0.58 this quarter, down 56.4% from last year and down 12.1% from last quarter. Adjusted NII yield was 9% this quarter, down from 19.7% last year and 10.3% last quarter. And latest 12 months return on equity was 9.1%, up from 5.8% last year and down slightly from 9.3% last quarter and above the industry average of 7.3%.

While last year saw markdowns due to a small number of credits in our core BDC, Slide 3 illustrates how our recent results have delivered an ROE of 9.1% for the last 12 months, above the industry average of 7.3%. Additionally, our long-term average return on equity over the past 11 years of 10.1% is well above the BDC industry average of 7%.

Our long-term return on equity has remained strong over the past decade plus, beating the industry 8 of the past 11 years and consistently positive every year. As you can see on Slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter. The recent AUM decline over the past year does not detract from our expectation of long-term AUM growth.

The quality of our credits remains strong and with just one recently restructured investment remaining on nonaccrual, Pepper Palace, our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline, while at the same time being appropriately cautious in this evolving and volatile credit and economic environment.

With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was 15.8 million, increasing from 15.3 million and 13.7 million shares for last quarter and last year's second quarter, respectively. Adjusted NII was $9.1 million this quarter, down 50.1% from last year and 10.5% from last quarter.

This quarter's decrease in adjusted NII as compared to the prior quarter and prior year were both due to lower AUM and base interest rates. The decrease from the previous year's second quarter was also largely due to the nonrecurrence of the $7.9 million Knowland investment interest income recognized last year that was previously on nonaccrual. The weighted average interest rate on the core BDC portfolio of 11.3% this quarter compares to 12.6% as of last year and 11.5% as of last quarter.

The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year. Total expenses this quarter, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes increased $0.3 million to $2.5 million as compared to $2.2 million last year and decreased $0.3 million from $2.8 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and up from 0.7% last year.

Also, we have again added the KPI Slides 26 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 2 years. Slide 30 is a new slide we added last quarter, comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.3% of cost is significantly lower than the industry average of 3.4%. This decreased from 0.6% last quarter due to our Zollege investment returning to accrual status. This highlights the current strength in credit quality of our core BDC portfolio.

Moving on to Slide 6. NAV was $410.5 million as of fiscal quarter end, a $14.1 million increase from last quarter and a $38.4 million increase from the same quarter last year. During this quarter, $11.4 million of new equity was raised at or above net asset value, respectively, through our ATM program. This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 32 quarters, including by $0.09 this quarter. Over the long term, our net asset value has increased since 2011 and grown by $3.64 per share or 16.6% over the past 8 years.

On Slide 7, 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, adjusted NII per share was down $0.08 in Q2, primarily due to: first, the decrease in non-CLO net interest income during the quarter of $0.10 due to recent decreasing AUM and base rates; and second, dilution from the increased DRIP and ATM program share count of $0.02. This was partially offset by both a decrease in operating expenses of $0.02 and increases in the CLO and BB debt investments' interest income of $0.02.

On the lower half of the slide, NAV per share increased by $0.09, primarily due to net realized gains and unrealized depreciation of $0.27, including deferred tax benefits, partially offset by the $0.17 underearning of the dividend and a $0.01 net dilution from the ATM and DRIP programs. Slide 8 outlines the dry powder available to us as of quarter end, which totaled $406.8 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 41% without the need for external financing with $201 million of quarter-end cash available and thus fully accretive to NII when deployed and $136 million of available SBA debentures with its low-cost pricing, also very accretive.

In addition, all $296 million of our baby bonds, effectively all our 6% plus debt is callable now, creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. 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 and that most of our debt is long-term in nature.

Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment. Now I would like to move on to Slides 9 through 12 and review the composition and yield of our investment portfolio.

Slide 9 highlights that we have $995 million of AUM at fair value, and this is invested in 44 portfolio companies, 1 CLO fund, joint venture and numerous new BB and BBB CLO debt investments. Our first lien percentage is 84.3% of our total investments, of which 22.0% is in first lien last-out positions.

On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, especially this past year, reflecting the recent decreases to interest rates. This quarter, our core BDC yield decreased to 11.3% from last quarter's 11.5%, reflecting further core base rate reductions. The CLO yield decreased to 11.8% from 13.7% last quarter, reflecting the inclusion of the new BB and BBB CLO debt investments to this category that have a yield in the 8% to 10% range.

Slide 11 shows how our investments are diversified through primarily the U.S. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 39 distinct industries in addition to our investments in the CLO, JV and BB and BBB CLO debt securities, which are included as structured finance securities.

Moving on to Slide 13. 7.9% of our investment portfolio consists of equity interest, which remain an important part of our overall investment strategy. This slide shows that for the past 13 fiscal years, we had a combined $43 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This long-term 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.

Our Chief Investment Officer, Michael Grisius, will now provide an overview of the investment market.

Thank you, Henri. Today, I will give an update on the market since we last spoke in July and then comment on our current portfolio performance and investment strategy. Year-to-date deal volumes in our market have been down significantly as compared to 2024 and are down further still as compared to 2021 through 2023.

We believe that M&A activity will invariably revert to historical levels, but that pickup in deal volume appears to be postponed for the time being, although the commencement of decreasing rates might help with that. The combination of historically low M&A volume in the lower middle market and an abundant supply of capital is causing spreads to tighten and leverage to remain full as lenders compete to win deals, especially premium ones.

