Saratoga Investment Corp (SAR) CEO Christian Oberbeck on Q4 2021 Results - Earnings Call Transcript
Saratoga Investment Corp (NYSE:SAR) Q4 2021 Earnings Conference Call May 6, 2021 1:00 PM ET
Company Participants
Henri Steenkamp - Chief Financial & Compliance Officer
Christian Oberbeck - Chairman & Chief Executive Officer
Michael Grisius - Chief Investment Officer
Conference Call Participants
Bryce Rowe - Hovde Group
Mickey Schleien - Ladenburg
Sarkis Sherbetchyan - B. Riley Securities
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corporation’s Fiscal Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. Please note that today’s call is being recorded. During today’s presentation, all parties will be in a listen-only mode. Following management’s prepared remarks, we will open the line for questions.
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.
Henri Steenkamp
Thank you. I would like to welcome everyone to Saratoga Investment Corp.’s fiscal fourth quarter and fiscal year 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 fourth quarter and fiscal year 2021 shareholder presentation in the Events and Presentation 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 4 p.m. today through May 13th. Please refer to our earnings press release for detail.
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. Our fiscal 2021 results reflect a full 12 months of unprecedented times, during which our company and our industry proved resilient as we and our portfolio companies successfully managed through these challenges.
Looking ahead, we have confidence that our conservative approach to investing, strong capital structure and levels of liquidity, organization and management experience positions us to effectively capitalize on potential future opportunities and navigate through the inevitable future challenges. We look forward to presenting our most recent quarterly and full year results and reviewing our solid capitalization and continued improvement in liquidity on today's call.
Our annual performance metrics for fiscal 2021 include full-year return on equity of 5%, including the full year impact of COVID and adjusted NII per share of $2.02 and last 12 month NAV per share growth of $0.12, or 0.4%, one of only a handful of BDCs to grow this metric over this period. Our year-end NAV per share of $27.25 represents our highest level yet.
To briefly recap the highlights of the past quarter and year on slide 2. First, we continue to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality, but 93% of our loan investments continuing to have our highest rating at year end, generating a return on equity of 5% on a trailing 12-month basis, significantly ahead of the BDC industry mean of 0.4%. And as of year end, registering a gross unlevered IRR of 13% on our total unrealized portfolio with our current fair value 1% above our total cost of our portfolio, and a gross unlevered IRR of 16.5% on total realizations today of $561 million.
Second, our assets under management increased slightly this quarter to 554 million, a 1% increase relative to Q3, including the impact of the refinancing of the CLO at quarter end, which included in upsizing of the CLO from $500 million to $650 million and extending the reinvestment period by a further three years. For the year, our AUM is up 14% from $487 million as of last year end. With $130 million of repayments this year, we again demonstrated the ability of our origination platform to keep pace with ongoing redemptions. With $202 million of new investments originated during fiscal 2021. We've continued to originate both new investments and follow-on throughout the year, despite the many market challenges, which has been a great differentiator for us. Mike will discuss this more in detail later.
Third, despite improving economic conditions, balance sheet strength, liquidity and NAV preservation remain paramount for us. Our capital structure remains strong, with $304 million of mark-to-market equity at year end, supporting $123 million of long-term covenant free non-SBIC debt. This translates into regulatory leverage of 347% with substantial cushion over 150% requirement. Our liquidity and credit facilities of $216 million at year end are available support our portfolio companies with $141 million of the total dedicated to new opportunities in our SBIC2 fund. The all in cost of this new SBIC2 debt is currently approximately 2%.
Total committed undrawn lending commitments outstanding to existing portfolio companies are just $13 million. Subsequent to year end, we issued a $50 million, 4.375% five year unsecured bond that strengthens both our capital and liquidity position, and also importantly, reduces our current cost of non-SBIC capital by almost 200 basis points. Finally, reflecting on our improved liquidity and overall portfolio resiliency, the Board of Directors decided to again increase our quarterly dividend by $0.01 to $0.43 per share for the quarter ended February 28, 2021 paid on April 22, 2021.
