Saratoga Investment Corp (SAR) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corporation's Fiscal Second Quarter 2021 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 Corporation's Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Second Quarter 2021 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 2021 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 1:00 p.m. today through October 15. Please refer to our earnings press release for details.

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

Thank you, Henri, and welcome, everyone.

Following another volatile and challenging quarter across our businesses and the world, we experienced improvement in market conditions and gained improved visibility on the immediate prospects of our portfolio of companies. We continue to believe Saratoga and our portfolio of companies are positioned well at this point in time to weather this calamitous health and economic environment. We look forward to presenting our most recent results and reviewing the solid structure of our capitalization and continued improvement in liquidity on today's call. While no business can anticipate with clarity how long the displacement in the market and the global economy will last, we have confidence in our historically conservative approach to investing, strong capital structure, solid levels of liquidity, organization and management experience will enable us to effectively navigate this challenging current and uncertain future environment.

To briefly recap the past quarter on Slide 2, first, we continued to strengthen our financial foundation this quarter by maintaining a relatively high level of investment credit quality with over 92% of our loan investments retaining our highest credit rating after incorporating the impact of changes to market spreads, EBITDA multiples and/or revised portfolio company performance related to COVID-19. This is up from 90% in Q1. Importantly, this resulted in more than half of the Q1 unrealized fair value reduction recovering this quarter, generating a return on equity of 14.3% on a trailing 12-month basis in Q2, net of the 6-month COVID-19 impact to the portfolio. This significantly exceeds the BDC industry average of negative 8.5% by 22.8%, and registering a gross unlevered IRR of 16.6% on total realizations of $506 million.

Second, our assets under management increased to $508 million this quarter, a 5% increase from $483 million as of last quarter and $486 million as of the same time last year. Despite the unprecedented uncertainty and turmoil in the markets, we originated a healthy $31.7 million of new investments, offset by $23.3 million of repayments. Importantly, our new originations included 2 new portfolio company investments. Our capital structure, portfolio performance and recently improved liquidity have enabled us to remain open for business, an important differentiator in today's market.

Third, as we look ahead to the numerous challenges that the COVID-19 pandemic presents to the economy and particularly small businesses, balance sheet strength, liquidity and NAV preservation are paramount, both for our portfolio of companies and ourselves. Our current capital structure at quarter end was strong, with $298 million of mark-to-market equity supporting $108 million of long-term covenant-free non-SBIC debt and $170 million of SBIC debt. This includes our new $43.1 million public baby bond that we raised in Q2. This was -- this substantially increased our BDC cash and available liquidity to support our existing portfolio of companies, in addition to the $155 million of available SBIC II facilities, which can be used to finance new opportunities, with an all-in cost of less than 2%. We also extended our Madison credit facility draw period to September 2021 with no change to the 2025 maturity date. We had $11 million of committed undrawn lending commitments as of quarter end and $34 million of discretionary funding commitments. Our quarter end regulatory leverage of 376% substantially exceeds our 150% requirement.

Finally, reflecting on our recent baby bond raise and improved liquidity and the overall portfolio resiliency, the Board of Directors has decided to increase our quarterly dividend by $0.01 to $0.41 per share for the quarter ended August 31, 2020. We'll continue to reassess the amount of our dividends on at least a quarterly basis as we gain better visibility on the economy and fundamental business performance. As discussed on previous calls, we have historically conservatively managed our RIC compliance obligations such that we had no ordinary income spillover obligations going into this fiscal year, and therefore, substantial spillover flexibility and consequent liquidity. Payment of this increased dividend further preserves our spillover liquidity position.

This quarter saw continued solid performance with our key performance indicators as compared to the quarters ended August 31, 2019, and May 31, 2020, and considering the current economic environment. Our adjusted NII is $5.5 million this quarter, down 2.5% versus $5.6 million last year and down 5% versus $5.8 million last quarter. Our adjusted NII per share is $0.49 this quarter, down from $0.68 last year and down from $0.51 last quarter. Latest 12 months return on equity is 14.3%, currently the highest in the BDC industry. And our NAV per share is $26.68, up 9% from $24.47 last year and up 6% from $25.11 last quarter. This is the highest year-over-year growth in the BDC industry, and we're actually one of only 3 BDCs that have grown NAV per share over the last 12 months. Henri will provide more detail on that later.

As in the past, we remain committed to future and to further advancing the overall long-term size and quality of our asset base. As you can see on Slide 3, our assets under management have steadily risen since we took over the BDC and the quality of our credits remains high. AUM increased to $508 million in Q2, a 5% increase since last quarter. Our cost basis increased to $524 million, which is an 8% increase from last year and a 2% increase from last quarter.