Market dynamics are at their most competitive levels since the pandemic. We've also experienced repayment activity from some of our lower-leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing has made it more difficult to find quality new platform investments than in prior periods. And with some viable concerns about the longevity of the current issuer-friendly environment due to both market-driven and macroeconomic factors, we remain vigilant in our underwriting.

As we noted on last quarter's call, this may naturally prompt the question of what is our approach to operating in this difficult asset deployment environment. In summary, first, stay disciplined on asset selection; second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us; and third, continue to support our existing healthy portfolio companies as they pursue growth.

The relationships and overall presence we've built in the marketplace, combined with our ramped-up business development initiatives, give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run.

Before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity.

The legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns and our track record of realized returns reflects this.

Additionally, during this past quarter, we continued to invest in multiple different CLO BB and BBB securities across 8 different CLO managers for a total notional amount of $26.3 million. These investments have performed well through numerous economic cycles in the past, experiencing very low long-term default rates while also providing enhanced yields relative to comparably rated corporate debt securities.

We anticipate third-party managed CLO BBs and to a lesser extent, CLO junior BBBs will play an increased role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high-yield credit markets.

Now our underwriting bar remains high as usual in a very tough market, yet we continue to find opportunities to deploy capital. As seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 13 follow-ons in calendar year 2025 thus far, and we have invested in 3 new platform investments this calendar year as well.

Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management continues to be critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams.

During the quarter, our Zollege investment returned to accrual status, reflecting its improved financial performance, leaving just Pepper Palace on nonaccrual, although we are still actively managing both as discussed in previous quarters. This is a significantly positive development as now only 0.2% and 0.3% of the portfolio at fair value and cost, respectively, are on nonaccrual status.

In general, our portfolio companies are healthy and the fair value of our core portfolio, our core BDC portfolio is 2.1% above cost. 84% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed 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. Looking at average leverage on this slide, you can see that industry debt multiples moved closer to 6x with unitranche in the mid-5s. Total leverage for our overall portfolio is 5.34x, excluding Pepper Palace.

Now Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of the calendar year 2024 despite the current M&A activity in the lower middle market remaining low. This recent increase of deals sourced is as a result of our recent business development initiatives with 20 of our -- of the 51 term sheets issued over the last 12 months being for deals that came from new relationships.

Overall, 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. Our originations this quarter totaled $52.2 million, consisting of 3 follow-on investments totaling $25.9 million and BB and BBB CLO debt investments of $26.3 million.

Subsequent to quarter end, we closed or currently have been closing in our core BDC portfolio approximately $42.7 million of new originations in 3 new portfolio companies and 2 follow-ons, including delayed draws. Two of the 3 new portfolio companies are with new relationships. As you can see on Slide 16, our overall portfolio credit quality remains solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital in strong business models where we are confident that under all reasonable scenarios, the enterprise value of the businesses will sustainably exceed the last dollar of our investment.

Our approach and underwriting strategy have always been focused on being thorough and cautious at the same time. Since our management team began working together 15 years ago, we've invested $2.34 billion in 122 portfolio companies and have had just 3 realized economic losses on these investments. Over that same time frame, we've successfully exited 84 of those investments, achieving gross unlevered realized returns of 14.9% on $1.29 billion of realizations.

The weighted average return on our exits this quarter were consistent with our track record at around 14%. Even taking into account the recent write-downs of a few discrete credits, our combined realized and unrealized returns on all capital invested equals 13.5%. Total realized gains year-to-date were $3 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt.

As mentioned, we have now only one investment on nonaccrual. Although Pepper Palace has been restructured, we're still classifying it as red with a fair value of $1.8 million. Pepper Palace continues to be managed actively with several initiatives underway. In addition, during the quarter, our overall course non-CLO portfolio was marked up by $3.9 million of net appreciation, including Zollege and Pepper Palace, reflecting the strength of the overall portfolio. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide.

And moving on to Slide 17. You can see our second SBIC license is fully funded and deployed, although there is cash available there to invest in follow-ons. And we are currently ramping up our new SBIC III license with $136 million of lower-cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing.

This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris?

Thank you, Mike. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the first quarter ended August 31, 2025, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ending November 30, 2025, marking the third quarter of our new dividend payment structure. 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 current interest rate macro environment's impact on our earnings.

Moving to Slide 19. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 22%, beating the BDC index's 4% for the same period by over 5x. Our longer-term performance is outlined on the next Slide 20. Also, our 5-year and 3-year returns both place us above the BDC index. And since Saratoga took over management of the BDC in 2010, our total return has been almost 3x the industry's at 862% versus the industry's 291%.

On Slide 21, you can further see our last 12 months' 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 and coverage, all of which reflect the value of our shareholders are receiving. While NAV per share growth and dividend coverage are lagging this past year, this is largely due to last year's 2 discrete nonaccrual investments previously discussed.

In addition, we've had significant recent repayments of successful investments that have reduced this year's -- this fiscal year's NII thus far and resulted in healthy levels of cash available for deployment. In this volatile macro environment, we will be prudent in deploying our significant available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long-term. We will also continue we also continue to be one of the few BDCs to have grown NAV accretively over the long term, with our long-term return on equity at 1.5x the industry average and latest 12-month return on equity also beating the industry by 180 basis points.

Moving on to Slide 22. 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, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 10.8%, ensuring we are strongly aligned with our shareholders.

