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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.’s Fiscal Second Quarter 2023 Financial Results Conference Call. Please note that today’s conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp.’s Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.’s fiscal second quarter 2023 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 2023 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri and welcome everyone. While the significant broader market volatility continued this fiscal second quarter, we remain focused on balance sheet and liquidity strength while identifying further opportunities and growing our asset base and high-quality credits. We believe Saratoga continues to be well positioned for potential future economic opportunities and challenges in this volatile environment. Our existing portfolio companies are generally performing well with our overall fair value add costs and our current business development pipeline robust with positive metrics in term sheets issued and deals executed. Our AUM grew significantly this quarter to $955 million as we originated $141 million in new platforms or follow-on investments offset by $75 million of repayments. We continue to successfully bring new platform investments into the portfolio with 6 added this fiscal quarter and all of our originations were made while maintaining the extremely high credit bar we set for all investments. Our NAV per share this quarter decreased by 1.5% from Q1 to $28.27 primarily reflecting the impact of widening market spreads on the core portfolio and the volatility being experienced in the broadly syndicated loan market. Last week, we also announced the approval of our third SBIC license. This will allow us to continue to expand upon our existing investments in support of the SBA’s mission to provide growth capital to small businesses, which are so important to our economy. Our SBA guaranteed debentures are a great benefit to our capital structure, further enabling us to provide innovative and cost-effective solutions to the many smaller and middle-market companies we finance. From an earnings perspective, we began to see the benefit of interest rate increases with 98% of our interest-earning portfolio at floating rate and more than 95% of our borrowings at fixed rates. Our core BDC portfolio yield increased by 140 basis points this quarter, up 16.5% from 8.5% in Q1 compared to 9.9% in Q2, with the full impact of the rising rate environment not yet fully reflected in our earnings. To briefly recap the past quarter on Slide 2. First, we continued to strengthen our financial foundation in Q2 by maintaining a high level of investment credit quality with 96% of our loan investments retaining our highest credit rating at quarter end, generating a return on equity of 4.8% on a trailing 12-month basis despite recognizing first $5.3 million of net unrealized depreciation, primarily reflecting widening market spreads and broadly syndicated loan market volatility in the CLO and JV and second, $1.2 million in realized loss on extinguishment of our SAK baby bond and SBA debentures and registering a gross unlevered IRR of 10.6% on our total unrealized portfolio and a gross unlevered IRR and of 6.4% on total realizations of $836 million. Second, our assets under management increased significantly to $955 million this quarter, a 7% increase from $895 million as of last quarter, a 17% increase from $818 million since year end and a 43% increase from $666 million as of the same time last year. Our new originations included 6 new portfolio companies and 9 follow-on investments and our current pipeline remains robust. Third, in volatile economic conditions such as we are currently experiencing, the balance sheet strength, liquidity and NAV preservation remain paramount to us. Our capital structure at quarter end was strong, $337 million of mark-to-market equity reporting $376 million of long-term covenant-free non-SBIC debt, $234 million of long-term covenant-free SBIC debentures, and $25 million of long-term revolving borrowings. Our total committed undrawn lending commitments outstanding to existing portfolio companies are $38 million. Our quarter end regulatory leverage of 184% had a substantial cushion over 150% requirement and we had $145 million of liquidity at quarter end available to support our portfolio companies, with $9 million of the total dedicated to new and follow-on opportunities in our SBIC II fund, $107 million available through our newly approved SBIC III fund and $13 million of cash. Finally, based on our overall performance and liquidity, the Board of Directors declared our quarterly dividend of $0.54 per share for the quarter ended August 31, 2022, an increase of $0.01 from last quarter, which was paid on September 29, 2022. This quarter saw a solid performance within our key performance indicators as compared to the quarters ended August 31, 2021 and May 31, 2022. Our adjusted NII is $7 million this quarter unchanged from last year and up 9% from last quarter. Our adjusted NII per share is $0.58 this quarter, down from $0.63 last year, but up from $0.53 last quarter. Latest 12 months return on equity is 4.8%, down from 14.4% last year and 6.9% last quarter. And our NAV per share is $28.27, down 2.4% from $28.97 last year and down 1.5% from $28.69 last quarter. Henri will provide more detail later. As you can see on Slide 3, our assets under management have steadily and consistently risen since we took over the BDC 12 years ago and the quality of our credits remain high with only one credit currently on non-accrual. Our management team is working diligently to continue this positive trend as we deploy our available capital into our growing pipeline, while at the same time being appropriately cautious in this volatile and evolving credit environment. With that, I would like to now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 4 highlights our key performance metrics for the fiscal second quarter ended August 31, 2022. When adjusting for the incentive fee accrual related to net capital gains in the second incentive fee calculation and interest expense on our SAK baby bond during the period that SAT was issued and also outstanding, adjusted NII of $7.0 million was up 8.8% from last quarter and relatively unchanged from last year’s Q2. Adjusted NII per share was $0.58, up $0.05 from $0.53 per share last quarter and down $0.05 from $0.63 per share last year. Across the three quarters, weighted average common shares outstanding were $12.0 million for this year’s Q2, $12.1 million for last quarter and $11.2 million for last year’s Q2. There was zero accretion or dilution from the share repurchases and DRIP plans this quarter. Adjusted NII was relatively unchanged from last year with the 18.5% increase in investment income, resulting primarily from a 43.3% increase in AUM and the increase in the current coupon on non-CLO BDC investments from 9.5% to 9.9%, offset by increased base management fees and increased interest expense resulting from the various new notes payable and SBA debentures issued during the past year and quarter. The benefit of higher rates on AUM is not yet fully reflected in interest income, while the cost of higher rate debt is already largely absorbed in interest expense without full deployment as yet. Sequential quarter changes reflect the same factors as year-over-year. However, the increase in current coupon is greater being an increase from 8.5% to 9.9%. Adjusted NII yield was 8.2%. This yield is up from 7.3% last quarter, but down from 8.7% last year. For the second quarter, we experienced a net loss on investments of $5.5 million or $0.46 per weighted average share and a net realized loss on extinguishment of debt of $1.2 million or $0.10, resulting in a total increase in net assets from operations of $0.9 million or $0.08 per share. The $5.5 million net loss was comprised of $13.3 million in net unrealized depreciation and $0.2 million of deferred tax expense on unrealized depreciation on investments held in our blockers offset by $7.9 million in net realized gains. The $1.2 million realized loss on extinguishment of debt was generated by the extinguishment of both the company’s $43.1 million SAK baby bond and the $18.4 million SBA debentures during this quarter. The $7.9 million net realized gain on investments represent the realization of the equity of the company’s PDDS investment and the $13.3 million net unrealized depreciation primarily reflects: one, $8.0 million reversal of previously recognized depreciation on the company’s PDDS investment; two, $1.2 million unrealized depreciation on the company’s CLO and JV equity investments, reflecting the volatility in the broadly syndicated loan market as of quarter end; three, $1.9 million unrealized depreciation on the company’s Pepper Palace investments due to company performance; four, $1.2 million unrealized depreciation on the company’s