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

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended August 31, 2020. When adjusting for the incentive fee accrual related to net capital gains in the second incentive fee calculation, adjusted NII of $5.5 million was down 4.8% from $5.8 million last quarter and down 2.5% from $5.6 million as compared to last year's Q2. Adjusted NII per share was $0.49, down $0.19 from $0.68 per share last year and down $0.02 from $0.51 per share last quarter.

The decrease in adjusted NII from last year primarily reflects the nonrecurrence of the income tax benefit recognized last year and the impact of lower LIBOR rates, partially offset by a higher level of investments, with AUM at cost up 9% from last year and also lower interest expense following the repayment of the $74.5 million SAB baby bond last year. The decrease from Q1 was primarily due to the increased interest expense resulting from the new SAK and private baby bonds, with all of that cash still undeployed. Once deployed, the impact will be fully accretive to NII.

In addition to the above, the decrease in adjusted NII per share from last year was due to the higher number of shares outstanding this year. Weighted average common shares outstanding increased by 34.5% from 8.3 million shares last year Q2 to 11.2 million shares for the 3 months ended May 31, 2020, and August 31, 2020, respectively.

Adjusted NII yield was 7.6%. This yield is down 340 basis points from 11% last year and down 30 basis points from 7.9% last quarter, reflecting primarily the impact of our growing NAV, the reduced LIBOR over this period and the effect of our currently undeployed capital.

For the second quarter, we experienced a net gain on investments of $16.5 million or $1.48 per weighted average share, resulting in a total increase in net assets resulting from operations of $21.8 million or $1.95 per share. The $16.5 million net gain on investments were comprised of $0.01 million in net realized gains and $16.6 million in net unrealized depreciation on investments, offset by $0.1 million of net deferred tax benefit on unrealized depreciation in our blocker subsidiaries. The $16.6 million unrealized depreciation -- sorry, appreciation reflects a 3.6% increase in the total value of the portfolio, primarily related to the impact of COVID-19 that resulted in changes to market spreads, EBITDA multiples and/or revised portfolio company performance, recovering more than half of the reduction in fair value in Q1.

Thinking about the total impact since COVID-19 began this year and as outlined in the MD&A in our Form 10-Q that was filed last night, the cumulative 6-month impact is now as follows: There are no investments with year-to-date unrealized depreciation of more than $3 million and only 6 investments with reductions of more than $1 million. The 2 largest reductions are C2 Education Services with $3.0 million and Nolan Group with $2.3 million each, but both improved from Q1.

Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains. Our return on equity was 14.3% for the last 12 months, which places us at the top of the industry for this period and well above the industry average of negative 8.5%.

Total expenses, excluding interest and debt financing expenses and base and incentive management fees, remained unchanged at $1.4 million as compared to both the last quarter and last year's Q2. This represents 1.1% of average total assets for all 3 quarters.

We have also again added the KPI slides, starting from Slides 25 through 28 in the appendix at the end of the presentation, that shows our income statement and balance sheet metrics for the past 12 quarters and the upward trends we have maintained. Of particular note is Slide 28, highlighting how our net interest margin run rate has almost quadrupled since Saratoga took over management of the BDC and has continued to increase in Q2.

Moving on to Slide 5. NAV was $298.2 million as of this quarter end, a $16.6 million increase from last quarter and a $73.9 million increase from the same quarter last year. NAV per share was $26.68 as of quarter end, up from $25.11 as of last quarter and up from $24.47 as of 12 months ago. This quarter, $5.3 million of net investment income and $16.6 million of net unrealized appreciation were earned, offset by $0.1 million deferred tax benefit on net unrealized depreciation in our blocker subsidiaries and $4.5 million of dividends declared. In addition, $0.8 million of stock dividend distributions were made through the company's DRIP plan and 90,321 shares were purchased for $1.6 million pursuant to the share repurchase plan, all in this quarter.

Our net asset value has steadily increased since 2011 and is up 33% in just the past year alone. And very importantly, this growth has been accretive, as demonstrated by the increase in NAV per share. No other BDCs have grown NAV per share like we have the past year, and only 2 others have grown it at all. We continue to benefit from our history of consistent realized and unrealized gains.

On Slide 6, you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. Starting at the top, NII per share decreased from $0.51 per share last quarter to $0.49 per share in Q2. A $0.05 decrease in non-CLO net interest income was partially offset by a $0.03 increase in other income.

