Saratoga Investment Earnings Call: Strength Amid NII Pressure

Saratoga Investment ((SAR)) has held its Q3 earnings call. Read on for the main highlights of the call.

Saratoga Investment Balances Strong Fundamentals With Earnings Pressure in Latest Call

Saratoga Investment’s latest earnings call struck a cautiously optimistic tone. Management highlighted a robust balance sheet, solid NAV growth in aggregate, excellent credit quality, and continued origination activity, all supporting an attractive dividend profile. At the same time, they acknowledged meaningful headwinds: year‑over‑year declines in net investment income (NII), yield compression from lower base rates and tighter spreads, elevated repayments that weigh on near‑term earnings, and higher operating expenses and share dilution. Overall, Saratoga appears fundamentally well positioned with substantial dry powder and a strong long‑term performance record, even as near‑term earnings face pressure.

NAV Growth and Portfolio Fair Value Support Underlying Strength

Saratoga reported quarter‑end net asset value (NAV) of $413.2 million, up 10.2% year over year from $375 million and 0.7% sequentially from $410.5 million, signaling continued balance sheet growth despite a tougher earnings backdrop. The total portfolio fair value stood 1.7% above cost, and the core non‑CLO book was 2.1% above cost, underscoring that asset values are holding up and, in many cases, appreciating. While NAV per share has declined, the aggregate NAV increase reflects successful capital deployment and positive marks on the underlying portfolio, indicating that the business is building intrinsic value even as per‑share metrics face dilution and market challenges.

Ample Liquidity and Dry Powder Enable Future Growth

Liquidity was a major bright spot. Saratoga closed the quarter with roughly $395.6 million of available liquidity, including $169.6 million in cash, $136 million of undrawn SBIC III debentures, and $90 million of undrawn credit facilities. Management emphasized that this level of dry powder could support approximately 39% asset growth without needing external financing, giving the firm significant flexibility to be opportunistic. In a competitive market where selectivity matters, this liquidity provides optionality to pursue accretive investments, support existing portfolio companies, and manage capital structure decisions without being forced into unfavorable financing.

Originations Outpace Repayments Despite Elevated Activity

Investment activity remained solid with net originations of $17.2 million for the quarter, driven by $72.1 million in new commitments across three new portfolio companies and nine follow‑on investments. Management noted that high repayment levels, especially from strong performers, continued to pressure near‑term interest income but were partially offset by these originations. After quarter‑end, activity accelerated further with about $89.3 million of new originations (four new portfolio companies and six follow‑ons) against $30.5 million of repayments. The net positive flow suggests Saratoga is still able to find opportunities that meet its underwriting standards, even though competitive dynamics make sourcing attractive deals more challenging.

Dividend Yield Remains Attractive and Payout Consistency Intact

Income‑oriented investors will note that Saratoga maintained its monthly base dividend at $0.25 per share, or $0.75 per quarter, which translates to an annualized yield of roughly 12.9% based on a $23.19 share price as of early January 2026. In addition, the firm paid a $0.25 special dividend in December, illustrating management’s willingness to return excess capital when performance allows. The board continues to evaluate the dividend on at least a quarterly basis. While NII has declined year over year, management’s messaging implies a strong commitment to supporting the dividend through disciplined deployment of capital and careful balance sheet management.

Credit Quality Remains a Standout Versus Peers

Portfolio credit quality remains a major differentiator for Saratoga. The company reported that 99.8% of its credits are rated in the highest internal category, with only one investment—Pepper Palace—on nonaccrual. That single nonaccrual exposure represents about 0.2% of the portfolio’s fair value and 0.4% of cost. The nonaccrual rate of 0.4% of cost is roughly one‑eighth of the BDC industry average of 3.2%, highlighting the conservatism of Saratoga’s underwriting and the resilience of its borrowers. This strong credit profile provides a critical buffer in a competitive lending environment, helping protect NAV and underpinning the sustainability of the dividend over time.