Looking ahead on Slide 23, while geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we are encouraged by the health and resilience of our portfolio and the continued strength of our pipeline. Backed by our experienced management team, disciplined underwriting and solid balance sheet, we are well-positioned to further expand the size and quality of our portfolio, drive consistent investment performance and deliver attractive risk-adjusted returns for our shareholders over the long term.

Recognizing the challenges posed by the ongoing tariff discussions and the volatility seen in the broader macro environment, we also believe that our strong balance sheet, capital structure and liquidity places us in a strong position to successfully address these types of uncertainties.

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

[Operator Instructions] Our first question comes from the line of Erik Zwick from Lucid Capital Markets.

I wanted to first say, I appreciate the slides 19 through 21, where you show some comparisons between your performance and peers. And looking at Slide 21, one metric that kind of stands out where maybe you're currently a little bit below the peer mean is just on the dividend coverage. And I know, Chris, you kind of addressed some of the commentary there about some of the factors that have impacted that. So just kind of curious from your perspective, given the outlook for some additional headwinds from the outlook for lower short-term rates, what levers and strategies do you feel are the easiest for you to pull at this point to potentially improve the dividend coverage? And how much of a priority is that at this time?

Well, I think that's a very important question, something that we're evaluating at all times here. I think there's like a longer-term and a shorter-term perspective on everything in life and this in particular. And I think if you look at the dynamics of our portfolio, I think one thing that we've done -- we're proud of doing well is our -- is the solidity of the portfolio performance.

And now we're back on an increasing NAV trajectory. And I think that contrasts with a lot of what's going on in private credit generally. There's a lot of deterioration -- and I think if you look at macro discussions of private credit these days, there's lots of concern. There's sort of like a grinding -- different numbers are out there, 4%, 5% losses grinding through the system, higher interest rates, all that type of thing. So we've been able to construct a portfolio that's kind of avoided those major problems. And so that has been project #1 for us was making sure we have a super strong portfolio, consistently strong credit underwriting.

And I think in terms of other macro factors, I think everyone is quite aware that the M&A environment has been quite muted for the last few years. And so the supply of private credit opportunities is just not as large as it has been. Now the backlog of future M&A has increased a lot, but it just hasn't happened, right? And so a lot of -- so there's been a lot of refinancing activity, and there's been a lot of new money coming into the business. And so we have found that putting money to work at our credit standards and underwriting standards has been a little more challenging than it has been in other years.

But that doesn't deter us from maintaining our standards. And I think we've got an enormous pipeline, and we're looking at lots and lots of deals. And our ability to deploy capital could turn very quickly. I mean we have a slightly higher hit rate, and we could deploy a fair amount of capital given all the things that we see right now. So I think as Mike had mentioned, we are seeing an increase in deal flow and an increase in M&A and all those types of things.

So we may be coming out of this sort of highly muted M&A environment. And so we feel confident that we will be able to deploy our capital. And we do have $400 million plus available so we can grow 40-plus percent of our assets inside the 4 corners of our current financial capability. We don't have to raise any outside money to be able to do that. So we're very well positioned, but we don't want to for short-term considerations, compromise our underwriting standards when we feel like we're going to get there. We're going to get to the right place. And I think if you look at -- if we deploy a good chunk of that $400 million going forward, we're going to have -- we're going to cover our dividend. It's not going to be a major issue.

The other element that's kind of run through and we've repeated it a lot with our investor base is we've had a lot of repayments. And repayments are the hallmark of successful investing, right? And so when the money comes back, it just -- we can't control the lumpiness of it coming back. And it's just come back in pretty large numbers recently. And so that's created a little more of a headwind in terms of our net originations. But we're still originating. And we're -- actually, I mean, I think Mike, do you want to talk about the pipeline? I mean our pipeline now is very robust.

Yes. Let me just more broadly address your question as well, just to add to what Chris had mentioned. The marketplace right now is incredibly tough, and it's mostly driven by the fact that M&A volume is down considerably relative to historical levels at the very same time that there's a lot of capital on the sidelines. And so what happens is when the quality asset comes to market, people clamor to provide capital to those businesses. And there's 3 things that we're witnessing there. And historically, 2 of them are kind of naturally the case. The third one is more concerning. But the first 2 are that pricing comes in. So we're certainly seeing competition for price and therefore, spreads are compressing.

The other thing that people are doing is they're pushing leverage a bit more. Not changing so much relative to the percentage of debt in the capital structure because the PE firms are also having to pay more for quality assets. So that's a little less concerning, but nonetheless, we are seeing more aggressive leverage profiles. But the third thing that we've seen, and we've passed on some deals as a result of this more recently, is that we're seeing some larger market participants coming down into our market. I don't think they understand the market that well, and they're offering terms and structures that you tend to see more in the larger market.

So you see less restrictive covenants or even much fewer covenants. And we're not going to do those deals. So we're passing on deals that have those features to them, while others are investing capital. It will be interesting for a person like the senior management team here has been through a lot of markets. It will be interesting to go back and look at how this vintage performs over time. As Chris mentioned, we're going to stay very disciplined in terms of what our investment bar is.

So how are we responding to that? We're doubling down our business development efforts. And I think as we've discussed in the past, one of the things that's so great about residing in the lower end of the middle market is there literally are hundreds of thousands of businesses out there. We know that our market presence is still very greatly underpenetrated in that market. So by investing in more business development efforts, really taking a concerted effort to get greater outreach in the marketplace, you can build your pipeline quite a bit.

