Saratoga Investment (SAR) Q2 FY2027 Earnings Call: Record AUM, NAV Pressure

Saratoga Investment Corp. (NYSE: SAR) reported record assets under management for fiscal Q2 2027, but higher financing costs, dividend under-earning and markdowns in three portfolio companies weighed on net asset value.

Key Takeaways

• Assets under management increased 2.1% during the quarter to a record $1.15 billion. Originations totaled $76.1 million versus $39.0 million of repayments, producing net originations of $37.1 million.
• Adjusted net investment income was $7.4 million, or $0.46 per share, compared with $0.47 per share in the prior quarter and $0.58 per share a year earlier.
• NAV per share declined to $22.15 from $23.23 sequentially and $25.61 a year earlier. Three credits—Madison Logic, Exigo and Chronus—accounted for $0.82 per share of the quarterly decline.
• The quarterly dividend of $0.75 per share exceeded GAAP NII of $0.45 per share. Saratoga declared another $0.75 per share for fiscal Q3 2027, payable in three monthly installments of $0.25.
• The company repurchased approximately 444,000 shares at a discount to NAV, generating $0.09 per share of NAV accretion. Management said repurchases must be balanced against their impact on equity and leverage.
• Quarter-end investment capacity was $211 million, including $121 million of available SBIC III capacity and $90 million from two revolving credit facilities.

Key Financial Data

Business and Operating Performance

Saratoga’s $76.1 million of quarterly originations comprised $54.0 million across two new investments, $12.9 million in nine follow-on investments and $9.2 million in four BB and BBB CLO debt investments. After quarter-end, the company recorded another $35 million of originations and $2 million of repayments.

The core BDC portfolio’s fair value was 1.6% below cost at quarter-end, while the total portfolio was 4.9% below cost. Saratoga reported that 96% of credits remained in its highest internal rating category, although Chronus and Madison Logic moved into the yellow category.

The total portfolio was marked down by $14.4 million during the quarter. The non-CLO core portfolio recorded $15.4 million of net depreciation, including $13.1 million tied primarily to Madison Logic, Exigo and Chronus. This was partly offset by $4.5 million of unrealized appreciation in Zollege. Net realized gains totaled $2.1 million.

Saratoga completed a refinancing of its approximately $350 million CLO after quarter-end. The transaction extended the reinvestment period through October 2029 and legal maturity to October 2037 while lowering financing rates. Management expects the reset to restore CLO management fees and interest income.

The company also increased its SAX baby bond issuance to approximately $120.8 million and used available cash and bond proceeds to redeem $105.5 million of 6.00% notes due in 2027, reducing near-term refinancing risk.

Henri Steenkamp will step down from his executive roles on October 31 for health reasons. He will remain a director, continue as CFO of the SBICs and support the company in a consulting capacity. Christine Ramdihal was promoted to Chief Accounting Officer and Treasurer.

Risks and Areas to Watch

Higher financing costs continued to pressure earnings. Management said liability costs have adjusted upward faster than asset spreads, while spreads on new originations were 220 basis points below those on the repayments they replaced during the quarter.

The $0.75 quarterly dividend remained above both adjusted NII of $0.46 per share and GAAP NII of $0.45 per share. Approximately $0.30 of the sequential NAV-per-share decline reflected the dividend exceeding GAAP NII. Spillover income had declined to approximately $1 per share as of August 31, 2026.

Exigo was marked down by $8.7 million due to continued end-market weakness. Saratoga exited the investment after quarter-end near its quarter-end mark, resulting in a negative 6.1% lifetime IRR. Chronus and Madison Logic also faced weaker customer retention, acquisition or sales trends, although both remained on accrual with sufficient cash balances.

Pepper Palace and the CLO F-Note represented 1.3% of portfolio cost and no fair value at quarter-end. Both were subsequently resolved, leaving Saratoga with no nonaccrual investments at the time of the call.

Management also highlighted persistent inflation, interest-rate volatility, geopolitical uncertainty, tight private-credit competition and potential AI-related disruption in software as continuing risks. It said the quarter’s valuation pressure was concentrated in a limited number of investments rather than reflecting broad portfolio deterioration.