Moving to the lower half of the slide, this reconciles the $1.57 NAV per share increase for the quarter. The $0.48 of NII, $1.47 of net unrealized depreciation on investments and $0.02 net accretion from the share repurchase plan and DRIP were offset by the $0.40 dividend paid in Q2.

Slide 7 outlines the dry powder available to us as of August 31, 2020, which totaled $265.4 million. This was spread between our available cash, undrawn SBA debentures and undrawn Madison facility. This quarter end level of available liquidity allows us to grow our assets by an additional 52% without the need for external financing, with $65 million of it being cash and thus fully accretive to NII when deployed, and $155 million of SBA debentures with an all-in cost of less than 2%, also very accretive. During the quarter, we also increased our available BDC liquidity by raising $43.1 million in a 7.25%, 5-year maturity, 2-year nonaccrual baby bond, trading under the ticker SAK, becoming the first BDC to raise a public baby bond since COVID-19 began. We also issued a $5 million private baby bond. We remain pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all of our debt is long-term in nature, actually all 3 years plus.

Now, I would like to move on to Slides 8 through 10 and review the composition and yield of our investment portfolio. Slide 8 shows that our composition and weighted average current yields have changed slightly as compared to the past. We now have $508 million of AUM at fair value or $524 million at cost invested in 40 portfolio companies and 1 CLO fund. Our first lien percentage has increased to 77% of our total investments, of which 13% is in first lien last out positions.

On Slide 9, you can see how the yield on our core BDC assets, excluding our CLO, as well as our total asset yield has dropped below 10%, yet remains healthy. This quarter, our overall yield remained unchanged at 9.6% as compared to Q1. Core asset yields decreased from 10.0% to 9.9%, but based on costs, remain unchanged at 9.5%. This demonstrates that the additional LIBOR decrease this quarter was effectively absorbed by the existing floors. As a reminder, 100 basis points is our lowest floor. So we do not expect to see further decreases in LIBOR impact interest income much. CLO yield increased from 11.7% to 16.4% as CLO market conditions improved. The CLO is currently performing and current.

Turning to Slide 10. During the second fiscal quarter, we made investments of $31.7 million in 2 new portfolio companies and 3 follow-ons and had $23.3 million in 1 exit plus amortizations, resulting in a net increase in investments of $8.4 million for the quarter. Our investments remain highly diversified by type as well as in terms of geography and industry. As you might note, we have updated our industry listing and schedule of investments to reflect the industry breadth and diversity that our portfolio represents. Our investments are spread over 29 distinct industries, with a large focus on education software, IT services, health care software and education and health care services, in addition to our investment in the CLO, which has included a structured finance securities.

Of our total investment portfolio, 6.0% consists of equity interest, which remain an important part of our overall investment strategy. For the past 8 fiscal years, including Q2, we had a combined $59.6 million of net realized gains from the sale of equity interest or sale of early redemption of other investments. About 2/3 of these gains were fully accretive to NAV due to the unused capital loss carryforwards that were carried over from when Saratoga took over management of the BDC. This consistent performance highlights our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE. In fact, our 6-year return on equity average is now almost 11%, with not 1 year below 9%.

That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our President and Chief Investment Officer, for an overview of the investment market.

Thank you, Henri. I'll take a couple of minutes to describe the current state of the market as we see it and then comment on our current portfolio performance and investment strategy in light of the continued impact of COVID-19.

Market conditions continue to be affected by COVID-19, but we are starting to see signs of renewed deal activity as well as renewed competition. When we spoke -- when we last spoke in July, loan inquiries were starting to pick up after nearly coming to a halt at the height of the pandemic. Most M&A processes were still on hold while buyers and sellers waited to better understand the impact of the pandemic.

The market has cautiously loosened up throughout Q2. As we have seen throughout the crisis, the deals that are getting done in the current market are less frequently with new platforms and more often with existing portfolio of companies that are either pursuing growth initiatives or seeking liquidity.

Now that said, we are beginning to see more new platform opportunities come to market. For quality deals, we are also seeing leverage widening and pricing tightening, albeit not quite to pre-COVID levels. Lenders in our market are staying disciplined on covenants and requiring deals to have healthy equity capitalization.

In these uncertain economic times, our underwriting bar is much higher than usual. However, we are actively seeking opportunities to deploy capital. We believe that compelling risk-adjusted returns can be achieved by deploying capital in support of those highly select businesses that have demonstrated strength and durability in the midst of this difficult environment. We have invested in 5 new platform investments since the onset of the pandemic, including one since quarter end.