Thank you, Henri. I will take a few minutes to describe our perspective on the current state of the market and then comment on our current portfolio performance and investment strategy. Since our last update in July, we saw market conditions continuing to be very aggressive, exceeding where they were pre-COVID-19 and still more of a borrower’s market. Liquidity remains abundant after the large-scale fundraising of last year, but lenders are being more risk-sensitive backing off historically volatile sectors and taking a harder stance on the use of capital. Leverage remains elevated. In the first half of calendar year 2022, we saw high transaction volumes and M&A activity albeit slightly lower than 2021, but continuing to be quite healthy. We currently have an actionable and robust deal pipeline. In a competitive market, investors continue to differentiate themselves in other ways, such as accelerated timing to close and looser covenant restrictions. Now that said, lenders in our market remain wary of thinly capitalized deals and, for the most part, are staying disciplined in terms of minimum aggregate base levels of equity and requiring reasonable covenants. Where we are seeing more noticeable change is on the rate side. Absolute yields are growing significantly as LIBOR and SOFR increased more than 150 basis points this past fiscal quarter and have continued to rise in September, as Henri demonstrated. And in addition, spreads are starting to widen in the lower middle-market, where up to recently it had mainly been happening in the broader syndicated loan and capital markets. The Saratoga management team has successfully managed through a number of credit cycles and that experience has made us particularly aware of the importance of first, being disciplined when making investment decisions and second, being proactive in managing our portfolio. We are keeping a very watchful eye on how continued inflationary pressures in labor costs, supply chain issues, rising rates and slowing growth could affect both prospective and existing portfolio companies. We have confidence in our strong position entering a possibly different credit and rate environments. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital as we will discuss shortly. Calendar year 2022 so far has been a very strong deployment environment for us with a strong pace of originations. Follow-on investments in existing borrowers with strong business models and balance sheets continue to be an important avenue of capital deployment, as demonstrated with 52 follow-ons in the last 12 months ending September and 15 in the last calendar quarter alone, including delayed draws. In addition, we have invested in 5 new platform investments in this past calendar quarter and we have multiple new platform companies expected to close in the next couple of months. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams, especially in this volatile market environment. All of our loans in our portfolio are paying according to their payment terms, except for Nolan investment that we put on non-accrual this quarter as we work with the company on an agreement that will likely have us pick our interest for a period of time. Nolan is our only non-accrual investment across our portfolio. After recognizing the unrealized depreciation from spread widening and performance on our overall portfolio this quarter, Saratoga’s overall assets are now just 0.1% below cost basis. We believe this strong performance reflects certain attributes of our portfolio that bolster its overall durability. 83% of our portfolio, up from 80% last quarter, is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce high degree of recurring revenue and have historically demonstrated strong revenue retention. Now, our approach has always been to stay focused on the quality of our underwriting. As you can see on Slide 14, this approach has resulted in our portfolio performance being at the top of the BDC space with respect to net realized gains as a percentage of portfolio at cost. We are at the top of a list of only 13 BDCs that had a positive number over the past 3 years. This strong underwriting culture remains paramount at Saratoga. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to peer as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics. We always have sought durable businesses invested capital with the objective of producing the best risk-adjusted and accretive returns for our shareholders over the long-term. Our internal credit quality rating reflects the impact of current market volatility and shows 96% of our portfolio at our highest credit rating as of quarter end. Part of our investment strategy is to selectively co-invest in the equity of our portfolio companies when we are given that opportunity and when we believe the equity upside potential exists. This equity co-investment strategy has not only served as yield protection for our portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated on the slide and the previous one. We intend to continue this strategy. Now looking at leverage on Slide 15, you can see that industry debt multiples increased from calendar Q1 to Q2 and are at historically high levels. Total leverage for our overall portfolio was 3.97x, excluding Nolan and Pepper Palace, while the industry now is well above 5x leverage. Through past volatility, we have been able to maintain a relatively modest risk profile throughout. Although we never consider leverage in isolation, rather focusing on investing in credits with attractive risk return profiles and exceptionally strong business models, where we are confident the enterprise value of the business will sustainably exceed the last dollar of our investment. In addition, this slide illustrates the strength of our deal flow and our consistent ability to generate new investments over the long-term despite ever-changing and increasingly competitive market dynamics. During the third calendar quarter, we added 5 new portfolio companies and made 15 follow-on investments, increasing our 9-month production to 47 total new investments versus 47 for the whole year last year. Despite the success we are having investing in highly attractive businesses and growing our portfolio, it is important to emphasize that, as always, we are not aiming to grow simply for growth sake. In the face of this uncertain macroeconomic environment, we are keenly focused on investing in durable businesses with limited exposure to inflationary and cyclical pressures. Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment will be accretive to our shareholders. Moving on to Slide 16, our team’s skill set, experience and relationships continue to mature and our significant focus on business development has led to couple of new strategic relationships that have become sources of new deals. Our top line number of deals sourced remains robust, but has dropped in the past 2 years, initially due to COVID, but more recently reflecting our efforts to focus on attracting a high percentage of quality opportunities. Most notably number of deals executed during the last 12 months is markedly up from last year’s pace demonstrating that this more focused sourcing strategy is yielding results. What is especially pleasing to us is that 10 of our 13 new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts. As you can see on Slide 17, our overall portfolio credit quality remains solid. The gross unleveraged IRR on realized investments made by the Saratoga Investment management team is 16.4% on $836 million of realizations. On the chart on the right, you can see the total gross unlevered IRR on our $902 million of combined weighted SBIC and BDC unrealized investments is 10.6% since Saratoga took over management. As of this quarter, we have two yellow rated investments being our Nolan Group and Pepper Palace investments. Nolan has been on yellow for a while now since COVID, being more dependent on in-person business interaction and was also added to non-accrual status last quarter. The current unrealized depreciation reflects the current performance of the company, but does not change our view of the fundamental long-term prospects of the business. The other yellow investment is Pepper Palace and this quarter, we recognized another $1.9 million of unrealized depreciation on this investment, increasing the total depreciation to $7.4 million since investment on our first lien term loan and preferred equity investments. This markdown reflects the current performance of the company, but they continue to pay interest. We are working closely with the company and the sponsor as they work to improve performance. During this quarter, approximately $3.6 million of the total $5.3 million of unrealized depreciation was related to wider market spreads and market performance, bringing fair value of our portfolio basically in line with cost. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital. Moving on to Slide 18, you can see our first SBIC license is fully funded. Our second SBIC license has already been fully funded with $87.5 million of equity, of which $264 million of equity and SBA debentures have been deployed. As of quarter end, there were still $6 million of cash and $9 million of debentures currently available against that equity. We are also pleased to have received approval for our third SBIC license last week which means we practically have access to another $107 million of low-cost SBA debentures currently, allowing us to continue to support U.S. small businesses. To summarize the quarter, the way the portfolio has proven itself to be both durable and resilient against the impact of COVID-19 and the subsequent market adjustment and volatility really underscores the strength of our team, platform and portfolio and our overall underwriting and due diligence procedures. Credit quality remains our primary focus, especially at times with such high activity levels as we are seeing now. And while the world is in continuous flux, we remain intensely focused on preserving asset value and remain confident in our team and the future for Saratoga. This concludes my review of the market. And I’d like to turn the call over to our CEO. Chris?