So to what Chris' point is, you can see that in our term sheets issued, especially the number of term sheets we've issued to newer relationships. And that is very encouraging to us. We've invested in expanding our team. We've added a new Managing Director who's got a very strong track record as a very successful originator in our space as well as augmenting our team with other investment professionals, which has freed us up to really get out there and drive that pipeline.

And then importantly, as I mentioned in the prepared remarks, we've got presently 3 new portfolio companies that are in closing and 2 of those 3 are new relationships that we didn't have just 6 months ago. So lots of reasons for us to feel, despite how challenging the market is, to feel confident that in the intermediate to long run, we'll get the capital deployed and we'll bridge that gap between where our earnings are and where our dividend is.

That's fantastic color. Maybe a quick follow-up, Michael, one of your comments about some of the larger competitors moving down market. Do you feel like that's likely a kind of shorter-term trend and once M&A comes back and there's more activity and not everyone is chasing all of the smaller deals that they kind of go back up to where they historically have operated?

I would expect that. I can't say that with certainty, but it doesn't make sense for some of the platforms that we see chasing $20 million deals or even $30 million deals when you look at their size. It'd be like us running around chasing $2 million or $3 million deals. It's just the math doesn't work. But I think when there's a dearth of deals in the marketplace, you'll see people sort of reach down into a lower end of the market. I've seen that historically. So I wouldn't expect -- at least my judgment would be, I wouldn't expect to see them permanently residing in our end of the market.

Got it. And one last one for me, and then I'll step away. I think Slide 13 is a very powerful slide that shows kind of the cumulative gains that you guys have been able to record over time. I guess, looking over kind of the near term with the 8% common equity portfolio now, any near-term opportunities that you guys potentially see for additional gains? Or I would think M&A coming back would potentially help that prospect as well.

Well, I think the valuations that we have take into account what we think the appropriate valuation is. So I think what you see in our valuation, which we're very proud of. I don't know how many BDCs are actually have their core portfolio above their cost basis. Ours is a good deal above its cost basis. But I wouldn't say -- I would say the valuations we have now are the appropriate reflection of fair value.

Just the other comment -- I'd just make on that, excuse me, is the -- this has been sort of a feature of being in the smaller middle market and what we've been able to do, which is we often take equity co-investments when we do a loan, and we do it kind of as systematically as we can. Now not every deal allows us in and not every deal do we want to be in, in a very large scale. But in general, systematically, we're taking equity positions in many of the companies that we're underwriting. And so over time, obviously, number one is not losing money on the basic loan investments.

But over time, that -- those equity gains have been very -- have contributed quite a bit to our NAV and NAV per share growth. And we're just going to continue that. And it's hard, because it's kind of spread out in a portfolio approach, it's kind of hard to say we're going to get -- we've had a couple of mega gains in the past. But in general, it's more of a consistent across the portfolio, steady kind of realization of these positions that basically add to the portfolio performance.

Our next question comes from the line of Casey Alexander from Compass Point Research & Trading.

Mike, I'm kind of fascinated by Slide 15, which you alluded to, term sheets up 143%, but deals executed down 36%. I almost feel like I feel a level of frustration related to those 2 statistics in that you're finding deals to bid and the old story used to be that given lack of small differences in deal terms, people would go ahead and go with you guys because of the certainty of close, reputation, knowing what you would do in distressed situations.

But I guess the difference between deal terms is large enough now that, that's kind of been put off to the side and people are just taking deals away from you because the price differential is just too much. I mean, am I reading that wrong?

Well, I think it's -- there's 2 things. I think it still is very much the case that we win many opportunities because of our reputation in the marketplace. People are impressed with the quality of the work that we do to understand their businesses, so they get confident that we're going to be very good financial partners to them. That wins us a lot of deals. It also gets us a lot of repeat business. We still have confidence in that core feature to our business model, which is reflective of really the team that we have here, which we think is best-in-class in the industry.

Having said that, when the market gets really competitive and you start seeing at some level, competitors offering much cheaper pricing, really relaxed covenant levels, things of that nature, those things aren't going to win the tie any longer. So you do see -- certainly see some deals go away from us now. I would add this, though, the work that we've been doing, especially more recently in, let's call it, the last 6 or 9 months, doubling down our business development efforts and really investing significantly in growing our presence in the lower middle market, we are seeing a lot more quality opportunities.

And our objective is to stay away generally from more commoditized scenarios, i.e., the ones that you're referring to, where it's just somebody gets a pricing grid out and a terms grid and they just choose the person that's offering the best terms. Where we really shine is when we're getting a chance to interact with the ownership and the management team and do a lot of things that I just mentioned. We feel confident that we'll continue to find plenty of opportunities in our market to differentiate ourselves in the way that we described.

We, of course, need to be competitive and pricing has come down, and we need to be able to respond to that. But we're not going to take the one place that we're not going to lower our bar is on credit quality. And we think that, that's reflective of how our portfolio has performed historically as well as where it's sitting today.

We're encouraged -- I should add, we're encouraged. I did mention that we've got 3 new portfolio companies that are in closing right now. 2 of the 3 of those are new relationships. So that's, I think, indicative of a lot of the efforts that we've undertaken to grow our reach in the marketplace.

Chris, this is for you. I have been doing this for a long time. And I've never had an investor come to me and say, "Gee, I wish my BDC owned a bunch of structured CLO securities. And in fact, the history of them in BDCs is not that great." And so I really want to understand the thought process that makes you believe that this is what your investors want.