We will continue to evaluate our dividend payments on at least a quarterly basis, as we gain better visibility on the intermediate term economy and fundamental portfolio performance. This quarter saw continued solid performance within our key performance indicators, as compared to the quarter ended November 30, 2020. Our adjusted NII is $5.8 million this quarter, up 5% versus $5.5 million last quarter. Our adjusted NII per share is $0.52 this quarter, up from 50% -- $0.50 last quarter. Latest 12 months return on equity is 5% this quarter, down from 11% last quarter. Our NAV per share is $27.25, up 2% from $26.84 last quarter. Henri will provide more detail later.
As you can see on slide 3, AUM is steadily risen, since we took over management at the BDC more than 10 years ago, and the quality of our credits continue to remain high. We are working diligently to continue this trend as we deploy are available capital while at the same time being appropriately cautious in this evolving credit environment.
With that, I would like to now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.
Henri Steenkamp
Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended February 28, 2021. When adjusting for the incentive fee accrual or net capital gains, adjusted NII of $5.8 million was up 5% from $5.5 million last quarter and down 15% from $6.8 million as compared to last year’s Q4. Adjusted NII per share was $0.52, up $0.02 from $0.50 per share last quarter and down $0.09 from $0.61 per share last year.
Across the three quarters weighted average common shares outstanding remained largely unchanged for each quarter. The sequential quarterly increase in adjusted NII per share is primarily due to the full period impact of last quarters originations and a growing a AUM base. The year over year decrease is primarily due to last year fourth quarter, including $4.4 million of non-recurring advisory fee income and prepayment premiums related to the easy ICE realization and the weighted average current coupon on non-CLO DDC investments decreasing to 9.6% this quarter from 9.8% last year.
Both of these were partially offset by an investment base that has grown by 14.1%, since last year. Adjusted NII yield was 7.7% when adjusted for the incentive fee accrual. This yield is up from 7.4% last quarter, but down from 9.3% last year due to the reasons noted above. For this fourth quarter, we experienced a net gain on investments of $5.1 million or $0.46 per weighted average share and a realized loss on extinguishment of debt of point $1 million, or $0.01 per weighted average shares, resulting in a total increase in net assets from operations of $9.3 million or $0.83 per share.
The $5.1 million net gain on investment was primarily comprised of $14.3 million in net unrealized appreciation on investments, offset by $8.7 million in net realized loss. The $8.7 million net realized loss primarily relates to the sale of the company's Elyria equity investment, the last remaining investment that dates back to before Saratoga took over management of the BDC in 2010.
The $14.3 million net unrealized appreciation primarily reflect; one, the $8.7 million reversal of previously recognized depreciation following the realization of Elyria. And two, a 1% increase in the total value of the remaining portfolio, primarily related to improvements in market spreads, EBITDA multiples and/or revised portfolio company performance. Therefore, all but $1.4 million or 95% of the net reduction in the value of the non CLO portfolio in the first quarter has been reversed since May 31 2020.
The point $0.1 million loss in extinguishment relates to the repayment of $26 million of hbas Adventures now first fpac licence. This is reflected in its own line item in the statement of operations. As this quarter is also year end, we also highlight the key performance metrics for the year ended February 28, on slide five. When adjusting for the incentive fee accrual our net capital gains adjusted NII of $22.6 million was down 3% from $23.2 million last year, adjusted NII per share was $2.02 per share down $0.47 from $2.49 last year.
The decrease in adjusted NII per share is largely a result of a 20% year on year increase in weighted average shares outstanding and the non recurring EVAs impact noted above, partially offset by au m up 14% year over year. Adjusted NII Yield was 7.6% when adjusted for the incentive fee accrual down from 9.9% last year.
For the full year, we experienced a net realized and unrealized loss on investments of $8.2 million or $0.73 per weighted average share, resulting in a total increase in net assets resulting from operations of $14.8 million or $1.32 per share.
The $8.2 million net loss on investments was comprised of the same $8.7 million in net unrealized loss and $3.9 million of income provision on our realized gains on investments paid in Q3. This was offset by $5 million in net unrealized appreciation on investments.
