Saratoga (SAR) Q4 2026 Earnings Call Transcript

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DATE

Wednesday, May 6, 2026 at 1 p.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Christian Oberbeck
• Chief Financial Officer and Chief Compliance Officer — Henri Steenkamp
• Chief Operating Officer and Senior Managing Director — David DeSantis

TAKEAWAYS

• Net Originations -- $101.1 million net originations, with $135.1 million in new investments comprised of five new portfolio companies and 15 follow-ons, exceeding repayments during the quarter.
• Adjusted Net Investment Income (NII) -- $8.5 million, representing a 6.2% increase year over year, but a 12.8% decline sequentially, due primarily to a $1.7 million excise tax incurred this quarter.
• Adjusted NII Per Share -- $0.53 per share, down 5.4% year over year and down 13.1% sequentially; excluding excise tax, NII per share was $0.61, flat sequentially.
• Return on Equity -- 9.1% for the latest twelve months, outperforming the BDC industry average of 4.3%, rising from 7.5% year over year but down from 9.7% last quarter.
• Net Asset Value (NAV) -- $396.2 million, a 0.9% rise year over year but a 4.1% decrease from last quarter; NAV per share at $24.42 declined both year over year and sequentially.
• Portfolio Valuation -- Total portfolio marked down 1% ($9.6 million), including $3.1 million net depreciation in the non-CLO core portfolio and $5.5 million unrealized depreciation in the CLO and joint venture.
• Dividend Declarations -- Announced and paid a $0.25 monthly dividend per share ($0.75 per quarter), equating to a 12.6% yield based on the referenced stock price, maintaining the new monthly dividend structure for a fifth consecutive quarter.
• First Lien Exposure -- 82.1% of investments held in first lien debt at quarter end, with 53.1% of that allocated to first lien last out positions.
• Nonaccrual Investments -- Two investments on nonaccrual: Pepper Palace (restructured) and the CLO F note, representing 0.2% of fair value and 1.2% of cost—well below industry averages.
• Dry Powder / Liquidity -- $210.8 million of investment capacity at quarter end, divided among $21.8 million cash, $99 million available SBA debentures, and $90 million available under revolving credit facilities.
• Regulatory Leverage -- Leverage ratio remained unchanged at 168.4% compared to the previous quarter.
• Expenses (Excluding Interest & Incentive Fees) -- Annualized expenses (excluding interest, base management, incentive fees, and taxes) increased to $11 million from $9.3 million year over year; quarterly figure was $2.4 million, up from $1.4 million year over year but down from $3.3 million last quarter.
• Portfolio Credit Quality -- 96.8% of credits in the highest internal rating, with nonaccrual rate at 1.2% of cost, nearly three times lower than the BDC industry average of 3.3%.
• Originations for Fiscal Year -- Totaled $309.5 million: nine new investments of $137.3 million, 32 follow-ons of $125.5 million, and $46.7 million in BB and BBB CLO debt investments.
• Equity Realizations -- $5.7 million in realized gains from equity interests during the year, contributing to a long-term realized gain total of $45.4 million across the past fourteen fiscal years.
• SaaS/Software Portfolio Performance -- Seven SaaS company realizations delivered a 14.2% gross unlevered IRR in the fiscal year, with the segment featuring a 31% average loan-to-value and 93% first lien exposure, and fair value exceeding cost by 2.5%.
• Non-CLO Write-downs and Offsets -- Exigo and Madison Logic investments saw unrealized depreciations of $2.8 million and $1.2 million, respectively, while ZOLEDGE, previously restructured, recognized $3.3 million in unrealized appreciation.
• Dividend Distributions vs. NII -- $3.74 in total annual dividend distributions, exceeding $2.32 annual NII per share, with excess distributions reflecting use of prior years' undistributed income.
• Capital Structure Activity -- Repaid $175 million of 4.375% notes and issued $150 million in new notes at roughly 7.5% maturities of four to five years; subsequent to quarter end, issued a $25 million 7.25% private note.
• Total Return (12 Months) -- 14% total return in the past year, outperforming the BDC index by 15 percentage points and ranking in the top seven among BDCs as of April 2026.