Thank you, Mike. As outlined on Slide 19, our latest dividend of $0.54 per share for the quarter ended August 31, 2022 was paid on September 29, 2022. 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 impact of rising base rates and spread on our earnings. Moving to Slide 20, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of negative 0.4%, in line with the BDC index. This performance reflects the current market volatility impacting both us and the industry. Our longer term performance is outlined on our next slide. Our 3 and 5-year returns place us in the top half of all BDCs for both time horizons. Over the past 3 years, our 26% return exceeded the average index return of 21%. Over the past 5 years, our 77% return greatly exceeded the index’s average of 40%. Since Saratoga took over management of the BDC in 2010, our total return has been 588% versus the industry’s 177%. On Slide 22, you can further see our performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, net asset value per share, performance, NII yield and dividend growth, which reflects the growing value our shareholders are receiving. Despite this quarter’s results being impacted by market spreads and volatility, we continue to be one of the few BDCs to have grown NAV long-term. We have done it accretively by also growing NAV per share, 17 of the last 21 quarters. Moving on to Slide 23, all of our initiatives discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 14%. Access to low cost and long-term liquidity with which to support our portfolio and make accretive investments recently increased with our SBIC III license approval last week, a BBB+ investment grade rating and active public and private bond issuances, solid historic earnings per share and NII yield beneficiary of rising rate environment with 98% of our AUM floating rate and 96% of our debt fixed rate, strong and industry leading historic and long-term return on equity accompanied by growing NAV, NAV per share, putting us at the top of the industry for both long-term, high-quality expansion of AUM and an attractive risk profile. In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry. In closing, I’d like to refer back to Slide 10 that Henri walked you through earlier in the presentation. In this rising rate environment, Saratoga is a beneficiary of increased base rates. In Q2, Saratoga’s average 3-month LIBOR used for interest income purposes was 2.07%. At August quarter end, the closing LIBOR rate was 103 basis points higher at 3.1%. And as of today, the spot rate is 3.63%, another 53 basis points higher from quarter end close. We wanted to ensure that we focus investors on this favorable dynamic for Saratoga. We remain confident that our experienced management team, historically strong underwriting standards and time and market tested investment strategy will serve us well in battling through the challenges in the current and future environment and that our balance sheet, cash structure and liquidity will benefit Saratoga’s shareholders in the near and long-term. In closing, I would again like to thank all our shareholders for their ongoing support. And I would like to now open the call for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.

Hi, guys and congratulations on a good quarter. A couple of questions if I can both about rates. First, on the credit quality side, I mean, to your point, rising rates will benefit your earnings, it does have obviously by charging borrowers more. And with the shape of the curve, it’s only really now I think that the buyers are really starting to see the rates move meaningfully higher pretty quickly. So can you give us any color on – has there been any – I don’t want to say pushback, but have you started to see any calls or anything like that from borrowers who are looking at these increases and are those starting to feel more stress or is there any metrics on interest coverage or anything like that, but the rising rates obviously potentially could have a negative impact on credit quality, but any color you can give us there given how steep the curve is right now?