Okay. I guess I'd be interested in understanding maybe at another time, if you could share with us the bad experience in CLO structured securities you're aware of. Are you talking about equity investments and equity of CLOs when you say that?

There have been several BDCs that have had multiple different tranches of CLO securities. And over time, it has not improved their valuation. It hasn't necessarily been that great for their returns. And again, I don't know that that's what the mandate is that investors give you as a BDC.

Okay. So again, Casey, we can go through the details at another time, but I would -- I think it's fair to say that most of those, and we are familiar with that because we do manage CLOs. So we're very familiar with the securities, that most of those are equity investments in CLOs, and we would agree that the record there is not very good. The securities that we're investing in are very different than equity. They're way up the scale. And we're investing in BB-rated and even BBB-rated. So they're either investment-grade or just below investment-grade securities.

And because we've been in the business, we happen to know a lot about it, a lot about the data. We have like better research. And at some point, we're happy to spend time with you on how we do the research, but we have a tremendous amount of insight and data on the managers and their portfolios. And as a result, we're investing in the absolute cream of the CLO manager crop, and we're investing in these structured securities.

And for a whole host of reasons, these securities are investment grade or just below investment grade, but they have absolute returns that are consistent with our absolute returns across our portfolio. And there's something we know about and we have a lot of insight into. And if you would compare them to regular corporate bonds, like if you had same BB, BBB- corporate bonds in general, that would be sort of maybe comparable in size and things like that, they're probably 200 basis points plus wider in the structured securities area.

So this is a very niche investment area for a whole host of reasons. There's very few parties that are in it. And a number of them are hedge funds, for example, that are -- have come in and out of it. And so we've noticed sort of an outsized return. So we're basically getting a return level that's consistent with what we're looking for in our private credit and what we're able to get in the private credit marketplace. We're able to do it on a highly diversified basis.

And then another feature of this market is they often sell through BWIC on a daily basis. And so there's a level of liquidity that can be achieved. In other words, if we wanted to get out of these positions, we could probably get out of these positions in a matter of days or weeks because of the way, obviously, not in a severe like COVID or 2008 environment. But in a general environment, there's a fair amount of liquidity in these names. So you get not only the portfolio return levels that are consistent with what we do.

We have very specific research on it. And we also have, in addition, a level of liquidity that we don't have in the rest of the portfolio. And so we think at a time when we have a lot of cash available, this is a very interesting place to invest. Now should our pipeline all of a sudden, we start putting a lot more money to work in our base business, our core senior first lien senior secured debt securities, that's our preferred place to be.

And then we can also unwind some of these investments without any real penalty to help fund that -- should that business grow. So we think it provides a very good balance for the portfolio. We think it provides very good absolute yield. And I think the characteristics of it, I don't think you've seen that in other BDCs because I don't think other BDCs are doing it precisely the way we're doing it.

I appreciate the clarification between the equity tranches and the tranches that you're investing in. My last question, and I think this has been addressed, but I think it's worth approaching again. I mean NII this quarter was $0.17 below the dividend. And if you do the math, I mean, you're a long way away from getting there.

And so I'm curious, especially given the trajectory of base rates, which may make it even more difficult by the time you get to a more fully invested position, why not more appropriately set the dividend, because your credit is great and you look at the stock, the stock is down $1.5 over the last 2 days. What's that telling you? It's telling you that the market doesn't understand the dividend relative to your earnings power. Why not get to a more appropriate level? And then if you get fully invested, you can start to take it back up from there?

Well, Casey, I think, obviously, the question of the dividend earnings is something that we evaluate at all times. And I think your question is a very good question. Again, I think that we are looking at a we kind of want to balance the short term with the long run. And we feel that, yes, rates may come down, but deal volumes may be going up. And we have had periods where we've deployed -- we've had quarters, Mike, we've recorded...

Well over $100 million a quarter.

Yes. I mean we've had quarters where we've deployed $100 million. And then the question, what does the net investment look like? So we feel like we're not that far off of being able to get -- close that gap for a variety of reasons. But obviously, it's something we evaluate at all times, and we also have spillover.

And so as a result of the spillover, there's really -- there's no particular need to cut the dividend relative to our spillover requirements right now. And so all those things considered, we think we're kind of in a moment where it makes sense to hang in there. And I think depending how deal volumes play out going forward, we think we have a very good chance of closing that gap. And all things being equal, we prefer to maintain our dividend.

Our next question comes from the line of Robert Dodd from Raymond James.

Following up from some of Casey's questions. I mean the comment I think that Mike made was you expect the CLO debt tranches to be a more significant part of the investment strategy going forward. I mean, how much of the overall portfolio should we contemplate that strategy reaching over the next 12 months, give or take?

Well, I think that -- again, we're very cautious about predicting in calls like this. I think when Mike said that, I think he was referring to the fact we find it a very attractive investment category. And so we're open to deploying significantly more. We're not projecting doing more than that. I think right now, Henri, like around 5%. And we would be comfortable being larger, maybe twice that much. We don't know. But I mean, we haven't made those determinations.

As with everything, we kind of make our investments, individual credits at a time. There's some seasonality, I guess, you'd call it, with this marketplace at certain types of the year, there's relatively more supply than others. And so -- and then depending on the demand versus the supply, there can be some very attractive purchases like we had in the July time frame. And so we're trying to be opportunistic with regard to this strategy. We feel very comfortable that it's a very solid, proven strategy, maybe not so much in the BDC landscape as we discussed with Casey.