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RISKS

• Henri Steenkamp stated, "There was just insufficient cash at the last CLO distribution to pay the F note interest for half of the quarter," resulting in nonaccrual status and full write-down of the F note, with recovery dependent on refinancing and future asset performance.
• Portfolio NAV per share declined by $1.44 year over year, primarily due to dividends exceeding NII by $1.42 per share, suggesting ongoing reliance on prior years' earnings to support current distributions.
• Certain key investments—Exigo and Madison Logic—experienced $2.8 million and $1.2 million in unrealized depreciation owing to challenging end-market and macro conditions, though both remain accruing with healthy cash balances.
• David DeSantis said, "a material change in product or future expectations. Because our underwriting bar is so high, especially for software, we have turned down far more software deals than we have done over the years," noting reduced deal flow in software may constrain future growth opportunities in that sector.

SUMMARY

Saratoga Investment Corp. (NYSE:SAR) reported substantial net originations and continued AUM growth, fueled by robust business development efforts and disciplined underwriting, despite a highly competitive and volatile market backdrop. Portfolio credit quality remains strong, evidenced by a below-average nonaccrual rate and high first lien exposure, while adjusted NII performance was impacted by a large excise tax and declining base rates. Strategic portfolio rebalancing away from software investments and active balance sheet management—including refinancing activities—position the company for flexibility, but reductions in portfolio valuations, targeted write-downs, and excess dividend distributions over NII highlight sensitivities to evolving market and asset-specific challenges. Management emphasized the company's alignment via significant ownership, its outperformance versus the BDC index, and readiness to pursue selective growth as M&A activity may accelerate in coming quarters.

• David DeSantis remarked that "deal flow has increased due to the success we are having with our own business development efforts," and the current pipeline is "significantly up from the end of calendar year 2024 and in line with last year."
• Henri Steenkamp noted the decline in adjusted NII per share was "primarily due to the impact of annual excise tax expense of $0.09," while excluding this, adjusted NII per share was unchanged sequentially.
• Christian Oberbeck stated, "Really, there is no ceiling on how much more business we could generate. It is time and relationship building. That is really our constraint. We do not think the opportunity set is the constraint, but how many people we have applied to it, how efficient we are in addressing these, and how fortunate we are in winning the auctions. We are noticing a fair amount of competition and sometimes we may be 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 not necessarily something we can control so much. But generating new relationships—there is really no limit. The limit is really ourselves: how much time and effort can we apply," in reference to future originations and sponsor outreach.
• Ongoing CLO performance issues contributed to the write-down and nonaccrual of the F note, with future value contingent on possible refinancing, as management assesses options for recovery and liability repricing.

INDUSTRY GLOSSARY

• CLO (Collateralized Loan Obligation): A structured finance vehicle that pools together leveraged loans and issues debt tranches with varying seniority, risk, and return profiles.
• SBIC (Small Business Investment Company) License: A federal program administered by the SBA that allows investment funds to access low-cost government-backed leverage to finance U.S. small businesses.
• First Lien Last Out: A position within a first lien loan where the investor's claim ranks equally with other first lien holders on collateral but receives repayment after more senior tranches in the waterfall structure.
• OID (Original Issue Discount): The difference between a bond's stated redemption price and its issue price, recognized as income over the life of the security.
• SaaS (Software as a Service): A software delivery model in which applications are hosted remotely and accessed by clients over the internet, often via subscription.
• ATM Program (At-the-Market Program): A capital-raising mechanism that allows a company to issue new shares gradually into the open market at prevailing prices.
• Nonaccrual: A loan or investment on which interest income is no longer recognized due to concern about collectability.
• LTV (Loan-to-Value): The ratio of a loan to the value of the collateral securing the loan, used as a risk metric in lending.