Well, certainly, we are benefiting from the rising rates and our borrowers are paying more interest. Robert, one of the things I’d tell you is that when we look at and underwrite our – each of our investments, we sensitize the investments to different scenarios, which would include a higher rate environment. One of the things that’s fundamental to our underwriting as well is we look for businesses that generate a high degree of free cash flow. So we are not generally investing in businesses that have massive capital needs where there is limited free cash flow with which to service debt such that interest coverage is tight going into a deal. Typically, there is very healthy interest coverage. And while it’s getting a bit tighter in this market with rising rates, there is very comfortable cushion across our portfolio for that as well as for further growth. We tend to underwrite our businesses a bit more with a focus on the enterprise value of the business and where we are situated on the balance sheet vis-à-vis that enterprise value and as well of course focused on whether they are producing enough recurring cash flow that we can get comfortable with even in a rising rate environment to cover our debt. And we are seeing that hold up nicely. Now that doesn’t mean that the borrowers are happy with rates increasing, but that’s across the market. So, they don’t really have much of an alternative. One of the things that’s been nice for us, because I think you’ve probably heard from us in prior quarters, we were seeing the larger market have not only rate expansion from index expansion, but they were actually seeing their spreads widen. Yet in the lower end of the middle-market, we weren’t seeing spreads widen much at all. More recently, we are starting to see signs of that. And so we are starting to benefit from the indexes rising and then a bit more room to increase the spread on our underwriting as well.

I appreciate – go ahead.

One little comment too, also I think that if you look at the character of our portfolio, we have – we are not really reflective of the general economy, the rates are one thing and then revenues at the company level is another. And our portfolio, by and large, is not that sort of sensitive to changes in the economy, which we are starting to see in many places with a lot of our SaaS business being subscription revenues and things like that. So on the sort of income side of our credits, things are holding up quite well. I think we have a couple of places, but it’s not really economic driven at this point.

Got it. Got it. I appreciate that. Thank you. Yes, you don’t have a lot of deep cyclical exposure, but the flipside going to the earnings exposure. I mean, I appreciate the chart and that index last quarter, the average LIBOR was effectively too. If I look at the forward curve that’s projected to go to, call it, 4.5% and then be stable there. To your point, there is a lag and it needs to be stable for it really to flow into earnings. Based on the disclosures in the 2Q, an extra 250 basis points on LIBOR is something in the range of potentially $0.30 to $0.40 incremental per quarter. Is that correct?

Well, Robert, I think as you can understand – and not to be too light about it, but I think this is one of those questions where one says you do the math.

Fair enough. Yes, fair enough.

Robert, I would just add, part of why we included that new slide was, obviously, to highlight just how there is this lag in the reset of LIBOR. But obviously, the Q disclosure is based on the SEC requirements and is calculated accordingly, I would just add to that, that, that is the impact to interest income, right? So there is obviously an incentive fee as well as you should just factor in that is not in that disclosure from just a standard SEC disclosure, but that’s the impact…

Thank you. Yes, there isn’t a footnote there saying whether that’s before or after, the incentive fee – so the incentive fee is not included in that. Got it. Thank you. Last one, if I can, on the same kind of thing. Dividend increased again this quarter and ignoring what I just said about how high earnings could go, what’s – can you give us any color on kind of the policy of where – I mean I do think you’ve got significant positive exposure, whatever the number may be is a different thing. But would you feel comfortable or the Board, but there is multiple Board members on the call, taking up the dividend based on earned driven by rate? So would you rather keep the dividend to a level where it would be sustainable even if rates came back down again? Because that – the curve obviously rolls over in the future as well. So can you give us any thoughts about that in terms of what’s the real framework? Does it need to be a sustainable dividend long-term? And if you over earn that because of rates, that’s not a reason to take up the base rate or how do you think about that?

Well, I think that’s a very thoughtful question of yours. Clearly, we have a curve that the market is defining right now. As you can see from last week, the last 2 days and then today, the market is not sure exactly what’s going to happen at the Fed or really anywhere else. And so there is a lot of uncertainty out there. So I think you are very thoughtful in terms of – we do need to be careful not raising our dividend to an unsustainable level. And we have to figure out what that is because if the economy goes in a recession and rates come back down again. You’re right that they will have an impact. So those are all things we’re going to have to manage. I wouldn’t say we have enough information today to make a hard decision. I think also as a BDC, we’re subject to regulatory requirements that require us to pay out a certain percentage of our taxable income. There are some flexibilities in terms of spillover and the like that put some degree of freedom in that. But in general, in any given sort of tax year, we have to pay out a certain amount. So our dividends ultimately need to be driven by what our actual taxable earnings are. But – so I’m not giving you a hard answer because we don’t have one at this moment. But suffice it to say, we’re experiencing a good uplift in earnings and the implications of that as you say and as the regulations require would be – those increased earnings needs to be paid out in dividends.

I appreciate that response. And it's a tough question. So congratulations on the quarter again, and the outlook and thanks a lot.

Thank you.

Thank you. And our next question comes from the line of Casey Alexander with Compass Point. Your line is open. Please go ahead.

Yes. Hi, good morning. Mike, I think you may have touched on this a little bit. But how – in this environment, origination yields in terms of a net yield compared to the reset yield on similar loans. Are you bringing those on board kind of at that level? Or a little bit of a discount to the reset yield of similar loans, giving them a little bit of room to move? How are you handling that dynamic in the marketplace, especially given the at which rates are moving?