Return Metrics and Long-Term Track Record Outperform Industry

Despite near‑term earnings headwinds, Saratoga continues to deliver superior long‑term returns. The latest 12‑month return on equity (ROE) reached 9.7%, up from 9.2% a year earlier and comfortably above the industry average of 6.6%. Over the past 12 years, Saratoga has generated an average ROE of about 10.1%, compared with roughly 6.9% for the broader BDC sector. On a market‑performance basis, the company delivered a 12‑month total return of 11% versus a 4% decline for the BDC index. These metrics suggest that, over cycles, Saratoga’s approach to underwriting, portfolio construction, and capital management has translated into superior results for shareholders.

Realized Gains and Portfolio Markups Continue to Add Value

The company continued to crystallize value through realizations and positive marks. Saratoga recorded $3.1 million of realized gains this quarter and $6 million year‑to‑date, while its noncore CLO portfolio was marked up, including realized gains, by $2.9 million during the quarter. Management also highlighted strong historical realized exit returns of approximately 15%, underscoring their ability to not only earn attractive yields during the life of investments but also exit at favorable valuations. These realized gains and markups are helping to support NAV and partially offset earnings headwinds from lower yields and higher repayments.

Improved Net Interest Margin and Lower Interest Expense

Net interest margin ticked higher sequentially, rising from $13.1 million to $13.5 million. This improvement was driven primarily by a $0.5 million reduction in interest expense after Saratoga repaid a $12 million baby bond and executed refinancing actions that lowered spreads on certain facilities by roughly 150 basis points. These moves demonstrate proactive liability management and a focus on reducing the cost of capital. While top‑line yields on the asset side are under pressure, management is actively managing the liability side to support margins and protect earnings capacity.

Strong Balance Sheet and Conservative Capital Structure

Saratoga’s balance sheet remains well structured for a BDC. Assets under management (AUM) totaled $1.016 billion across 46 portfolio companies, with 83.9% of the portfolio in first‑lien positions, reflecting a conservative senior‑secured tilt. The debt profile is characterized by long‑dated instruments and callable baby bonds, with no restrictive short‑term BDC covenants that might force quick deleveraging. During the quarter, the company repaid a $65 million senior facility and replaced it with an $85 million facility featuring a lower spread and extended maturity, enhancing both flexibility and cost efficiency. This balance‑sheet positioning gives Saratoga multiple options in addressing future capital needs and managing through cycles.

NII Declines and Yield Compression Pressure Earnings

The main earnings negative centered on net investment income. Adjusted NII fell to $9.8 million for the quarter, down 21.3% year over year, while adjusted NII per share declined 32.2% to $0.61 over the same period (though it improved 5.2% sequentially). Adjusted NII yield dropped to 9.5% from 13.3% a year earlier. Management attributed this deterioration largely to lower short‑term base rates and tighter spreads on new originations. As loans reprice and new deals come in at lower spreads, the portfolio’s income‑generating capacity has been squeezed, particularly versus the higher‑rate environment of the prior year.

Core Portfolio Yields Trend Lower

Reflecting these rate and spread pressures, the weighted average interest rate on the core BDC portfolio declined to 10.6% this quarter, down from 11.8% a year ago and 11.3% in the prior quarter. This drift lower in core yields underscores the challenge facing income‑focused lenders in a market where borrowers have more financing options and spreads are tightening. For Saratoga, lower yields translate into less NII per dollar of assets, which means that to maintain or grow earnings and dividends, the company must either grow the portfolio, further lower its funding costs, or drive more fee income and realized gains.

NAV Per Share Declines as Shares Increase

While aggregate NAV is up, NAV per share fell to $25.59 from $26.95 a year earlier, a 5.1% decline, and was slightly lower than the prior quarter’s $25.61. This reflects not only market and yield pressures but also the impact of additional share issuance. The decline in NAV per share highlights the importance of accretive capital raises and careful management of new equity relative to investment opportunities. Investors will be watching closely to see if increased deployment of the company’s large liquidity pool can stabilize or reverse this per‑share NAV trend over time.