Full Conference Call Transcript

Christian Oberbeck: 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 twelve months 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 per share in aggregate for 2027, which when annualized represents a 12.6% yield based on the stock price of $23.89 as of 05/04/2026, 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 and discerning in our underwriting approach, particularly in light of the current volatile and uncertain environment. We believe Saratoga Investment Corp. 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 ZOLEDGE 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 assets that was 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 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 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 to 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 create elevated volatility and continued uncertainty on credit spreads across the private credit sector. While negative press and sentiment weigh 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 Investment Corp. 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 Investment Corp.'s performance and growth opportunities. David will be making his debut presentation today addressing the market and Saratoga Investment Corp.'s portfolio. Moving on to Saratoga Investment Corp.'s fiscal 2026 fourth quarter key performance indicators as compared to the quarters ended 02/28/2025 and 11/30/2025, 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 twelve-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 twelve 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 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 twelve months, above the industry average of 4.3%. Additionally, our long-term average return on equity over the past twelve 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 twelve 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 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, 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.

Henri Steenkamp: 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 $37.5 million, down 20.2% 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 million as compared to $9.3 million in fiscal year 2025. These same expenses for Q4 increased by $1 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 two years, we have again added the KPI slides 28 through 51 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 three times 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 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 nine years, when not many BDCs have grown NAV per share long term. We will 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 appreciation recognized in Q4, with almost two-thirds 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 equals the entire twelve-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 at low-cost pricing, also very accretive.

In addition, $169 million of our baby bonds, with two-thirds 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 repaid our $175 million 4.375% 2026 notes that matured at the February year end and issued $150 million of new notes at around 7.5%, with maturities between four and five 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 I would 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 that is invested in 49 portfolio companies, one CLO fund, one 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 the 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% last quarter due to a lower fair value. Slide 13 shows how our investments are diversified primarily through 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 interests, which remain an important part of our overall investment strategy. This slide shows that for the past fourteen fiscal years, we had a combined $45.4 million of net realized gains from the sale of equity interests 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.

David DeSantis: Thank you, Henri, and good to meet all of you for the first time. So today, I will give an update on the markets since Saratoga Investment Corp.'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 are having with our own business development efforts, as seen by the fact that six of the ten new platform companies 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 as spreads tighten and leverage is full, and 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 have also experienced repayment activity for some of our lower loan-to-value loans being refinanced on more favorable terms. The Saratoga Investment Corp. 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 third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we have built in the marketplace combined with our ramped up business development initiatives give us confidence in our ability to achieve healthy and disciplined portfolio growth in a manner that we expect to be accretive for our shareholders. Excuse me. Now I would like to switch to a discussion of software as a service, or SaaS. Companies have been getting a lot of press lately.

Specific to SaaS companies in our SaaS portfolio, Saratoga Investment Corp. does not view software generally as being a single industry. The companies in Saratoga Investment Corp.'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 Investment Corp.'s more than thirteen years of investing in software-related businesses, we have found that the performance of each of these businesses is more affected by position in the industry and specific end market within which it operates—key considerations for any business—rather than by the fact that it is a service offering delivered through a 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—not just related to software companies—has been driven by the accelerating emergence of AI as a potential disruptive force. To add some perspective on the software underwriting approach we have taken over the years, as with all deals in all industries, we have always taken into account potential disruptive forces, whether they be stronger players within a market, an entrant from an adjacent market, or a material change in product or future expectations.

Because our underwriting bar is so high, especially for software, we have turned down far more software deals than we have done over the years. The advent of AI has increased the chances for disruption, a fact we are accustomed to underwriting; therefore, our underwriting bar has become higher still in recent times. We always evaluate not only how we believe AI may 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 that Saratoga Investment Corp. chooses to provide capital to must have several of the following positive attributes: enterprise software companies 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, 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, often 70% plus, that bolster profit potential and signify high value add; leading competitive position in an industry vertical; and the ability to be run for cash versus growth; regular and frequent human user and/or decision-making required in the workflow.

Because we are not tourists in the space and have been disciplined in the application of these underwriting guidelines, we have achieved successful realizations on 35 software-related businesses, producing a gross unlevered IRR of 14.4% with zero economic losses over the last thirteen 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 is 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 Investment Corp. to invest in exceptional software businesses where we have confidence that our capital is well protected due to sustainable enterprise values and unique value propositions of the underlying businesses. However, I would like to emphasize that Saratoga Investment Corp. is seeing significantly fewer software-related investments that meet our strict underwriting requirements than in 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 have closed one new platform since the quarter end and have two more in closing, none of which are software-related businesses.