We continue to be very actively engaged with our portfolio of companies. We have found that our portfolio of companies have generally taken the right steps to help mitigate both near and long-term effect of COVID-19 on their businesses. Many of them were able to avail themselves of the Paycheck Protection Program, or PPP, loan relief.

All of our loans in our portfolio are paying according to their payment terms, except for Roscoe. Taco Mac, My Alarm investments and Roscoe have experienced challenges for some time now and remain on nonaccrual.

Our Q1 valuations reflected a 6.1% reduction in the total value of the portfolio, primarily related to the impact of COVID-19, and more than half of that reduction has been recovered this quarter. We believe this strong performance reflects certain attributes of our portfolio that we expect will help us as we navigate through this economic environment and we remain confident thus far in the overall durability of our portfolio. 77% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stressed situations. We have no direct energy exposure.

In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Now, however, there are still plenty of uncertainties, and therefore, potential future adverse effects of COVID-19 on market conditions and the overall economy, including, but not limited to, the related declines in market multiples, increases in underlying market credit spreads and company-specific negative impacts on operating performance could lead to unrealized and potentially realized depreciation being recognized in our portfolio in the future.

While no business can anticipate with clarity how long the displacement in the market and global economy will last, we continue to believe that our well-constructed capital structure and liquidity will help us to navigate the challenges presented by the coronavirus. We believe that sticking to our strategy has and will continue to serve us best, especially in the market we currently face. Our approach has always been to focus on the quality of our underwriting. And as you can see on Slide 12, this approach has resulted in our portfolio performance being at the top of the BDC space with respect to net realized gains as a percentage of portfolio at cost. We are at the top of a list of only 10 BDCs that had a positive number over the past 3 years.

Now a strong underwriting culture remains paramount at Saratoga. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to appear as deeply as possible into the business in order to understand accurately its underlying strengths and characteristics. We always have sought durable businesses and invested capital with the objective of producing the best risk-adjusted accretive returns for our shareholders over the long term. Our internal credit quality rating reflects the impact of COVID, and shows 92% of our portfolio at our highest credit rating as of quarter end, up from 90% last quarter.

Now looking at leverage on Slide 13, you can see that industry debt multiples remained unchanged from calendar Q1 to Q2. Total leverage for our overall portfolio was 4.12x, decreasing from last quarter, reflecting strength in portfolio company capitalization. As we frequently highlight, rather than just considering leverage, our focus remains on investing in credits with attractive risk-return profiles and exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of investment.

In addition, this slide illustrates our consistent ability to generate new investments over the long-term despite difficult market dynamics. During the first 3 calendar quarters, we added 6 new portfolio companies and made 15 follow-on investments. And since the end of September, we also invested in another new portfolio company.

There are a number of factors that give us measured confidence that despite the current precipitous decline in deal activity, we can continue to grow our AUM steadily in this environment as well as over the long term. First, we continue to grow our reach into the marketplace, as is evidenced by the several investments we have recently made with newly formed relationships. Second, we have developed numerous deep long-term relationships with active and established firms that look to us as their preferred source of financing. Third, we expect the pace of payoffs to wane until financing markets recover and the impact of COVID is more fully known.

Moving on to Slide 14. Our team's skill set, experience and relationships continue to mature, and our significant focus on business development has led to new strategic relationships that have become sources for new deals. The number of new business opportunities has generally been impacted by COVID-19, although we are beginning to see a more active deal pipeline. But what is especially pleasing is that 1/3 of our term sheets issued over the past 12 months and 4 of our 7 new portfolio company investments are from newly formed relationships, reflecting solid progress as we expand our business development efforts.

As you can see on Slide 15, our overall portfolio credit quality remains solid. On the chart on the right, you can see that total gross unlevered IRR on our $489 million of combined weighted SBIC and BDC unrealized investments is 12.1% since Saratoga took over management. As Henri mentioned earlier and reflected in our Form 10-Q, more than half of our -- of the Q1 markdowns have bounced back in Q2, and what remains is across a wide variety of companies. We do not believe the remaining unrealized depreciation changes our view of the fundamental long-term performance. The 3 largest depreciations are in our Nolan Group, C2 Education and ArbiterSports investments, all of which are more dependent on in-person human interaction.

Our investment approach has yielded exceptional realized returns. The gross unleveraged IRR on our realized investments made by the Saratoga Investment Management team is 16.6% on approximately $506 million of realizations. The single repayment in Q2 had an IRR of 11.4%.