Return on equity, which includes both realized and unrealized gains remains an important performance indicator for us. Our return on equity was 5.0% for the last 12 months, well above the BDC industry average of point 0.4%.
Quickly touching on expenses for the year, total expenses excluding interest and debt financing expenses, based an incentive management fee and income tax and excise tax expense increased to $6.3 million this year, from $5.7 million in the same period last year, but remained unchanged as 1.1% of average total assets.
And we have also added the historical KPIs in slides 28, through 31, in the appendix at the end of the presentation that shows our income statement and balance sheet matrix for the past 14 quarters. And the upward trends we have maintained.
A particular note is slide 31, highlighting how our net interest margin run-rate has quadrupled since Saratoga took over management of the BDC and also increased by 14% just as past year.
Moving on to slide six, NAV was $304.2 million as of the year end, basically unchanged from last year. Looking at just Q4 NAV was up $4.3 million, or 1.4%. NAV per share was $27.25 at year end, up to 1.5% from $26.84 as of last quarter, and our point 4% from $27.13 as of 12 months ago.
NAV per share is increase in all but two of the last 14 quarters, and we remain one of the few BDC to have grown NAV per share in the past year. In fiscal 2021, NAV also includes $2.4 million of stock dividend distributions made through the company's dividend reinvestment plan, offset by $3.6 million in repurchases of common stock.
During Q4 50,000 shares were repurchased at a cost of $1.1 million at an average price of $22.88 per share. On slide seven, 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 $0.47 from $2.49 per share last year to $2.02 per share this year. The significant changes were $0.53 increase in non-CLO, net interest income offset by a $0.30 decrease in other income, primarily due to the BDC previously noted, a $0.07 reduction from an increase in base management fees due to increased AUM and a $0.41 dilution due to the 20% increased in shares from the ATM and DRIP programs
The lower half of the slide reconciles the $0.12 NAV per share increase for the year. The $2.07 generated by our fiscal NII and $0.02 accretive impact of our ATM and DRIP programs for the year were partially offset by $0.33 net realized losses and unrealized depreciation. The $1.23 dividend declared for FY 2021, $0.35 for income tax provision from realized gains and a $0.01 realized loss on extinguishment of debt.
Slide 9 outlines the dry powder available to us as of year end, which totalled $215.9 million. This consists of our available cash and drawn SBA debentures and undrawn Madison facility. This year end level of available liquidity allows us to grow assets by an additional 39% without the need for external financing, with $30 million of it being cash and that's fully accretive to NII when deployed, and $141 million in SBA debentures with an all in cost of under 2%, also very creative.
In addition, on March 10, 2021, we closed the public offering a $50 million, 4.375% notes due 2026 resulting in net proceeds of approximately $48.8 million. This liquidity is accretive to the year end Saratoga investment available liquidity on this slide. We remain pleased with our liquidity and leverage position, especially taking into account the overall conservative nature of our balance sheet. And the fact that all our debt is long-term in nature with no non-SBIC debt maturing within the next four years, and mostly fixed rate.
Now we'd like to move on to slides 10 through 13 and quickly review the composition and yield of our investment portfolio. Starting with slide 10, our $554 million of assets are invested in 40 portfolio companies and one CLO fund. And 80% of our investments are in first lien, of which 8% of that is in first lien last out positions.
On slide 11, you can see how the yield on our core BDC assets, excluding our CLO remains just above 9%. As short-term LIBOR continued to decline this year, and as of year end. Overall yield decreased 30 basis points to 9.1% from 9.4% last quarter. But with LIBOR already below floors, this was mainly because of the increase in our overall portfolio fair value back to above cost. This is demonstrated by our core asset yields increasing slightly to 9.6% from 9.5% last quarter.
As a reminder, 100 basis points is generally our lowest floor. So we do not expect to see further decreases in LIBOR greatly impact interest income. Our CLO yield of 11.6% is similar to last quarter, and our CLO is current and performing.
Turning to slide 12, our investments remain highly diversified by type as well as in terms of geography. During the past quarter, we made investments of $80 million in two new portfolio companies and 11 follow-ons and had $79 million in five exits plus amortizations, resulting in a net increase in investments of $0.9 million for the quarter.