But again, I think the mistakes in the BDC landscape was going with the equity, not the -- not these essentially investment or just below investment-grade tranches. So again, we find an attractive investment class, but we don't have a hard target to get to our hard allocation. We're just evaluating deploying capital in this as the opportunities arise relative to our regular core private credit business.

Got it. Got it. Yes. I mean just one additional thing. I don't think a BB CLO tranche should necessarily be classified as a first lien on scheduled investments since it's well above the equity, but it's well down from the top of the stack. But that's neither here nor there. The other question...

And Robert, yes, sorry, this is Henri. And we obviously disclose it as part of our structured finance product category. So we do clearly separate it in all the disclosures.

The most -- Rob, I can't help but add this one thing because we don't want to get into too much of a sales pitch around it. But just as we've evaluated, as you can imagine, one of the things that makes us really attractive to those securities is that they've held up historically very well even in stressed environments. That particular tranche of securities, where it resides has really held up well over time.

Yes. On the CLO, just -- I mean, the prior history of CLO equity has obviously been a disaster in the space. There are other highly credible players that do invest in the debt tranches. And I don't think it's been viewed too unfavorably so long as it's not too big a piece of the portfolio. But that's -- I appreciate all the color there.

On the one concern I have, not about -- but Mike, on your comment that the large market participants coming down and they're essentially offering large market covenants to small company deals. If the M&A market picks back up, maybe to your comments, maybe they move back up market, what's the risk in your view that these smaller companies now and their advisers have now gotten a sniff of those simpler, easier covenants what's the risk they hold out for those even if the large market participants move back up and you end up with a fight with some of your normal competitors, but some of them cave on the covenant side.

Well, I think there's always risk that you have a competitor who offers irrational terms and underprices risk or poorly structures risk. We've managed through that historically. I've been in this market for so long through so many cycles. I've seen this movie before. And usually, what happens is they get -- they stub their toe or worse than stub their toe, and they get some discipline.

And I can tell you that being at this end of the market, the way we structure deals, the way we underwrite deals is we're very confident is the right way to do it. So I think in the intermediate to long run, we feel like, one, it doesn't make a lot of sense for much larger balance sheets to be trying to deploy capital that inefficiently.

So it's not likely that they'll stay there. We've certainly seen that pattern in prior cycles. And then the second thing is, if you structure deals that way aggressively in our end of the market, it's generally not going to work out well.

I totally get you. I agree. It usually leads to stub toes, but that can take a while for people to realize that...

Yes, we're going to hold the line. I think the more important thing that we think about is just that, and as I mentioned before, it's such a massive market. Every time you go to kind of second-tier city and you get to meet some of the accountants there or some of the brokers or business -- investment bankers that are kind of living in that market, there are new sources of deals that you find and businesses that you otherwise wouldn't. And we're really doubling down our efforts there.

So we feel confident that we'll find plenty of opportunities to do what we do best. And as I said, we'll try to avoid those commoditized overbanked processes and instead kind of do what we've done historically, and we're starting to see that in our pipeline and with some of the deals that we've closed recently.

Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann & Company.

Henri, what's the spillover income for the quarter?

The remaining amount is around about sort of a mid-2s, around $2.30, $2.50 a share at the moment.

Great. And then on the deck, it said the portfolio yields for the CLOs were 12.2%. Is that the GAAP yield? Or -- and is the cash yield materially different?

So that is the yield on all of what we call our CLO and CLO-related instruments, Chris. So that includes, for example, the F note that we have in our existing CLO. It also includes the E note in our joint venture CLO, and then it includes all of these BBs and BBB. So it's the blended weighted effective yield currently on all of that.

Great. Final question. I appreciate the market commentary talking about the M&A market, and that's quite helpful. But I couldn't help -- is -- I know that you guys have a large exposure to various software companies. And I guess my question really is, is AI starting to eat the lunch for a lot of these smaller software providers? And is that one of those sectors which could be under stress because of the encroachment of artificial intelligence?

It's a very good question. It's something that we're very focused on with all of our underwriting. So yes, indeed, AI can affect a software company. It can affect it in 2 ways. It can disrupt a software company and be a threat to it in that it can, in some cases, allow a competitor to kind of enter the marketplace a little bit easier with fewer barriers to entry.

In other cases, AI can be a really powerful enhancement to the value proposition of the software company. And that's something that we look at very, very carefully in our underwriting. So when we're looking at the software companies that we underwrite, we're very much focused on and talking to industry experts about what the exposure is what the barriers to entry are, what the switching costs for a product would be.

And we're looking at companies that -- or businesses that generally have really high retention rates, where the workflow is such an important part of kind of daily use in the customer base, where the product itself, it's an enterprise software product, it's kind of attached to the system of record for the entire industry. Things of that nature are things that we're looking at, and those are the types of deals we underwrite.

So while we do have a lot of businesses that are operating in a SaaS environment, we're incredibly selective around the businesses that we choose. We're still just like we are in our non-SaaS portfolio, turning down way more deals than we're doing, and we're reaching for those ones that we feel have the most sustainable value. And certainly, AI underwriting is a big part of what we evaluate as well.

Great. Final question, the Final question, given the upcoming debt maturities and given the uncertain outlook for short-term rates, should we expect you guys to be utilizing the credit facilities to refinance that?

I think one of the things we've worked really, really hard, Chris, is around flexibility on our balance sheet and our capital structure over the last year. So obviously, that is an option. But I think generally, we tend to more look at the current capital structure that we have is one where we still have a little bit of time.