Now moving on to Slide 16. You can see our first SBIC license is fully funded with $222.3 million invested as of quarter end. Our second SBIC license has already been funded with $65 million of equity, of which $86.9 million of equity and SBA debentures have been deployed. There's still $0.7 million of cash and $110 million of debentures currently available against that equity.

In looking back at Q2, the way the portfolio has proven itself to be well-constructed and resilient against the impact of COVID-19 really came to the fore this quarter, demonstrating the strength of our team, platform and portfolio and our overall underwriting and due diligence procedures. Credit quality remains our primary focus. And while the world has changed significantly this year, we remain intensely focused on preserving asset value, and we remain confident in our team and the future for Saratoga.

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

Thank you, Mike.

As outlined on Slide 17, following Saratoga Investment's recent baby bond raise and the current performance of its portfolio, the Board of Directors have decided to declare a $0.41 per share dividend for the quarter ended August 31, 2020. This reflects a $0.01 increase from last quarter. The Board of Directors will continue to reassess this on at least a quarterly basis, considering both company and economic factors.

Moving to Slide 18. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of negative 30%, slightly below the BDC index of negative 22%. LTM total return was impacted by COVID-19, which has caused volatility, severe market dislocations and liquidity constraints in many markets, particularly impacting the smaller BDCs with average latest 12-month returns for BDCs with NAV a low $300 million, closer to negative 40%.

Our longer-term performance is outlined on our next slide, 19. Our 3- and 5-year returns places in the top 20 and 10, respectively, of all BDCs for both time horizons. Over the past 3 years, our negative 4% return actually exceeded the negative 11% return of the index. While over the past 5 years, our 55% return greatly exceeded the index's 10% return.

On Slide 20, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics. We remain above the industry average across diverse and key categories, including interest yield on the portfolio, latest 12 months return on equity and latest 12 months NAV per share growth. We continue to focus on our latest 12 months return on equity and NAV per share outperformance, which are both #1 for the whole industry and reflects the growing value our shareholders are receiving. Not only are we one of the few BDCs to have grown NAV, we have done it accretively by also growing NAV per share, one of only 3 BDCs to have done that the past year.

Moving on to Slide 21. All of our initiatives discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. Our differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 15%, which has decreased percentage-wise as a result of recent equity issuances and not by shares sold by management other than transfers among managers for compensation-related purposes; access to low-cost and long-term liquidity with which to support our portfolio and make accretive investments; receipt of our second SBIC license providing sub-2% cost liquidity; a BBB investment-grade rating and a new public and private baby bond issuance; solid historic earnings per share and NII yield; strong historic return on equity accompanied by growing NAV and NAV per share, putting us at the top of the industry for both; high-quality expansion of AUM and an attractive risk profile. In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry.

We remain confident that our experienced management team, historically strong underwriting standards and tested investment strategy will serve us well in battling for the substantial challenges in the current and future environment, and that our balance sheet, capital structure and liquidity will benefit Saratoga shareholders in the near and long term.

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

(Operator Instructions) Your first question comes from the line of Mickey Schleien from Ladenburg.

Let's just start with a few questions about the CLO, if I may. Its reinvestment period is ending soon. And I believe you've mentioned interest in raising new capital for CLOs. I just wanted to clarify, would this be capital for an additional new CLO or for expansion of the existing CLO?

Mickey, this is Chris. Thank you for that question. Yes, our investment period is ending in early 2021 and we have retained a very high-quality investment banker who helped us raise the last one, and we're actively in the marketplace. It looks like spreads are coming in on liabilities and the market is firming up. For our refinancing, exactly when that will take place is really subject to market developments, which are evolving in the right direction as of now pretty rapidly.

In terms of market requirements, depending on if we want to upsize the CLO or not, it may require additional capital, certainly for an upsize and it may also -- there may also be a requirement for additional equity on a refinance because leverage levels, certainly as of today, are a little lower than they have been the last time out. So there may be some capital required on our refinance of our existing portfolio.

If I could follow-up then, Chris. Do you think, all else equal, that given current terms in the CLO market, the profitability of the CLO in terms of distributions to the equity would be similar to where it's been the last couple of years? Or would it be less profitable?

I guess that's a difficult question to answer at this point in time. Obviously, if we need to put more equity in, the return on that equity, all else being the same, might be lower. But on the other hand, it really depends on the pricing of the liabilities as well as the market valuation and spreads on the assets. So I mean if we have this conversation a month ago, the answer would have been definitely substantially less. In the last 4 to 6 weeks, the market has improved dramatically. So where the market will be when we precisely refinance, it's just not something that we're able to effectively comment on right now.