On slide 13, you can see the industry breadth and diversity that our portfolio represents. Our investments are spread over 31 distinct industries, with a large focus on education software, IT services, and education and healthcare services. In addition, our total investment in the CLO is reflected as structured finance securities on this slide.
Of our total investment portfolio, 6.7% consists of equity interest, which remained an important part of our overall investment strategy. For the past nine fiscal years, and as demonstrated on slide 14, we had a combined $59.6 million of net realized gains on investments originated by the Saratoga team, from the sale of equity interest or sale early redemption of other investments.
Over two-thirds of these gains were fully accretive to NAV due to the unused capital loss carry-forwards that were carried over from when Saratoga took over management of the BDC. Following the realization of our legacy illyria position this creates new capital loss carry forwards that future capital gains will be offset by. This overall consistent performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long-term ROE.
That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, President and Chief Investment Officer for an overview of the investment market.
Michael Grisius
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.
Market conditions continued to be affected by COVID-19, but mainly in certain pockets and to a far lesser extent than earlier in the crisis. Liquidity conditions remain exceptionally robust. We are seeing rebounding and even increasing transaction volumes, tightening credit yields and greater leverage multiples back to pre-COVID levels and the willingness to accept greater risk.
Earlier in the crisis, deals were mostly limited to existing portfolio companies either pursuing growth initiatives or seeking liquidity. This started to change in Q2 of last year and it's accelerated since then.
Significant competition for quality deals is helping widen leverage and tighten pricing even back to pre-COVID levels. Calendar Q1 was quite robust and there appears to be a positive outlook for calendar year 2021. Lenders in our market are for the most part staying disciplined with covenants, and requiring deals to have a healthy equity capitalization.
Our underwriting bar remains high as usual, yet we are actively seeking and finding opportunities to deploy capital. We believe that compelling risk adjusted returns can be achieved by deploying capital and supportive businesses that have demonstrated strength and durability throughout the COVID environment.
Follow-on investments with existing borrowers with strong business models and balance sheets continue to be an important avenue of capital deployment. As demonstrated with 11 follow-ons this past quarter. Most notably, we have invested in 12 new platform investments since the onset of the pandemic, including two in this past calendar quarter.
Portfolio management continues to be critically important, and we remain actively engaged with our portfolio companies. We have found that they have generally taken the right steps to help mitigate both the near and long-term effect of COVID-19 on your businesses.
As we've mentioned before, many of them are also 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, including Rosco that returns to accrual this quarter.
Taco Mac and My Alarm are the two investments that remain non-accrual. There have been no new non-accruals prior to and through COVID. We also recognize that an additional $5.6 million and unrealized appreciation this quarter, which means that our overall portfolio has recovered over 95% of the unrealized depreciation in Q1. And the fair value of Saratoga’s assets has recovered to 1% over its cost basis.
And we believe this strong performance reflects certain attributes of our portfolio that bolster its overall durability. 80% of our portfolio is in first lien debt, and generally supported by strong enterprise values in industries that have historically performed well, in distressed situations. We have no direct energy or commodities 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. There remains potential future adverse effects of COVID-19 on the 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, and could lead to unrealized and potentially realized depreciation being recognized in our portfolio in the future.
Now, despite this lack of clarity, we continue to believe that our well constructed capital structure and liquidity will help us to navigate beyond the challenges presented by COVID-19 and the broader macro environment. Our approach has always been to stick to our strategy and focus on the quality of our underwriting.
And as you can see on slide 15, this approach has resulted in our portfolio performance being at the top of the BDC list that has only seven BDCs with a positive net realized gain as a percentage of portfolio cost over the past three years. 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 Endeavour to appear as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics. We always have thought 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 93% of our portfolio at our highest rating as of year end.
Looking at slide 16. Total leverage for the overall portfolio for investments underwritten using EBITDA was 3.63 times, down from 4.03 times in the previous quarter, reflecting strengthen portfolio company capitalization, and the lower leverage of certain new deals. Our leverage is also below the average year to date market leverage multiples which are about five times across our industry.