That’s a good question because it is a pretty dynamic equation. As it relates to competing on new deals, we’re pricing those based on generally for new deals, we’re pricing those based on SOFR. And what we’ve seen is that we’ve got a little bit more room to price those at a bit wider spreads than we could even a quarter ago. I’m not going to say that, that’s massive movement, but we are seeing an ability to price new deals at that level. Perhaps addressing your question, I want to make sure that I do that right. The deals that are in portfolio have a bit of a lag because the borrowers will have an option, for instance, to price their deals, I’ll use an example on a 90-day LIBOR. And so it might take 90 days for them to reset their pricing and therefore, the increase in rate won’t materialize for a few months. And that’s why that average LIBOR that we referenced is a bit lower than the current market. But new deals are getting priced without a holiday, but really based on current indexes and spreads that are all else equal, a bit wider, we’re experiencing than where we priced deals even a quarter ago.

Okay. Thank you. Secondly, I know that Nolan and Pepper Palace are yellow, but you did also take down

Yes. Let me give you a little bit. And obviously, I’ll preface it by saying that there is only so much we can get into these are private companies, and there is a certain amount of information we can relay, but some of it we don’t get into the details too much. But I’ll tell you, it’s really – we think a really solid business. It has a differentiated platform where they are providing education and training primarily for dental assistance. And they do that in a really unique way that produces stronger outcomes. Every education deal we look at, we’ve very much get to the outcomes and the outcomes for the students are very strong here in terms of their placement. The outcomes for the people that are hiring them are very good as well because the students are, we think, better equipped and people that are going through other training methods. And so it’s a business that is fundamentally really solid. They very recently encountered some performance difficulties related to an enrollment interruption that was due to a partnership arrangement that they had that they have since moved away from. And since moving away from that partnership arrangement, enrollment is back on track to historical levels. And as a result, we’re optimist at and expect that their financial performance will come back and follow suit as well. But that valuation write-down is largely reflective of that enrollment interruption, which we expect to be temporary.

Okay, great. Thank you. I think, that’s it for me. Thanks. I appreciate it.

Thank you, Casey.

Thank you. And just a moment for our next question. Our next question comes from the line of Mickey Schleien with Hovde Group. Your line is open. Please go ahead.

Yes. Good morning, everyone. Chris, your total balance sheet leverage is running higher than you’ve historically been, and some of your debt is redeemable. So I’d like to ask you how you flow potentially reducing the balance sheet leverage as it seems that the economy is going to slow down pretty meaningfully to help reduce risk.

Well, I think Mickey that’s obviously a question that is kind of profound about how one organizes and capitalizes a BDC such as ours. I think one of the things we’ve been careful about since inception is the structure of our debt. And so when one looks at leverage and when thinks of risk, the sort of the debt is a major component of what is risk. We believe that our debt is a very low risk debt structure. It’s all a fixed rate of interest and quite well. I mean we have interest rates that are 2% on some of our SBIC funds and 4% of our other funds recently six handle. So, all of our rates on our debt that we have right now are substantially below rates today in the environment that we’re in. So our debt – I mean, if you did a mark-to-market of our liabilities, right, our liabilities will probably be discounted substantially. And so the face value of the debt would look a lot less if you actually marked all this stuff to market. So the value of our liabilities is really good from the point of view as being a borrower. And the structure is very favorable. All debt is not the same, and we have no covenants in any of these debt instrument. So all we have to do is to maintain our – these debt instruments just to pay our interest. And then the maturities of these are very far out. I think our earliest maturities, we have some wind down going on in our SBIC I, but that’s largely driven by redemptions rather than maturities. As – and then our others, we – most of our debt – Henri, can you just jive a little bit on our maturity schedule of our existing debt?

Yes, sure, Chris. Yes. I mean we’ve got a small amount of SBIC debentures that are just over 2 years still left. But otherwise, all of our non-SBIC debt is 3 years or longer and actually almost – actually, most of it 4 years or longer. So still very, very long maturities remaining on all of them and sort of staggered sort of 4 to 6.

And then if you look at those liabilities, look at the assets that we have. And I think as Mike reviewed, we are pleased with the performance and the credit quality of our asset base. And our – and the spreads are really breaking out on the wide side here. So the spread over what our assets are producing and what our debt costs us is providing a very attractive gross margin, if you will, on the leverage that we have. And we feel very, very favorable. And we have a lot of follow-on investments we’re doing. We’re able – we’re getting some more pricing power than we’ve had before. So on the asset side, we’re getting – we’re happy with the quality and we are also getting improved pricing, if you will, as rates go up and as new loans are put on reflecting the new market environment and so paying down at face value, if you would, would be kind of like losing money, if you will. I mean, just because the value of this is not what it is on the balance sheet, given the market. So we feel comfortable with the leverage that we have given the structure it has and in the relationship with the assets that are on our balance sheet. I think as you can see, our earnings this past quarter are up significantly. And I think if you look at the yield curves our spreads are in the process of widening. And so we don’t feel that our liability structure in this environment, given the market positioning provides a risk. In fact, we believe it provides a tremendous benefit.

And Chris, to follow-up on that yield curve dynamic. I understand that those charts in the Qs and Ks are assuming everything remains equal, which it never does. But given how much LIBOR has climbed and taking into account Mike’s comments that spreads are actually widening a little bit, do you think we’re going to get to the point when we think about how much private debt capital is out there where lenders including folks like yourselves will start to give some of that back to borrowers in the form of spread compression?