I understand. And my last CLO question. I think Henri mentioned that this -- the CLO is still in compliance. Does that imply that the distribution in September was made and is equal to the distribution in July?

So 2 things on that. One is the test date is early October, and we're now past that test date and we've exceeded all requirements. So we are on track for a later in October equity distribution. The precise amount of that distribution is being calculated, but our estimate at this time is it's -- it would be generally at that level or higher than it was in July.

Okay. I appreciate that, Chris. And in the prepared remarks, I think Mike mentioned that most recently, the market spreads have tightened a little bit and multiples have expanded a little bit. And we saw some of that in, clearly, in your August results. How would you say spreads and multiples have been behaving in September with everyone looking to put capital to work in what is still a difficult underwriting environment?

And Mike, would you like to address that?

Absolutely. It's a good observation and certainly one that we're facing. In the midst of COVID, one thing hasn't changed, and that is that there's still plenty of capital in the marketplace. And so what we have observed is that for companies that are performing well, the businesses that we're seeking to support, there certainly is competition for capital and so that's starting to materialize. I think a few months ago, if you would ask me how much spreads had widened, it's deal-specific, but I would probably say it was somewhere in the 50 to 100 basis points, maybe even a little bit greater, depending on the specific deal. In this market, that's come in a bit. So all else equal, it's probably 25 to 50 basis points wider than pre-COVID, some cases a little bit more than that. But certainly, pricing has come in a little.

One thing that's very nice that we benefit from is that the cost of our debt financing and certainly our SBIC debt financing has come in quite a bit as well. I think as Henri mentioned in prepared remarks, the most recent SBIC debentures got priced, I think, at an all-time low such that the all-in cost of that debt financing, even take into account fees and so forth, is roughly 2%. So we still feel very confident that we can put capital to work in good opportunities and do it in a way that's very accretive to our shareholders.

That's helpful. And you sort of hit the nail on the head in terms of my follow-up question, which is FMG. Were you refinanced out of FMG? Or if not, what caused the exit? And I asked because everyone is looking for software deals right now. And obviously, that is a software company.

Yes. And we're delighted that we were early entrants into that market many years ago. So we've got really strong relationships in that space, and I think our shareholders have benefited from it. It's evident in the strength and durability of our portfolio as well.

But that was a company that was actually on the market to be sold or the expectation was that it was going to be sold pre-COVID. And then in the height of COVID, it was put on the shelf for a little bit because there's just a lot of uncertainty. It was not the best time to be selling. The company continued to perform so well that they reengaged with the sale exercise and it just got sold.

And so we'll continue to face some of that. We're watching repayments. All else equal, we think the repayment pace will be less than it usually is for natural reasons. But for those companies that are distinguishing themselves and performing very well, you still can get -- you still are subject to prepayment risk from just a change of control transaction. We think it's much less than in normal markets and we don't expect the pace of repayments to match what we usually face.

I understand. And Mike, I think you mentioned that portfolio leverage declined partially due to -- it sounded like equity capital being injected by sponsors. Is that correct? Or am I mistaking your comment?

Not so much from that. It's really just reflective of improvement in EBITDA. So it's that part of the equation that improved the leverage profile.

And I guess the FMG exit too, right, because it was second lien and presumably at a higher multiple?

Right.

Okay. And lastly, just in terms of helping investors understand the risk in the portfolio, can you give us a sense of where your average borrower EBITDA stands now?

I'm trying to get a sense of -- we usually don't divulge. These are all private companies, so we don't divulge that at that level. But are you asking for an absolute dollar amount or...

No, no, an average across the portfolio or weighted average. Is it $5 million, closer to $10 million? Where are we at in general?

I don't have that number readily available. I think what I would say to you, Mickey, is that we do operate at the lower end of the middle market. And the thing that we've done, I think, very, very well is that we -- even though we're investing in businesses that are at the smaller end of the market, what we seek out is opportunities to deploy capital in businesses that have larger company characteristics.

They're leaders in their niche. And just about every one of our portfolio companies are distinguished in that respect. They've got really strong management teams. They've got good prospects for growth and they're delivering excellent value proposition to their customers. So they have really strong durability of their revenues and repeat business from those customers. They've got diverse customer sets. The end markets that they're operating in have good tailwinds.