We've got a lot of capital available as well, and we're going to sort of assess it over the coming months on sort of how best to either repay or refinance some of the maturities that we have coming up next year. It's a good question because it's obviously something we think about, but I think we -- what's really great is that we have so many different levers to pull as we have some of those maturities coming up in addition to, of course, raising new capital at the right time as well.

And then just a further comment to that, I just -- so everyone on the call is certain that we don't need to go outside to refinance anything that's coming up. We can cover it with -- and I think Henri has done a fantastic job, as you mentioned, on all this flexibility. So we've got a number of -- the paths that Henri is mentioning going on are all paths like within the 4 corners of what we have already. We're not dependent on the capital markets for any of that.

Our next question comes from the line of Mickey Schleien from Clear Street LLC.

A few more questions from me. I appreciate your time. Maybe for Henri, what strategies are you considering to perhaps get some of that cash out of the SBICs? For example, could they pay the BDC a dividend?

Yes, there's actually a couple of options that we have, again, flexibility that we have around our capital structure, Mickey. So firstly, yes, we have not taken out any of our REIT, undistributable reserves for quite a period of time, probably a couple of years now, maybe like 18 months.

And so that's obviously something that's immediately available for us to take that cash out. We just haven't needed it. So it hasn't been anything that we've had to do. And then secondly, you probably also noticed that in our SBIC III, we've only got $39 million of debentures drawn. But we've actually already got over $200 million of assets, which means we've prefunded much of the assets, more than half of the assets that are currently in the SBIC.

And the way you can do it by prefunding it, that allows you then to take out the capital because you prefunded the assets and it's already collateralized. So we actually have quite a lot of different levers to pull there to get that cash out of the SBIC, and that's why we sort of view most of the cash that's in the SBIC as available for general corporate purposes in the BDC, which is a good place to be in, obviously.

Yes. And to follow up, one of the 3 follow-ons that you made last quarter was ComForCare, which was already a large position. Now it's even larger, which always gives me a digestion. So I'm curious what's attracting you to that portfolio company?

That is a good question, and it's one that we love to talk about because it's such a great example of what we do and the types of businesses that we find. So we did that deal, I think, 2017 in support of one of our stronger sponsor relationships, did a $10 million investment in a business that had a couple of million dollars of EBITDA, let's say, in an end market that has absolutely terrific tailwinds serving senior community for nonmedical home health.

And a lot of seniors are rather than going to nursing homes and other settings like that, they're aging in place. So they've got terrific tailwinds there. In a branded product that has just fantastic franchisor economics. I'm sure you know when you look at a franchisor's business model, they generate really, really high free cash flow.

So since we've been in that business, not only has the core business grown incredibly successfully, but they've also -- and we've supported them with additional debt to undertake acquisitions that, in turn, have been very successful acquisitions that have augmented the platform in a way, some of them not in the exact same business, but generally serving the senior community with also franchisor economics.

So this is a business that is performing exceptionally well. And the only reason the sponsor hasn't sold it is they feel like they've got lots and lots of running room in it. We feel like where we sit on an LTV basis relative to the enterprise value is really, really comfortable. So we were delighted to have an opportunity to upsize the investment. Although we obviously take that very seriously and monitor that very carefully because it is significant exposure.

But we think where we are relative to the enterprise value of that business and how it's performing and how closely we monitor it. We've come to know the management team incredibly well. We know the sponsor exceedingly well, and we're watching its performance, which is really strong. Those are the things that have made us comfortable upsizing to that level.

That's really helpful. And sticking to the theme of originations, I think you had 3, which was announced in the press release. One of those others was WellSpring. But for the life of me, I can't find the third one. What was the third follow-on?

Hang on for one second. So many deals...

Just to clarify, ComForCare, WellSpring and something else.

No, a very small one in Modis Dental. And that was just a really small equity follow-on to support an acquisition that they were doing. So it was 2 primary follow-ons and then a small follow-on in Modis.

Okay. A couple more questions. Just at a high level, the non-CLO portfolio was marked up, which is great to see. Could you tell us how much of that was driven by market multiples versus company performance? Broadly speaking.

Yes. We've actually got that.

Yes, it's probably close to 50-50, Mickey.

But I should say this, because I think probably where you're going, and I'll just add this anyways, is that we do feel very good about the underlying performance of our portfolio. The vast majority of our portfolio is up quarter-over-quarter.

Yes, I see that. And the marks are good and the credit quality is good. So I'm not surprised with that markup. Just curious to what extent that was driven by company performance versus multiples. And lastly, I hate to beat a dead horse maybe for Chris. You again raised some equity capital, which just seems completely redundant in the current market setting and given how much liquidity you have. Can you help us understand why you continue to raise equity?

Sure, Mickey. And I think, again, we think it's a very good question, something, again, that we are constantly discussing ourselves. But I think one of the characteristics of Saratoga is that we have among the highest insider ownership of any BDC out there at 11%. And so we're aligned very much so with our shareholders.

And as a sort of long-term historic holder and going forward, we look at things -- we have to look on a quarterly basis for conversations like this and reporting like this, and we have to look on a semiannual, annual basis. And we also have to look on a very long sort of 5-, 10-year type of run on all different types of decisions for people, hiring people, younger people that are going to be with us for 20 years and things like that.