Well, obviously, that’s a very good question, and it really has to do how the market plays out going forward. I think, as Mike said earlier – and Mike, please chime in on this one. We’re seeing widen – spreads widening right now. We’re not seeing spreads compress. So we had relatively tight spreads just one quarter ago, and most of our lift has been from the base rate increases. But as new deals are coming down the pipe, the spreads are also widening. So the trend we’re seeing is not a trend of compressed spreads. And a lot of this, I think, is going to flow back into equity valuations and maybe not as much credit issues. I mean obviously, the amount of value you might have – one might have below one is going to decline, but the ability of the company to pay and – pay its debt is not going to decline as much as really the returns on the equity. So I think at this point, obviously, it seems we get a lot worse than they are. But we’re not seeing that. We’re not – that’s not how we conduct our business. We kind of look at our credits as they exist and as we see them. And so we at predicting massive economic destruction at this point in time and so we just feel – as I said earlier, we feel comfortable with our leverage, our assets, who we’re lending to and the spreads we’re receiving. And then just one further thing to say that I think distinguishes Saratoga from a number of the other BDCs, and I’m sure – and you follow a lot of them. So forgive me if I’m telling you something you already know, a lot of the BDC’s debt is asset-based and floating rate. I mean there is – a whole lot of BDCs have floating rate liabilities relative to their floating rate assets, which is fine. And then if spreads widened, that helps. But when the assets go up, the liabilities also go up. But also those are often bank facilities that have covenants, and they have diversity requirements and there is all sorts of things in those loans that make that debt can be more problematic in a scenario where certain credits don’t do as well as other credits, rising rates, that type of thing. And then there is covenants and then also a lot of the banks have the ability to change their advanced formulas. And then also there is formulas and triggers. And then there is ratios of floating of – secured debt versus unsecured debt at the B2C. I mean there is lots and lots of these cycle covenants that its crept into and have always been in a lot of the credit facilities out there. But we have – to-date, we’ve avoided those types of credit facilities. So it are very clean, very simple, essentially interest-only and long-dated maturities and fixed rate again, in this environment is a very favorable place to be. I think the questions from – your question and Robert’s question earlier, the wild card is what happens to the economy and what does that do to the credit quality of our assets. And that’s not a question we can answer other than to say, at this point in time, we feel very – as you can tell from them, how we’re rating our credits, we feel that our credits are performing very well.

Mickey, I’ll just add just to emphasize something that Chris mentioned, but just so that you’re focused on it. I think we compete against BDCs for sure. So very much compete against other non-bank lenders. And it’s our experience that the majority of them are funding much of what they are advancing in part with floating rate facilities. And so they are not benefiting as much from the rise in the indexes. So their temptation to start to give some of that rate increase back in the form of tighter spreads, it doesn’t really exist for that reason. We’re getting the benefit of it because we’ve got a different balance sheet construction, as Chris mentioned. But most of those other groups, we’re seeing they have got a greater percentage of their balance sheet, where the increase in indexes is just one for one for them, and it’s really a spread gain.

Yes, that’s a good point, Mike. Chris, I want to congratulate you on pricing the CLO market – I’m sorry, the CLO in the JV, considering how difficult the CLO market is right now. That pricing looks pretty good, perhaps 50 basis points wide of a more normal market, but still attractive. Just I want to understand why you decided to go ahead with that now and not perhaps wait for a point in time in the future where spreads are a little bit tighter and maybe the economics work a little bit better?

Sure. Well, first of all, I’ll accept the congratulations, but I want to completely hand it over to our team. I think our team here did a tremendous job in getting that done. That is remarkable. And I think Tom and his team and Henri and getting all that done in this environment is really something special. And I’m not going to take any credit for it because I think our team did a – personally – and our team did a really, really good job. As to your question, I think as you may recall, we had a – we’ve had – we have our existing CLO, and this is now a joint venture off balance sheet CLO. And we have we had a warehouse facility with Goldman Sachs. We’ve accumulated a sizable portion. I don’t know if we disclosed exactly what that was publicly or not. But we had a warehouse that was engaged in the marketplace, and that warehouse expires next year – mid next year. And so there is an investment period in the warehouse. And then the market has been a very, very dismal market. The number of CLOs have been priced is really at a very low level. Recently, I think there is a lot of outflows in the asset class. So the cumulative value of these loans has gone down a fair amount. Some of it is due to credit quality, but a lot of it is really about liquidity and redemptions. And when the mutual fund shareholders are deemed they are floating rate funds and things like that. And a lot of these things, that moves the markets tremendously. So on the asset side, right, the purchasing of what you can acquire while we syndicated loans for right now with good credit selection is very favorable. It’s among the more favorable times it’s been in many, many, many years. And these are first lien loans. And obviously, you have to pick your spots. I mean, you’re buying sort of retailers or something like that, that’s probably not the best place to be, but we don’t do that. we have a highly selective process. So we are seeing tremendous value in a very disruptive broadly syndicated loan marketplace. And so that’s one part of the equation. Secondly, we have worked with Prudential who was the AAA and the long pole in the tent that’s taking these types of deals is your AAA provider. And Prudential is our AAA provider. They had been in the past a tremendous partner of ours and supporter of ours, and we’re very pleased that they would step up in this environment and participate with us. And I must say, I think Goldman did a tremendous job in pulling all this together. And so we felt that putting together the CLO now, and taking advantage of what looks like a very favorable broadly syndicated market purchasing environment and locking in a 2.5, 3-year investment period in a time of tumult without covenants, right? These are self-managing. This not like a covenant. There is not a maturity in this – in these CLO arrangements, was a favorable thing to do from a risk-reward basis. And I’d just like to go back in time, I think – and I don’t know how much everyone is a student of CLOs and CLO history. But I often ask this question, I’d say to people, which CLOs do you think perform best, the vintage of 2007, 2008, 2009, 2010, 2011? And the answer is 2007. And right before the last crisis, were the best-performing CLOs. And part of the reason they performed well as they were able to take advantage. They had a fixed rate on their liabilities, and they were able to take advantage of both the investment periods and the reinvestment in the broadly syndicated loan market that had lots and lots of volatility in it, but ultimately came out the other end, consistent with it had – what it did in the past. And so we may well be in – not in an exact environment, but an analogous environment to that where a lot of what’s going on right now with these loans has more to do with people trying to get liquidity than the actual fundamental credit quality and the ability to get repaid on these loans. And so all of that factored into it, I must say – we had – I forget how many hours or investment sessions went on going forward on this thing. But we did debate it quite a bit. As you can imagine, I think our fundamental decision was we thought this was a good idea in the best interest of our shareholders. And also, I think, again, in this environment, tremendous execution. I mean that deal could not be done a week later or a few days later than we did it.