All of those features are ones that usually make people say, oh, the upper end of the middle market is superior to the lower end of middle market. And the trick to what we've done well is that we think we found businesses that have all those characteristics, but we can get better returns, well-structured deals that actually have covenants and lower leverage. And so we think the risk-adjusted returns in the way that we've constructed our portfolio are superior to what you'll see in the upper end of the middle market where everybody's competing on basis points.

And Mickey, if I could just add to that, just one further point. It's -- I think your question -- let's give some thought to that. I don't think we have the answer right now because, as you can appreciate, we've got a lot of software as a service companies and so they have a very different dynamic than just an EBITDA metric, right, because they're growing companies and there's a lot of reinvestment going on. And so to give a meaningful answer to that -- because it sounds like what you're trying to find is to sort of get a sense of the size of the companies were involved with, right?

Yes.

And -- but -- so we have to do some work to make sure that, that was a meaningful statistic to put out. Let's just work on that and we can address it maybe in the future.

That's fine, Chris. It's just that investors have had this quandary, is upper middle market or lower middle market, is there a meaningful disparity in risk? And prior to COVID, we would have expected the upper middle market companies to outperform, but your portfolio, which is a lower middle market portfolio, has done very well. And that's why I'm asking the question.

For example, a new deal build-out is a $15 million investment. I don't know if you're the sole lender there, but if I were to apply the average portfolio leverage of 4x, that would imply that's a $4 million, $5 million EBITDA company. That's what I'm just trying to understand.

I think as Mike articulated earlier, I think that part of the way to assess risk, certainly retrospectively, is just look at how we performed with our portfolio. But I think what Mike was saying and to repeat a little bit is that, in essence, we have a unique portfolio. Every company that's in our portfolio has been uniquely underwritten by us and selected by us. And so to put them in sort of an average grouping based on a metric like some $10 million EBITDA, it doesn't necessarily capture the level of credit underwriting that goes into each of these companies. And the equity dynamic -- because, quite frankly, a number of these grow a lot, we have equity investments in them. And so it's not so easily broken out by a single slice or metric.

No, I understand, Chris. Congratulations on a very good quarter in a very difficult environment.

Your next question comes from the line of Casey Alexander from Compass Point.

I think that shareholders should truly appreciate the fact that you guys chose to exercise some portion of your share repurchase program during the current quarter. I have a couple of questions in relation to that. Even with the change in the price of the stock today, the discount in the stock is similar to that which you were repurchasing shares during the last quarter. Are you continuing to repurchase some shares during the current quarter?

And secondly, strategically, how do you think about it? And should we read this as at least some expression of your confidence in capital deployment, given that 2 quarters ago, you deferred the dividend to harvest capital, now you've reinstated the dividend and you're using some capital to repurchase shares?

Casey, that's a good question, and that's something that we think about, discuss, analyze on a very profound basis sort of at all times. Clearly, you just look at newspaper headlines or whatever you want to look at, in the last several months, not a week goes by, there's not a dramatic change in the outlook one way or the other for all sorts of things: economic, COVID-related, et cetera. So we've come to a very volatile time in terms of forward-looking, like what's the future going to be.

I think as you can see from our portfolio performance, we had enormous amount of questions in that early period of time in April and May and a tremendous amount of stimulus came in from the government. I think the government did a fantastic job between the Fed and the government with the fiscal stimulus, PPP, et cetera. And I think a lot of what would have been sort of organic risks to the system based on what had happened were somehow -- were definitely muted very substantially by these interventions. We -- those are one of the hardest things to predict, how much is the government going to do and how long are they going to do it for. So those kind of uncertainties became more and more clear as time went by. And as our portfolio continued to perform and some of our portfolios had a bit of seasonality, some of the summer and the fall had -- were important for what revenue projections would be, et cetera. And so we basically gave a tremendous amount of visibility, and our portfolio has performed very well through this environment, all things considered.

And so our view on portfolio risk based on what we know and see as of right now has improved. We think our risk profile relative to what we thought it was is much improved. In addition, we've taken some very substantial steps relative to our balance sheet to create a lot of liquidity. And we raised the baby bond in June and we did a private -- a smaller private baby bond following that to open new avenues so that we have a more diversified source of capital, kind of preparing for what could be either difficult times or very opportunistic times where a lot of very interesting deal flow might come our way if we are open for business as we are and differentiated from some of our competitors. So all of that has evolved very substantially and is recognized by us, not only putting our dividend back in place, but then raising the dividend rate.