Through past volatility, we have been able to maintain a relatively modest risk profile throughout, although, we never consider leverage in isolation. Rather focusing on investing in credits with attractive risk return profiles and exceptionally strong business models where we are confident the enterprise value of the business will sustainably exceed the last dollar of our investment.
In addition, this slide illustrates our strengthening ability to generate new investments over the long term, even in the midst of the difficult market dynamics. During the calendar year 2020, we added 11 new portfolio companies and made 26 follow-on investments, including a follow-on to that supported portfolio company's liquidity during COVID-19. We also added two platforms and five follow on investments in the first calendar quarter of 2021. That we were able to accomplish this in the face of COVID challenges underscores the ongoing emphasis on broadening our origination capabilities.
Now subsequent to fiscal year end, including investments that are either close today or will be closing in the next couple of days. We have executed approximately 90 million of new originations in three new portfolio companies and six existing portfolio companies and also had one repayment of approximately $14 million for net new investments originated of approximately $76 million.
Moving on to slide 17, 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 of new deals. Our number of deal sources dropped reflecting the difficult sourcing environment during much of last year, although we are beginning to see a more active deal pipeline in this year.
The 52 term sheets issued during the last 12 months is also markedly up from last year's pace. What is especially pleasing to us is that almost one-fifth of our term sheets issued over the past 12 months, and four of our 10 new portfolio company investments are from newly formed relationships, reflecting notable progress as we expand our business development efforts. There are a number of factors that give us measured confidence that 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 evidenced by 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 continue to see plenty of investment opportunities in industry segments that are experiencing long term secular growth trends, and within which we have intentionally developed expertise.
As you can see on slide 18, our overall track record is very strong, on almost $1.1 billion of originations. On the chart on the right, you can see the total gross unlevered IRR on our $514 million of combined weighted SBIC and BDC unrealized investments is 13% since Saratoga took over management.
The two largest unrealized depreciations remaining due to COVID are in our Nolan Group and C2 Education investments, both of which are more dependent on in person human interaction. We did not believe the remaining unrealized depreciation changes our view of their fundamental long term performance. Even with those current markdowns, our overall portfolio fair value is now 1% above its total cost.
Our investment approach has yielded exceptional realized returns. Our gross unlevered IRR on the realized investments is 16.5% on approximately $561 million of realization. Subsequent to year end, we also had some developments on our My Alarm centre investment, which had a remaining fair value of $181,000. The senior debt burden of the company plus the cost of acquiring and retaining new customers resulted in significant pressure on cash flow and liquidity.
As a result, a new senior lender took a majority position in the credit and is accelerated its debt through a recent pre-packaged chapter 11 filing, with the equity sponsor choosing not to infuse additional capital into the business at this time, there is very little prospect for recovery at the junior capital.
Moving on to Slide 19, you can see our first SBIC license is fully funded with 208 million invested as of year end, and we have started paying down some of our SBIC I debentures using repayment proceeds, with 26 million repaid in Q4.
Repayments of debentures occur on a semi annual basis. Our second SBIC license has already been funded with $69 million, of equity, of which 107 million of equity and SBA debentures have been deployed. There are still 3.4 million of cash and 104 million of debentures currently available against that equity. We still have 18.5 million of unfunded equity, which when dropped down into the SBIC would increase our debenture availability by $37 million.
Looking back over the whole year, the way the portfolio has proven itself to be well constructed, and resilient against the impact of COVID-19, really came to the fore, demonstrating the strength of our team, platform and portfolio, and our overall underwriting and due diligence procedures.
Credit quality is always our primary focus. And while the world has changed significantly this year, we remain intensely focused on preserving asset value, and remain confident in our team and the future for Saratoga Investment.
This concludes my review of the market and our portfolio. And I'd like to turn the call back over to our CEO, Chris.
Christian Oberbeck
Thank you, Mike. As outlined on Slide 20. Following recent capital raises and the current performance of our portfolio, the Board of Directors declared $0.43 per share dividend for the quarter ended February 28, 2021. This reflected a 1% – $0.01 increase from last quarter, the third sequential quarterly dividend increase. The Board of Directors will continue to reassess this on at least a quarterly basis considering both company-specific and economic factors.