Analyst Q&A Highlights

• Dividend coverage and NAV: Management did not commit to a specific dividend change. It said the board reviews the payout at least quarterly and weighs current earnings, spillover income, interest rates and broader economic conditions. Management expects portfolio deployment, wider asset spreads, incremental SBIC funding and CLO income to support earnings over time.
• Share repurchases and leverage: Management said repurchasing shares at a significant discount can generate attractive NAV accretion, but emphasized that buybacks reduce equity and increase leverage. The company intends to balance the two considerations.
• CLO earnings contribution: Management estimated that the refinanced CLO could generate approximately $450,000 of quarterly management fees on $350 million of assets. Saratoga also expects interest income from its subordinated notes and Class E notes.
• SBIC deployment: Approximately 85% to 90% of the deals Saratoga reviews are SBIC-eligible. Management said SBIC debt is its lowest-cost source of capital and is therefore a priority for funding eligible investments.
• Software and AI exposure: Management said the operating challenges at Chronus and Madison Logic were not meaningfully caused by AI. Saratoga nevertheless continues to assess AI-related risks across every borrower and expects new deal flow to shift substantially away from software.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

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

Henri Steenkamp

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Second Quarter 2027 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law.

Today, we will be referencing a presentation during our call. You can find our fiscal second quarter 2027 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night.

For everyone new to our story, please note that our fiscal year ended February 28, so any reference to Q2 results reflects our August 31 quarter end period. A replay of this conference call will also be available. Please refer to our earnings press release for details.

I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Christian Oberbeck

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Henri Steenkamp

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

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

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

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

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

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

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

Subsequent to quarter end, we issued a further $23.1 million SAX baby bonds through a reopening, bringing the total principal amount issued to approximately $120.8 million. We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet and the long-term nature of most of our debt. Also, our debt is structured in such a way that we have no material BDC covenants that can be stressed during volatile times, which is especially important in the current economic environment.

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

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

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

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

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

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

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

David DeSantis

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

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

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

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

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

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

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

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

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

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

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

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

81.5% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. Looking at leverage on the same slide, you can see that industry debt multiples recently increased to the 6x range, while the total leverage for our portfolio decreased to 4.7x, excluding Pepper Palace, reflecting the new investments originated at much lower leverage levels.

Turning to Slide 15. That provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of calendar year 2024. This recent increase is a result of our recent business development initiatives. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.

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

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

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

Christian Oberbeck

Thank you, David. As outlined on Slide 18, our latest dividend of $0.75 per share in aggregate for the quarter ended August 31, 2026, was paid in 3 monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended November 30, 2026, marking the seventh quarter of our new dividend payment structure. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both company and general economic factors, including the current interest rate, macro environment impact on our earnings and spillover levels.

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

On Slide 21, you can further see our last 12 months of performance placed in the context of the broader BDC industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage, all of which reflect the value our shareholders are receiving. The recent reduction in our NAV per share is accounted for as a combination of the payment of previously undistributed profits as well as the markdowns of discrete credits this quarter, partially offset by the quarter's share repurchases well below NAV.

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

Moving on to Slide 22. All of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined in this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiated characteristics, many previously discussed, include maintaining 1 of the highest levels of management ownership in the industry at 11.5%, ensuring we are strongly aligned with our shareholders.

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

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

Operator

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

Question-and-Answer Session

Erik Zwick

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

Henri Steenkamp

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

Erik Zwick

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

Christian Oberbeck

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

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

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

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

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

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

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

Erik Zwick

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

David DeSantis

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

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

Operator

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

Jason Stewart

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

Christian Oberbeck

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

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

Jason Stewart

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

Christian Oberbeck

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

Henri Steenkamp

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

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

Jason Stewart

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

Henri Steenkamp

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

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

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

Operator

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

Christopher Nolan

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

Henri Steenkamp

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

Christopher Nolan

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

Henri Steenkamp

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

Christopher Nolan

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

Henri Steenkamp

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

Operator

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

Erik Zwick

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

David DeSantis

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

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

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

Operator

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

Christian Oberbeck

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

Operator

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