In terms of the specifics relative to the share repurchase, I think if you look at that amount of repurchase, on the one hand, it's not that large. And I had -- it is a share repurchase, and your point is very well taken that some of the best investments can be just buying more of our portfolio at a substantial discount. The intention around that particular set of purchases was more about kind of countering any dilution to our stock through our dividend repurchase sales. And so that amount -- I mean, it was more than what we did last quarter, but depending on what the DRIP is this quarter, we were kind of countering what that dilution might be.

In terms of our outlook going forward, we don't have a set decision at this moment. We do recognize that we think the stock is quite a bargain at this time, but we also recognize that we have substantial undeployed leverage capability that is dependent on our equity level. Our trading value -- also float is another consideration. And our outlook in terms of our potential portfolio growth and growth with a proper [crop] balance in this environment of equity debt, all those things go into the equation as to how much -- as to whether and how much we might look to repurchase going forward.

And I would communicate that I think that shareholders would be pleased, especially at this level of discount, if you continued to at least offset the dilution from the dividend reinvestment program. That would certainly make a lot of sense.

I got a question -- a couple of questions for you, Mike. First of all, the 2 new originations in the quarter, can you share -- first of all, thank you for the granular information and breaking up business services into their constituent components because it was a little bit too blanketed for most people's comfort level. But in the 2 new originations that you did in this quarter, what industries are they specifically in and what made them attractive?

And then I'll just give you the follow-on to that. EMS LINQ has a new CEO and has done an acquisition in this current quarter. Did that create an add-on opportunity for that particular education company? And also, we have heard that things have improved substantially at Roscoe Medical. If you could give us some color on Roscoe Medical, that would also be helpful. So I know that's stirring a lot, but I gave it to you at once so that you can go into it.

Okay. Let me see if I've got all of those. So the 2 new portfolio companies are both businesses that are delivering their product in a SaaS model. One is serving the commercial real estate industry, but is a fundamental product that we don't think really is greatly affected by volumes in the commercial real estate industry so much in the way that the business is constructed. The other is a business that is in the field service management business, so think of electrical contractors and HVAC and things of that nature. So 2 SaaS-related businesses that we think have terrific fundamentals and all of the characteristics that I've mentioned before that we look for in businesses, and very well-capitalized businesses with good ownership as well.

In terms of specific companies, we typically don't do this, but if you're going to highlight the one business, EMS LINQ, it is a business that has been paid off, and so we've exited that transaction post quarter end. It was holding up well, but we did get recapitalized out of that business. You're correct in noting that the performance of many of the companies in our portfolio we're pleased to see has held up well. In some companies, Roscoe would be one that would fall into that category. Their performance has actually improved markedly during the downturn. And so we're encouraged by that. We'll wait to see how that shakes out over the next 6, 8 -- coming months, but there are a lot of reasons for us to be optimistic about how that company's value will grow as their performance continues to improve.

Your next question comes from the line of Tim Hayes from B. Riley Securities.

This is actually Mike on for Tim. Just a quick one on the dividend. So you increased it by $0.01. Can you just talk a little bit about what exactly went into this decision? Just given the in-place coverage and idle cash, do you anticipate recommending to the Board to go back to $0.01 a quarter increase like before? Or is this something you're kind of just in wait and see mode given all the macroeconomic uncertainty?

Well, thank you for that question. So I think as we have been consistent all along, we pretty much make our dividend decisions at the time we declare them, and we don't make long-term projections on our dividends. And I think that practice is particularly important in the world we're in right now where there's such dramatic changes in both perception and reality can occur in such short time frames.

And so our view when we set the $0.40 dividend was to be conservative and set a number that we didn't feel like we would have to cut back on in the future based on what we knew at that time. And as the quarter rolled out and as we got the performance from our existing companies, we had increased confidence in our underlying earnings power for the BDC, and we decided to increase our dividend based on that.

At the moment now, we're 5 weeks into our current quarter. Not -- we don't want to make any projection based on all that. But as you could see from the macro environment, right, there hasn't been any substantial business setback. So we don't want to, again, make any kind of projection as to our dividend in the future, but certainly, looking backwards at our reported earnings, our coverage is high. In other words, we're earning well in excess of our existing dividend in this past quarter and that was why we raised it. And again, some of the similar thinking will be applied at our next quarter. Again, depending on the circumstances, we will make that decision at that time.

There are no further questions at this time. Sir, you may continue.

Okay. Well, thank you, everyone, for joining us today, and we look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude today's conference call. Thank you for participating. You may now disconnect.