Yes, I agree with that. And I appreciate that explanation. And just I want to follow-up with a question about the existing CLO. I understand that there are many assumptions in estimated yields projections. But it’s currently – on the equity, the estimated yield is only 5.5%, which is a lot lower than I see generally in the market. And I’m curious, what is the main driver of that? Is it – because in those assumptions, you include reinvestment price, which is very attractive, the forward LIBOR curve. But collateral prices are very depressed, and I suspect that’s impacting the terminal value assumption. Is that the main reason it’s low? Or was there something else that I’m missing?

Yes. There is a couple of things in that at the moment, Mickey. I think obviously, this quarter, we increased our discount rate from 16% to 18%, and that obviously plays a big factor in the valuation and especially the weighted average effective interest rate. There is also the fact that because rates are resetting so quickly, that in the short-term, you’re seeing, obviously, the interest expense go up so significantly in the short-term because the assets only reset are 90 days versus the liabilities on 30 days. And then there is also around the assumption of defaulting assets under 80 and how you treat those assets, how you reinvest them, how you realize them that assumption also plays a big role. So it’s obviously, valuation assumptions, you disclose them as they are the real world doesn’t always play out the way the valuation does. But it’s sort of a combination of those assumptions in the short-term that drive the effective interest rate low. And as you know, that effective interest rate moves around quite a lot, right? So it’s not uncommon for it to go from 10% to 5% and move sort of by 5% or more increments one quarter to the next as it reflects just this point in time, economic conditions.

Okay. I understand, Henri. My last question, flipping back to Pepper Palace, it was funded only about a year ago, and you’ve discussed its current mark is relatively low. So I’d like to understand how its performance has deviated from your expectations? And what’s its outlook in the current economic environment?

Mickey, I think one of the things that I’d emphasize is that we still believe in the fundamentals of the concept and the unit economics for the retail concept work very well, we think, especially when located in the right locations. The business has been affected by a number of things, but they face some higher infrastructure costs to run the overall business. They are certainly facing higher input cost for their product as well as higher labor. And then that’s happening in a marketplace where there are consumers that are buying the product, that have a little less discretionary income than they did when we underwrote the deal. So those things are affecting their performance. But fundamentally, we still are believers and continue to be believers in the concept, and it’s a sponsored transaction. The sponsor is continuing to be highly supportive of the business, and we’re working with them to continue to grow the platform and hopefully get it back on track.

So Mike, that sounds like their margins are under pressure. Do you think it’s at the point where that balance sheet needs to be restructured to take into account everything you just talked about?

No. I wouldn’t say that necessarily. I think we’re working to try to continue to grow the business and improve its performance that way. But we will continue to evaluate it. It’s something that we’re definitely focused on, for sure. I think what you see in this business, and it’s not uncommon if you look at the broader marketplace for retail or restaurants or people that are out selling to consumers in a lot of those models right now, you see revenue growth, but you see costs rising faster than that. So you’re seeing the revenue increase, but spread compression, and that’s one of the things that they are facing. We don’t think that’s permanent, but it’s certainly something they are facing now.

Understand. That’s it for me. Appreciate your patient with all my questions, and congratulations on another solid quarter. Thank you.

Thanks, Mickey.

Thank you.

Thank you. And we have other question. Just a moment please. And our next question comes from the line of Erik

Thank you. Good morning, guys.

Good morning.

First, I just wanted to start on – earlier, you made some comments that the origination pipeline is actionable and robust at this point. And I guess the harder thing to predict or have insight to is the repayments that may be coming in future quarters. So I guess just for the remaining two quarters and this fiscal year, curious if your expectations for AUM growth is similar to what you experienced in the first part of the year?

Maybe I will start with that, Mike and – why don’t you start, Mike and I’ll get back to you. So just on a very high level, I think M&A activity generally is down like 40% plus sort of across the board. The market volatility right now is disrupting financing markets. Most companies, the financing that they have is more attractive than the financing they could get if they were to try and do it again right now or refinance, a lot of uncertainty in the marketplace, which affects M&A. And so on a macro level, this is not necessarily a time where you would expect to see a lot of sales of businesses being sold and a lot of financial structures being refinanced at more favorable rates. So that’s just like a general overview. And then historically – Mike correct me on this one, but I think close to 70% plus of our repayments have come from the sale of companies. So that’s a general comment. And obviously, every company has got its own individual destiny that may vary from that overall. Mike?

Yes, that’s right, Chris. I mean the – what drives most of our redemption activity is a change of control, where the owners decide to sell the business. or they look at the capital markets and there is an opportunity for them to refinance at more favorable rates. In this environment, there is less of that. Not that, that doesn’t exist, for sure. You saw the exit on PDDS. And there is still very, very healthy market, certainly in the lower end of the middle market. We’re still seeing healthy activity just in general, but less than what you’d see in a more robust environment. And certainly, on the refinancing front, we’ve got a lot less exposure to somebody looking at their capital structure and saying, boy, in this market, I can refinance at much more favorable rates. They are kind of generally holding pat where they are in that respect. So the rule of thumb that we use, and it’s just directional as we kind of think about on average, the portfolio at our end of the market should kind of have a duration of a few years in robust markets, some deals will refinance faster than that for all the reasons we just talked about. In markets of greater uncertainty like we have now, that redemption activity tends to go down and that 3-year horizon tends to extend out a little bit. So overall, we would expect, although nothing certain, we would expect that our redemption activity will be lower than what it typically is.