Now I would 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 are able to perform evaluating investments 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 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 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 represent 0.2% of the portfolio at fair value and 1.2% at cost. In general, our portfolio 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 at 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 actively working with management and 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 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, our ZOLEDGE 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 primarily include 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 5.4 times; total leverage for our overall portfolio was at 5.3 times, excluding Pepper Palace. Moving on to Slide 17, this 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 in line with last year.

This recent increase of deals sourced is a result of our recent business development initiatives, with 22 of the 108 term sheets issued over the last twelve months being for deals that came from new relationships formed this year. Overall, the significant progress we have 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 new investments totaling $78.4 million, 15 follow-ons totaling $55.2 million, 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, 32 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-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 business will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy have always been focused on being thorough and cautious.

Since our management team began working together almost sixteen years ago, we have invested $2.53 billion in 130 portfolio companies and have had just three realized economic losses on these investments. Over that same time frame, we have 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 exits this quarter was 15.8%, 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 equal 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, 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, and 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 would like to turn the call back over to our CEO.

Christian Oberbeck: Thank you, Dave. As outlined on Slide 20, our latest dividend of $0.75 per share in aggregate for the quarter ended 02/28/2026 was paid in three monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended 05/31/2026, 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 twelve months, which includes both capital appreciation and dividends, has generated total returns of 14%, vastly beating out the BDC index's negative 1%. This places us in the top seven of all BDCs for the latest twelve months, April 2026. Our longer-term performance is outlined on the next slide, Slide 22, which shows that our one-year, three-year, and five-year total returns all place us well above the BDC index. Additionally, since Saratoga Investment Corp. took over management of the BDC in 2010, our total return of 838% has been more than three times the industry's 247%.

On Slide 23, you can further see our last twelve 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 per share NAV this year is almost completely accounted for by the payment of 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 1.5 times the industry average, and latest twelve 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 Corp. 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 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. We will now open the call for questions.

Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Please go ahead.

Erik Zwick: Thanks. Good afternoon, everyone. I wanted to start with a question maybe for Henri. 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 are no rate cuts priced into the market anymore, so hopefully SOFR and base rates stay level so that pressure is gone. But just looking at what was added for new investments in the quarter coming on 200 basis points lower than the repayments, it seems like there is still potentially some pressure there. So is that right as we look at the next quarter or so—likely still some pressure on yields?

And then, if your number one objective is expanding the asset base in a prudent manner, is that a way to potentially offset some of that pressure as I think about NII going forward?

Henri Steenkamp: Hey, Erik. Nice to hear from you. Absolutely. I think, firstly, it is nice to see from an earnings perspective that the SOFR rate has definitely stabilized and that if anything, we might see a drop or spread widening taking place. As we look ahead and look at our Q1 projections and Q2, we are definitely seeing a stabilization of base rates. And then the other variable, as you mentioned, is the recycling of assets, and it is obviously always hard to predict repayments.

I would say that the assets that were repaid this past quarter that resulted in the 200 basis points were some of our higher-yielding assets, so I do not 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 a squeeze happening there.

To offset that, though, as the prepared remarks said, we are seeing some of the highest levels of business development pipeline-type activities happening, reflecting everything that has been done over the last year or so, and so that is helping us grow our asset base, which obviously does help offset some of that squeeze that we are seeing as assets repay.

Erik Zwick: Great. That is helpful. And maybe just a bit of a follow-up with the success of the business development efforts—has that gradually changed the mix of the pipeline in terms of new versus follow-on activity?

Christian Oberbeck: Generally, that is not something we can control, as you know. We obviously cover our portfolio companies, and our portfolio has been a good source of repayments. But we have a very active and very productive calling effort, and I think, as Dave mentioned earlier, we are looking at relatively fewer software and relatively more other types of secular growing businesses—education, healthcare, those types of things.