Higher Operating Expenses and Share Dilution Weigh on Per-Share Earnings

Operating expenses, excluding interest, fees, and taxes, rose to $3.3 million versus $2.8 million a year ago and $2.5 million in the prior quarter. At the same time, weighted average common shares increased to 16.1 million from 13.8 million year over year. Management noted that issuance through at‑the‑market (ATM) equity programs and dividend reinvestment (DRIP) caused roughly $0.01 per share dilution to NII per share this quarter. Together, these higher expenses and a larger share count are dragging on per‑share earnings, even as the company grows in absolute terms. Managing expense growth and ensuring that new equity remains accretive will be key levers for future per‑share performance.

High Repayment Activity Softens Near-Term Earnings

Saratoga continues to see high levels of repayments, particularly from well‑performing investments. While these exits often generate realized gains and demonstrate strong credit outcomes, they also remove interest‑earning assets from the portfolio. In the near term, this dynamic has contributed to the year‑over‑year decline in NII and related metrics. Management is working to replace repaid loans with new originations, and this quarter’s net positive origination figure is a step in the right direction. Still, elevated repayments remain a headwind until reinvestment fully catches up in terms of both volume and yield.

Competitive Market and Tight Spreads Limit Upside

Management described the current deal environment as highly competitive, with historically low M&A volumes and abundant capital chasing a limited number of quality opportunities. This has pushed spreads tighter and made it more difficult to find attractive platform investments that meet Saratoga’s conservative underwriting standards. The company is choosing to be highly selective rather than stretch on credit quality or structure to maintain volume. While this approach may temper near‑term growth, it is consistent with management’s emphasis on long‑term NAV preservation and strong credit outcomes.

Upcoming Debt Maturity Adds Refinancing Decision Point

Looking ahead, Saratoga faces a notable funding decision with a $175 million 4.375% note maturing at the end of February 2026. Management acknowledged the uncertainty around how best to address this maturity, whether through existing cash, future liquidity, or capital markets transactions. With callable baby bonds and substantial dry powder on hand, the company has multiple options, but the timing and structure of any refinancing or repayment will influence future interest expense and leverage. Investors will be watching for more clarity as the maturity date approaches.

Cautious but Constructive Guidance Focused on Deployment and Dividend Support

Management’s guidance was measured but constructive, emphasizing NAV preservation, disciplined capital deployment, and dividend stability. They plan to thoughtfully deploy the company’s roughly $395.6 million of dry powder—comprised of $169.6 million in cash, $136 million of undrawn SBIC III debentures, and $90 million of undrawn revolvers—to grow AUM beyond the current $1.016 billion and increase NAV from its present $413.2 million level, while preserving credit quality. The goal is to lift adjusted NII and improve run‑rate earnings, building on the current net interest margin of $13.5 million and a weighted average core yield of 10.6%. Management reiterated their intention to maintain the $0.25 per month base dividend, reviewed quarterly, supported by strong credit metrics (portfolio fair value above cost, heavy first‑lien mix, and minimal nonaccruals). They also pointed to ongoing net originations, callable baby bonds, and the flexibility to address the 2026 note maturity through cash or capital markets as circumstances dictate.

In sum, Saratoga Investment’s earnings call showcased a BDC with strong credit quality, ample liquidity, and a long‑term record of outperformance, yet facing near‑term earnings pressure from lower yields, elevated repayments, and higher operating costs. For investors, the story is a balance between short‑term NII and NAV‑per‑share headwinds and the longer‑term potential created by significant dry powder, a conservative balance sheet, and a disciplined investment approach. If management can successfully redeploy capital at attractive risk‑adjusted returns while keeping credit losses minimal, Saratoga appears positioned to sustain its dividend and potentially restore per‑share earnings momentum over time.