Moving on to Slide 21. Our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of 153%.,outpacing the BDC index of 121%. Our longer term performance is outlined on Slide 22, our next slide.
Our five year return places us in the top of all BDCs with both the five, three and one year returns easily beating the BDC industry averages. Over the past three years, our 62% return outperformed the 34% return of the index and over the past five years, our 148% return greatly exceeded the indexes 59%.
On Slide 23, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics. We continue to achieve high marks and outperform the industry across diverse categories, including interest yield on the portfolio. Latest 12 months return on equity and latest 12 months net asset value per share growth.
Notably, our latest 12 months return on equity and NAV per share our performance reflects the growing value our shareholders have been consistently receiving. First, not only are we one of the very few BDCs have grown NAV, we have done it accreatively by also growing NAV per share 12 of the last 14 quarters, and only one of seven BDCs growing in the past 12 months. And second, our seven year average return on equity is now 11.4%, one of the highest in the industry.
Moving on to Slide 24. All of our initiatives, decisions and achievements discussed today on this call, are designed to make Saratoga investment a highly competitive BDC and is attracted to the capital markets community. We believe that our differentiated characteristics outlined in 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%, 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 that was recently upgraded, and active public and private baby bond issuances, solid historic earnings per share in NII yield and strong and industry leading historic and long-term 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 as well in battling through the substantial challenges in this current environment. And that our balance sheet, capital structure and liquidity will benefit Saratoga invest shareholders in the near and long-term.
In closing, I would again like to thank all of our shareholders for their ongoing support. And I would like to now open the call for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Bryce Rowe with Hovde Group.
Bryce Rowe
Thanks. Good afternoon.
Christian Oberbeck
Hi, Bryce.
Michael Grisius
Good afternoon.
Bryce Rowe
Hi. I wanted to maybe start on pricing. Good to see stability from year on the debt portfolio. And so wanted to get a feel for what you've seen here in the current quarter. Mike, you talked about the $90 million of activity subsequent to February. And then, kind of what your expectations are from the CLO perspective. I know once those get reset, you kind of start with a lower yield into the portfolio, and then it could possibly build as we move through time.
Michael Grisius
Yes. Let me take that in two parts. And I'll let Henri address the CLO. But as it relates to the market in general, we're definitely seeing reflections of a lot of capital available to invest in private credit. And as a consequence, yields have come in, I would say to the point where yields are below even where we were seeing them pre-COVID.
But having said that, I'll remind you that where we operate at the lower end of the middle market, there are literally 1,000s of companies out there, good companies that we feel will continue to find very good opportunities to invest in those businesses at rates that are very accretive for our shareholders. Certainly, the fact that, that our debt capital has come down as well as it’s helpful to that end, but pricing certainly has come in a bit.
Henri Steenkamp
Yeah. Great. And then on the CLO, you're absolutely right. So as the CLO gets closer to the end of its reinvestment period, the weighted average effective interest rate, which reflects the future cash flows, that is now sort of shortening and you see more clarity on the performance of the portfolio, the weighted average effective interest rate grows. So you would have seen, in the last couple of quarters, our weighted average, I think, the effective interest rate is being closer to 20%, 22%.
As you then reset it -- and we've seen this each time, and obviously, we haven't done evaluation yet for Q1, because the interest rate is an output of the valuation. But, our expectation is, that it will behave similarly to what it did last time.
And last time, what it did was, it probably went to about half or maybe just slightly better than that, of what the weighted average effective interest rate was, just before the repricing.
That's on the interest side. And that's obviously one component of the income that the CLO generates. But in addition to that, it also has the management fee that the BDC earns, and that management fee, and the new CLO remains the same, 50 basis points on the AUM, but now instead of it being on $500 million, it'll obviously be on $650 million going forward, once we're fully ramped up. And so that will be additional income to the BDC on the largest size.
Bryce Rowe
Okay. That's helpful. Henri, I wanted to maybe shift gears a little bit and ask one more question of you. You guys ended the calendar year with undistributed taxable income. And so, kind of, and there was an excise tax in this quarter to account for that. Can you talk about kind of how you plan to manage that? I know in the past, you've preferred to possibly not carry UTI. So just kind of curious how you're thinking about that now?