Erik Zwick: Got it. And then 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 nonaccrual?

Henri Steenkamp: Yes. As you know, we have different tranches in our CLO, and so we obviously have the equity that leads to distributions to the equity. Following the equity distribution, the F note is the next tranche up, and out of the cash that comes from distributions, the F note interest has to be paid. There was just insufficient cash at the last CLO distribution to pay the F note interest for half of the quarter. This is a test that gets done every quarter, so it will be reassessed next quarter. But based on what we know now, and seeing as half the interest could not be paid, we put that on nonaccrual.

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.

Erik Zwick: Okay. Then maybe one quick follow-up there. Is it a grouping of assets that have been underperforming, or what led to that shortfall?

Henri Steenkamp: It is really a function of the remaining assets in the CLO. There is a group of assets that has been underperforming, and they continue to underperform. As you had seen over the last couple of quarters, the F notes had continuously been written down over the past couple of quarters. There was a big write-down in Q3—it was still about $1.20 on the books—and then we fully wrote it down now in Q4. It is just a function of those underperforming assets not generating sufficient cash flows anymore to cover the interest.

Erik Zwick: Understood. Thanks for taking my questions.

Operator: One moment for our next question. The next question comes from the line of Robert Dodd with Raymond James.

Robert Dodd: Hi, guys. I have several, but I will start with the F notes since that was on that point. It has been written down and is now carried at zero. If we looked at a normal portfolio company for you guys, if something was on nonaccrual and marked down, you would be talking about the lender getting together and the sponsor, etc. Obviously, that is not the situation here because you control the F note effectively. Is there a path to recovery in value of the F note? Is it cost recovery or anything? It has been written down to zero, but is there a perspective where that can appreciate again?

It has not been a one-off this quarter to write it down, it has gradually depreciated. 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?

Henri Steenkamp: That is a great question, Robert. Obviously, it is a much larger assessment because it is a tranche of debt within a structured finance product. If you look at our existing CLO, it is an asset that the BDC has had for eighteen years since the start, has done exceptionally well, and has generated around $120 million of distributions, plus all the fees that it receives because the BDC is the manager of the CLO as well. It is something that has done really well, but it is no longer in its reinvestment period at the moment.

So 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 are continuously assessing. The assets of the CLO were $650 million and, when you are out of the reinvestment period, you use all the proceeds from repayments to start repaying the debt, so it is down to about $350 million of assets. It is a much smaller size, which also makes it easier to refinance. We are continuously looking at the performance of the assets that remain in the CLO and also where market conditions are, where refinancing rates are, etc., to determine whether we want to refinance the CLO.

If you refinance the CLO, that will be the first step to then recovering the value of the F note because you then start reinvesting cash into new assets that will be generating new cash flow that will help the value of the F note. So it is a larger process and a larger consideration than, as you said, individual portfolio companies, but it is tied to the refinancing of the CLO that we are assessing on a continuous basis.

Robert Dodd: Got it. Thank you. Different topic. On the outreach—you have outperformed over the last couple of quarters, onboarding new portfolio companies and doing follow-ons despite a muted environment for a lot of your competitors. Your outreach in establishing new relationships on the sponsor side has been paying off. How much further can you push that—originations, pipeline, adding more sponsors? I know you are underpenetrated relative to where you would like to be, but by how much? How much could the pipeline increase?

Christian Oberbeck: That is a very interesting question. The nature of what we do in the lower middle market—if there is a pyramid structure, the biggest deals, the multibillion dollar deals, are at the top of the pyramid, and the much smaller deals are at the bottom. It is a much wider base. We do not even talk about what our market share is because it is really infinitesimal compared to the opportunity set out there. A lot of the transactions we do are sometimes the first institutional capital in a deal, and sometimes it is a founder either selling or looking for a partnership to do something.

It is not really driven by the exact same factors that drive the larger middle market that are determined by M&A volumes and things like that. There is a much broader mix of sourcing, including non-sponsor sourcing, and obviously there are a lot of sponsors going into those transactions. Really, there is no ceiling on how much more business we could generate. It is time and relationship building. That is really our constraint. We do not think the opportunity set is the constraint, but how many people we have applied to it, how efficient we are in addressing these, and how fortunate we are in winning the auctions.