Thanks. I appreciate the commentary there. And then moving to Slide 12 in the deck, and I’m curious about the real estate the 5.6% of the portfolio. And certainly, the residential real estate market has flowed and even started to pull back in some geographies. And I think there is concern nationwide certainly more urban markets about the health and outlook for commercial real estate office activity. So curious, one, if you could maybe provide a little color in terms of your portfolio of companies that are classified as real versus what they are doing and then how exposed might be to a turn or pullback in real estate markets?

No, it’s a good question. We certainly have a little bit of exposure to that. But if you look at what comes to mind is an investment we have in a company called build-out which is a business that continues to perform very well. It’s offering a product that is a productivity tool that actually allows commercial real estate participants to operate more efficiently with less labor cost. So it’s benefiting from positive secular trends in that respect, just the technology that they are offering is helpful to that degree. And we found that regardless of what’s going on in the general market activity in real estate for those participants that are in the market, it’s a product that’s continuing to work well for them, and that’s reflected in their performance. But outside of that, it’s a real good question. We don’t have significant exposure to that space.

Thanks. I appreciate that. And then just curious, you’ve mentioned the importance of the team throughout the call. And then as I look at Slide 24 that for an increased capacity to source annualized growth, I mean, I was just curious about if you have any kind of current initiatives underway or any near-term expectations for new hires and what the market is like for adding new talent today given the inflationary environment?

It’s a really good question. I mean it all starts with team, right? There is a lot of BDCs out there. We believe in our team, and we think that ultimately is the big differentiator at the senior level, we have people that are very experienced, very disciplined, have a lot of capital invested in the business. And then we believe this is to do it right, it’s an apprenticeship business. You bring people in mostly at the junior levels and you teach them about credit and you teach them how to analyze credit, invest capital like it’s their own money and make decisions for the long-term. So we are very focused on adding people that have a really strong skill set and teaching them along the way. And we’ve hired, I think just since COVID, we’ve hired seven investment professionals during that time. Most recently, one just started a couple of weeks ago. We’re still actively looking for people. It remains a competitive environment to attract talent, but I think we’ve been successful in bringing people onto the platform. They see the success that we’ve had growing our enterprise, and we’ve developed a culture that we’re very proud of in terms of how we treat people fairly and give them an opportunity to grow in their careers. And so that’s all worked well for us.

On a broader comment, I think last year was like a record year in many places and particularly on Wall Street, I think there is a lot of – I mean, unbelievable year. And there is a lot of pressure on compensation on the pushing compensation up. Hiring was extremely difficult and very tight. I think Wall Street’s performance right now, you can tell that the stock performance of a lot of leading investment banks buying it’s way down. There is layoffs coming. And I don’t – the word layoff wasn’t in the Lexicon last year, and now there is lots of layoffs coming in the financial industry. I think there is a lot more constraints on growth and then and compensation and things like that. And so we are – as Mike said, we’re in the market if you know of anyone great people, let us know. We are very interested in adding to our team. We think we present a very attractive environment to do business and do well in this challenging environment.

And then just one last question for me today, if I understand it correctly, under the depreciation on the CLO and JV investments was driven by price movements in the broadly syndicated loan market. And I think there is still a backlog there, and they are moving through things that were underwritten months ago, and so that’s having a big impact on prices. So just curious from your perspective, how long does it take to clear that backlog? And once that market starts up more normal, what that could potentially mean for that unrealized depreciate that you’ve recorded now, that would reverse or if that’s likely to take several quarters?

Well, again, I think that’s a very – I think that’s the right question. The – I think the challenges had to answer because there is so much going on there. I think at the heart of the matter is a supply and a demand. And right now, there is a lot more people looking to get out of this asset class and to get in it. And so with regards to Mark’s there is probably going to be somewhat challenging to get a whole lot of improvement from here, but that doesn’t necessarily speak to the fundamental underlying credit quality and the prospects back to car on these loans that might be trading in the 90 – in the lower 90s rather than the higher 90s. Obviously, this will outline credit events, but in a broad – the bell curve of it all, sort of like going from the high 90s to low 90s and – but that doesn’t mean it’s not going to go back to everything paying out – most things paying out at par, which we believe. So Mark, improvement from here is hard to say given the environment we have. But as we mentioned earlier, with our newly priced CLO well more than half of that CLO has not yet been purchased. So we are – we hope that the next as we move into this marketplace that we can take advantage of these discounts based on what we believe is more supply and demand rather than fundamental credit quality, how we select it – occurs. So we think we are going to gain some ground from this location with our newly priced CLO, and we have time to do that and liquidity. And so I think we’re on the right side of the market at that point in time. Obviously, the big part of all that none of us can predict is do we have a hard landing? How hard is the landing? What does that mean for – generally and what is that mean specifically for the specific credits in our portfolio? And obviously, those are answers that we don’t have at this time. We wish we did, but we don’t. But again, I think industry selection, credit selection quality of company fundamentality of this is what we focus on strength of balance sheet, etcetera, and we think that there may be some rougher times ahead, but we think we’re going to come out the other end in very good shape.

Yes. Yes, Eric, because – I would add, just a reminder, again, when you think of the valuation of our BDC loans, if you will, our lower middle market loans versus the valuation of our CLO and joint venture which is now second CLO loans, they have done very differently, right? The lower middle market is obviously fair value at the end of the quarter, but incorporating company performance and market spreads and market performance into a level 3-type valuation, right? The joint venture and the CLO is actually traded loans, securities that have a specific price at the end of the quarter trading price, if you will, or a broker quote and that quote you use even if it is just – it’s really just a point in time. Obviously, unrealized at the moment, but a very specific point in time.

Great. I appreciate all the color and commentary. Thanks for taking my questions today.

Thank you.

Thanks, Erik.

Thank you. And I’m showing no further questions at this time. And I’d like to turn the conference back over to Chris Oberbeck for any further remarks.

Well, we would like to thank all of you on this call and all of our investors for your continued support. And we look forward to speaking with you next quarter. Thank you.