Henri Steenkamp
Well, I think on the on the actual, where we are at the moment here, you’re right, Bryce, as you probably saw in the 10-K. So we start this year now, which is March 1 for us with spillover, effectively taxable income related to last year of just under $8 million.
As you know, our dividend on a quarterly basis -- the last couple have been around -- between $4.5 million and $5 million. So this dividend that we just declared, and then the next one will take care of the spillover.
But in addition to that, obviously, we also -- I think, historically, actually have been more conservative in the way we've managed capital, so that we hadn't had spillover, in the past. This is now obviously a reflection of our earnings power that we've had, as well as the fact, the dividends we paid last year. That means we have some spillover this year, but it should be taken care of, sort of, by the next dividend.
Christian Oberbeck
Yes. And then, just a question, just to -- further, in terms of how we look at it. I think, we spent a lot of time last year in the in the height of the COVID crisis pointing out how, how much flexibility the spill over -- the absence of spill over gave us in terms of potential liquidity, should it have been needed.
I think, as I certainly mentioned, thankfully, this past year has turned out to be quite a good year, as opposed to what it looked like it could have been in the past. We did move into the spillover realm to the tune of $8 million, as Henri mentioned.
In terms of, you asked specifically on managing it out. It's not something that needs to be managed, if you will, there's no -- there's nothing in the ordinary course that will just take care of the spillover. The cost of the spill over, the excise taxes, I believe, we’re having is 4% on whatever that outstanding amount is. So the absolute cost of it, viewed in the context of the totality of our liability cost structure on our balance sheet is not high.
So we're obviously looking at it, aware of it, we have a little less spillover flexibility than we had before. But we still have substantial spillover flexibility on top of it, should that prove needed in the future. And as we -- as depending on our earnings and dividends and the interplay between those two elements, that's still over we would anticipate, we wouldn't anticipate it growing much from here and then possibly shrinking.
Bryce Rowe
Okay. Thanks, Chris. Appreciate the answers. I'll jump back in the queue. Let’s others ask. Thanks.
Operator
Our next question comes from Mickey Schleien with Ladenburg.
Mickey Schleien
Good morning. Just one question for Mike. You mentioned new relationships created last year. And I wanted to ask that given that these are private funds, could you describe to us the due diligence that you do on new sponsors, which that you conduct before you decide to work with them?
Michael Grisius
Happy to. And thankfully, most of the groups that are sponsored private equity firms have undergone a lot of diligence to attract the capital from investors that are pretty sophisticated as well. But having said that, we're pretty deep in the marketplace and kind of know who most of the players are, and continue to develop our network. But when we get to meet a new -- a firm that we haven't done deals within the past. The starting point is looking at the team, looking at their backgrounds.
As long as we've been in the marketplace, we typically know people who know them, or we know people that were at their prior firms. And we may even know some of them, at least do maybe one step removed, what have you. And so the starting point is always with the team. And invariably, we're able to get a lot of very strong and -- very strong references on the experience that the people have had investing with those teams.
The second place that we go is just looking at their portfolio. What kind of deals are they doing? How are they capitalizing their deals? What's their reputation in dealing with lenders? It's a pretty robust process. And then the best way you get to know somebody, we don't when we issue a term sheet, the deal is by no means done. The best way you really get to know somebody is to work with them directly. And what drives our decision making more so than anything is, is it a good business opportunity? Do we feel very good that our capital is in a good position and that the businesses has all the durable characteristics that we always talk about? And the combination of that factor plus the work that we do to get comfortable with the sponsor is how we get there.
Mickey Schleien
Mike, you just mentioned behavior with lenders and try to put that in top three, right in terms of gauging your interest in working with a sponsor. Do you look at that just anecdotally, or do they provide you information on trouble deals and how they were worked out in the past?