And so we've got a constant mix of sort of horizons that we're considering. And on the equity side of BDCs, historically, and you've been studying the industry for a long time, generally speaking, BDCs can't raise capital all the time. There are periods of time where they can. And then right now, I guess there's a period of time where not much BDC equity is being raised, that BDCs are trading at discounts to NAV. And so there's a cycle to that. And there's some old Wall Street adages, not to say those are truths or anything.

But you've got -- sometimes you have to raise the capital when you can. And sometimes, when you can raise capital, it may not be the best time to deploy it. There's like harvest time and planning time. And so sometimes you don't want to plant too many seeds at harvest time and you want to harvest too much in planning time. But you don't control that. We don't control that. And so for us, being a smaller BDC, we're now bigger than we used to be.

Our trading volume is substantially better as a result of these equity sales. And we crossed the $400 million threshold. It's putting us in a different place in terms of how we can serve our client base out there in terms of size of deals we can do, the underwritings we can do. I think the volume is helping our shareholders. I think our stock held up fairly well.

Obviously, you have your point of view on it. But I think going to the monthly dividend and things like that, we've done quite a few things for the stock that I think is working well, and it's enabled us to be able to sell stock at or around NAV, which is a very unusual thing for BDCs in general and BDCs of our size.

Ultimately, we want to be substantially larger. But I think as anyone who's watched our company over time, we're not driven by being larger, right? We want to be larger. We're prepared to be larger. We have financial characteristics to allow us to grow quite a bit, but we're also highly disciplined in terms of how we grow. And we've had periods of time we've grown very rapidly and other times where we've kind of held in. And right now, it is one of the ones where we're focused a little more on discipline. And I think the quality of our portfolio is showing that relative to the other portfolios out there.

So back to your specific question, we can raise equity now. We think it's important for the long-term future of Saratoga as a viable entity, not only for serving our clients and customers, but for our -- the people that work here, they want to view this is a growth enterprise. I think that allows us to attract the best people and attracting the best people gives us the ability to have the quality of the investment performance that we're having for our investors.

So it's all part of a kind of longer-range thinking that maybe not make sense this quarter, but we think it's -- we've had a very good record so far, and we think we're going to have a very good record going forward. And that's principally why we're doing it.

Chris, you just triggered another question in my mind, and I'll end with that. But in terms of growth, we have seen some consolidation in the sector where other BDCs just haven't done well or portfolio and it was not a pretty picture. They've been acquired. Is that something -- there's a price for everything in this world. Is that something you'd be interested in doing to put maybe some of the liquidity to work? Or is it just not in your DNA and you don't want the headaches of a messy portfolio and cleaning it up and all of the stuff that comes along with that type of acquisition?

Well, you've kind of answered the question yourself in the way you phrased it. But look, I think, generally speaking, well-performing BDCs are generally not for sale and poor-performing BDCs are. And there's a couple of elements in the BDC as a vehicle. Obviously, it's a really, really attractive vehicle. And a lot of investment managers that don't have BDCs would like to have BDCs.

And so there's a value to the vehicle, which sometimes trumps a little bit the value of the portfolio. And sometimes, as we've seen in the past, sometimes the portfolio gets sold in one direction and the BDC itself gets sold in another. So there's sort of 2 dimensions to that. For us, having another BDC manager license is not that interesting, where for some other people, it is. And so that element of the asset value isn't that attractive because we already have a BDC. And then the BDCs that are for sale and get into trouble, generally speaking, first of all, the duration of a good portfolio is probably 5 to 3 or 4 years, right?

And the duration of a bad portfolio can be 7 to 10 years. So you're buying these portfolios and you're going to be working them out for a very, very long time, probably. And you're going to have to -- and some of our -- there's a lot of examples in our industry out there where you buy these things. And then you're constantly -- not only are you having to talk about it in all your quarterly conference calls, your people have to deal with it. And you're kind of focused on the wrong things.

And as I said, a really good portfolio turns over every like 1/3 a year or something in regular way times. And so you don't really get that much buying a portfolio if we had a good portfolio, we would be very interested. I mean if someone were selling a portfolio out of an insurance company or out of someone else and it was a quality portfolio, we would be very interested in that. But that generally doesn't happen. It's only the bad ones that show up. And then we've seen a bunch of -- we've looked at some secondary sales and things like that.

And you do see some portfolios and then they try and sprinkle in some good assets to sort of level the bad assets that they're trying to offload. But you're still buying -- just you're buying a lot of problems that aren't really the things we want. And we have a very particular type of investing that not a lot of other BDCs do. And so we want to stick with that. I think the origination market is challenging right now, but that historically, that's changed. There are times when it can get very good. And a few more $55 billion private equity buyouts and maybe that will soak up some of the demand -- some of the supply out there of some of these larger funds.

The M&A market gets kick-started. I mean the -- if you look at the statistics in private equity, right, I mean, the amount of realizations in the middle market private equity funds is very small, right? So there's a backlog of deals that need to get done. Now are they going to get done next year? We can't say. But at some point, all these things are going to trade because they're all in finite funds. Yes, there are continuation funds, but that trend may not last forever either.

And so anyway, so we feel that our best approach is to stick with quality assets in a BDC. We're not a distressed fund and a distressed fund is a different kind of animal. We like good quality companies and having portfolios of good companies, we get more good companies. So that's kind of where we're focused.

Yes, I agree with that.

Thank you. At this time, I would now like to turn the conference back over to Christian Oberbeck for closing remarks.

Okay. Well, I want to thank all of our shareholders for their continued interest in being part of the Saratoga team here, and we look forward to speaking with you next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.