We are noticing a fair amount of competition and sometimes we may be 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 not necessarily something we can control so much. But generating new relationships—there is really no limit. The limit is really ourselves: how much time and effort can we apply?

Henri Steenkamp: In addition to our quarterly presentation on the website, we also have an investor presentation, which is a separate presentation. I will point you to Slide 27 and Slide 31 that give a bit more color on our business development process and relationships and how we find deals, etc. We talk there about how there are probably about 450 companies or firms or sponsors that we have on what is called a focus list of ours. Then we tier them, and there are probably a couple of hundred that we would view as our more top-tier relationships that we are more actively pursuing.

But when you think of the deals we do, it is probably a handful of sponsor relationships that we have most of our deals in. The population of sponsors out there is extremely broad. Obviously, you get more quality deals from a small handful of sponsors, but the opportunity is really large as you spend more time on business development, which we really have been doing with the team over the last six months and year or so.

David DeSantis: I would also add that we have spent a lot of time cultivating these different relationships over time. This is oftentimes a multiyear effort, and the sponsor universe is quite broad. Depending on the metric, I have read a lot of different sources, but it is somewhere between 1,500 and 4,000 sponsors. As we cultivate relationships with these firms and engender ourselves to them through the work that we do on deals—particularly those that do not close—this is a multiyear effort to become more successful, more ingrained, more credible, and trusted by these sponsors. We are starting to reap the fruits of that labor today.

Operator: One moment as we bring up the next question. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. Our next question comes from Christopher Nolan with Ladenburg Thalmann. Go ahead. Your line is open.

Christopher Nolan: Hi. Thanks for the detail on the F notes. Were there any particular industries that drove the nonaccrual?

Henri Steenkamp: I do not know exactly off the top of my head, but it is really a handful of assets. I do not think they are in one industry, but probably about five assets or so that drove most of the decline.

Christian Oberbeck: I think it is fair to say that it is less about a given asset group and more about the structure, because in the structure we are in now, a lot of the cash flows are going to pay down the more senior debt. The cost structure of the liabilities is a factor, which is why we are very focused on finding a refinancing point for it. In essence, we are 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, is the opportunity to reset.

We have dialogues ongoing at all times here, and hopefully we will find an opportunity to reset it. 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 refinanced right now.

Henri Steenkamp: Chris, we also have significant disclosure on the CLO in our 10-K that we just filed. In the MD&A, you will be able to see the split by industries and the weighting by our credit risk categories as well.

Christopher Nolan: Should we expect CLOs to decrease as a percentage of the investment portfolio?

Christian Oberbeck: I think they have decreased a fair amount at this point in time. The whole business, as Henri mentioned earlier—we had tremendous success with CLOs for a long time. Over the last four to five years, the CLO industry has had a lot of negative developments. There has been some weakening of the covenants, LMEs—the liability management exercises—you have had a change in interest rate structure, and all that. There is a big digestion cycle for a lot of the way the market operated several years ago that is causing the problems today.

As we move forward, there are fewer LMEs, the documentation is getting a little better, and companies are getting financed more appropriately for the current interest rate environment, which is more stable than it was over the last several years. The underlying dynamic is stabilizing. The whole industry does suffer from the slowdown in M&A, so a lot of what is going on in private equity and private credit is refinancings of existing companies, and those generally come at much tighter spreads and are much more shopped. As the M&A environment comes back, those types of deals generally have wider spreads to them for a whole host of reasons.

We think there has been a cyclical, maybe slightly secular, degradation in the quality of the market in CLOs, but we think there are a number of initiatives going on that are at a minimum stabilizing that, and we think it is possible to even improve from here.

Christopher Nolan: Okay. Thank you.

Henri Steenkamp: Thanks, Chris.

Operator: I am showing no further questions at this time. I would now like to turn it back to Christian Oberbeck for closing remarks.

Christian Oberbeck: 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.

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

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