Michael Grisius
It tends to be more anecdotally, candidly. And it's also the kind of thing where if, if a sponsor develops a bad reputation that word spreads pretty quickly. So when I say it's anecdotally, it's not without good , background knowledge. The thing I would remind you though that is important, certainly the relationships and the sponsors that we work with are very important. I wish our business were such that you could just find a sponsor. And the minute the deal got into a little bit of trouble, they've come to the rescue with a big equity check, and so forth.
We don't do underwriting that way. So even if a sponsor is the very best private equity sponsor at the lower end of the middle market, and they like a deal a lot, we turn plenty of those down. So we tend to, it's not to diminish the importance of the sponsor. It's a very important part of it, of our underwriting.
But we're not underwriting the sponsor, and hoping that they're going to save the day if you know things go wrong. We're always when we're looking at investment saying, make the assumption that the sponsor is not there.
And that, like we're in a position where this business underperforms, what are our ways out? Where are we in the capital structure? How good do we feel about the durability of the business model? Is it going to face cyclical pressures?
Do they produce a lot of free cash flow, so that even if they under perform a little bit, they can continue to pay our loan and even pay it down overtime? All of those elements come into play, but certainly the sponsor in their relationship is one of them.
Q -
Okay. Thank you for taking my questions.
Operator
Our next question comes from Sarkis Sherbetchyan with B. Riley Securities.
Sarkis Sherbetchyan
Hi. Thanks for taking my question here. I just wanted to touch a little bit on the fee income side. It was up meaningfully this quarter. And just wondering if that jump was attributable to the Roscoe medical investment returning to accrual?
Henri Steenkamp
Yeah. Hi Sarkis, this is Henri. Yeah, absolutely, that was because we released the Roscoe reserve that that was pick. We released a back into income, as it's gone back on actually last quarter really our Q3. And so we released that reserve. That's really the jump.
So if you take that out, and you sort of look at pick it around, right as of Q4, it's under 2%, from a total interest income perspective that Roscoe, just use it.
Sarkis Sherbetchyan
Got you. And just to be clear, how much of that was one-time in nature? And how much of that kind of continues?
Henri Steenkamp
See the one-time so the release of the Reserve was 941,000. And I think the -- I think Roscoe on a quarterly basis, I would have to double check, but I believe it's around 45,000, a quarter.
Sarkis Sherbetchyan
Yeah, thank you for that. I just wanted to verify the $0.9 million there.
Henri Steenkamp
Okay.
Sarkis Sherbetchyan
And then, if you talked about the sale on the Elvira position, you mentioned that there was a new capital loss that kind of comes with that. Any I guess what's, what's the level of the capital loss? And obviously, that helps you for the future. So just trying to understand what that level is?
Christian Oberbeck
Yeah. So when we had the Easy Ice gain last year, so that's February 2020 that cleaned out our capital loss carry-forward we had and then ended up in us having a realized gain on which we paid the federal income tax that you saw now this year in Q3. So we sort of cleaned out our loss position, gain position back to zero. And then with Elyria, now being sold in Q4, that realizes the full loss on Elyria that's been written-off, written down over many, many years. And so that the total position were in from the Elyria loss is $8.7 million, which is obviously a new capital loss carry-forward that can be put against future realized gains.
Sarkis Sherbetchyan
Great.
Henri Steenkamp
And just one further point on Elyria, if -- that investment predates our ownership and management of the BDC. That was one of our legacy positions.
Sarkis Sherbetchyan
Yep. Understood. Thank you.
Operator
I'm showing no further questions in queue at this time. I'd like to turn the call back to Chris Oberbeck 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
This concludes today's conference call. Thank you for participating. You may now disconnect.
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Certain Officers.
Resignation of Director and President
On October 15, 2020, Michael J. Grisius, a member of the Board of Directors (the “Board”) of Saratoga Investment Corp. (the “Company”), tendered a
letter of resignation from the Board and from his role as President of the Company, effective immediately, which was accepted by the Board. There was no
disagreement between Mr. Grisius and the Company on any matter relating to the Company’s operations, policies or practices. Mr. Grisius will continue in
his current roles at Saratoga Investment Advisors, LLC, (“Saratoga Investment Advisors”) the Company’s investment adviser, including in his capacity of
Chief Investment Officer.ir.saratogainvestmentcorp.com/...