Q2 2024 Saratoga Investment Corp Earnings Call
Participants
Christian L. Oberbeck; Chairman, CEO & President; Saratoga Investment Corp.
Henri J. Steenkamp; Chief Compliance Officer, Secretary, Treasurer, CFO & Director; Saratoga Investment Corp.
Michael Joseph Grisius; Co-Managing Partner & CIO; Saratoga Investment Corp.
Bryce Wells Rowe; Senior Research Analyst; B. Riley Securities, Inc., Research Division
Casey Jay Alexander; Senior VP & Research Analyst; Compass Point Research & Trading, LLC, Research Division
Erik Edward Zwick; Director; Hovde Group, LLC, Research Division
Mickey Max Schleien; MD of Equity Research & Supervisory Analyst; Ladenburg Thalmann & Co. Inc., Research Division
Sean-Paul Aaron Adams; Research Associate; Raymond James & Associates, Inc., Research Division
Presentation
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.'s 2024 Fiscal Second Quarter 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 Corp.'s Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.
Henri J. Steenkamp
Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s 2024 Fiscal Second Quarter 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 2024 shareholder presentation in the Events & 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. Please refer to our earnings press release for details.
I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Christian L. Oberbeck
Thank you, Henri, and welcome, everyone. Saratoga's adjusted net investment income per share increased 86% as compared to last year and remained unchanged as compared to last quarter. This performance outpaced our recent and significant dividend increases and reflected growth in AUM and margin improvement from rising rates on our largely floating rate assets in contrast to largely fixed interest rates paid on financing liabilities.
Higher and rising interest rates and a general contraction of available credit are producing higher margins on our portfolio, and importantly, an abundant flow of attractive investment opportunities from high-quality sponsors at increasingly improving pricing, terms and absolute rates. We believe Saratoga continues to be well positioned for potential future economic opportunities and challenges.
Saratoga's credit structure with largely interest-only, covenant-free, long-duration debt incorporating maturities primarily 2 to 10 years out positions us particularly well for the rising and potentially higher-for-longer interest rate environment, coupled with market volatility. Most importantly, at the foundation of our performance is the high-quality nature and resilience of our approximately $1.1 billion portfolio, which has been marked down 1.4% overall versus cost in this challenging environment.
Our core BDC portfolio, excluding our CLO and JV, is up 0.2% versus cost, reflecting the strength of our underwriting and our solid growing portfolio of companies and sponsors in well-selected industry segments. This quarter's unrealized depreciation of $5.7 million reflects $15.4 million net unrealized depreciation related to our Pepper Palace investment, significantly offset by a broad appreciation across the rest of our core and broadly syndicated portfolios.
Consistent with Q2 and since quarter-end, we continue to see improvements in pricing in the broadly syndicated loan market that would increase that portfolio at fair value if marked as of today. Importantly, we raised $34 million of equity since last quarter-end, increasing our NAV from $338 million as of May 31, 2023, to approximately $372 million on a pro forma basis as of today using our August 31, 2023, NAV as a basis. This equity provides additional balance sheet strength and reduces our regulatory leverage and supports our strong originations.
Our portfolio strength is further manifested in our many key performance indicators this past quarter outlined on Slide 2, including, first, following sequential quarterly adjusted NII per share increases of 33% in Q3, 27% in Q4 and 10% in Q1, adjusted NII remained unchanged from Q1 at $1.08 per share, including a $0.03 dilution from the increased share count resulting from our ATM equity issuances. These earnings reflect an 86% increase from 58% -- $0.58 last year.
Second, current assets under management grew to approximately $1.1 billion, a record level. And third, our dividend increased to $0.71 per share, our largest dividend yet, up 31% from $0.54 per share in Q2 last year; up 1.4% from $0.70 per share last quarter; and overearned by 52% as compared to this quarter's $1.08 per share adjusted NII.
We continue our prudence and discernment in terms of new commitments in the current environment. Our originations this quarter demonstrate that despite an overall robust pipeline, there are periods like the current one where many of the investments we review do not meet our high-quality credit standards. We originated 1 new portfolio company investment this fiscal quarter and had 17 smaller follow-on investments in existing portfolio companies we know well with strong business models and balance sheets.
Originations this quarter totaled $28 million with $6 million of repayments and amortization. Our credit quality for this quarter remained high at 98.2% of credits rated in our highest credit category, adding 1 additional credit to nonaccrual with 2 now on nonaccrual in total. With 85% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stressed situations, we believe our portfolio and leverage is well structured for a challenging economic conditions and uncertainty.
Saratoga's annualized second quarter dividend of $0.71 per share and adjusted net investment income of $1.08 per share imply an 11.7% dividend yield and a 17.8% earnings yield based on its recent stock price of $24.24 on October 6, 2023. The overearning of the dividend by $0.37 this quarter, or $1.48 annualized per share, increases NAV, supports the increasing dividend level and growth and provides a cushion against adverse events.
In volatile economic conditions such as we are currently experiencing, balance sheet strength, liquidity and NAV preservation remain paramount for us. Our capital structure at quarter-end was strong, $362 million of mark-to-market equity; supporting $571 million of long-term, covenant-free non-SBIC debt; $189 million of long-term, covenant-free SBIC debentures; and $35 million of long-term revolving borrowings. Our total committed undrawn lending and discretionary funding facilities outstanding to existing portfolio companies are $141 million with $58 million committed and $83 million discretionary.
Our debt maturity schedule ranges primarily from 2 to 10 years, providing a solid credit structure at a fixed cost and with favorable terms, positioning us well for both the current rising rate environment or should overall economic challenges arise. And at quarter-end, we had a substantial $239 million of investment capacity available to support our portfolio companies with $161 million available through our newly approved SBIC III fund; $30 million from our expanded revolving credit facility; and $48 million in cash.
Saratoga Investment's second quarter demonstrated strong performance within our key performance indicators as compared to the quarters ended August 31, 2022, and May 31, 2023. Our adjusted NII is $13.2 million this quarter, up 89% from last year and up 2% from last quarter. Our adjusted NII per share is $1.08 this quarter, up 86% from $0.58 last year and unchanged from $1.08 last quarter.
Latest 12 months return on equity is 9.6%, up from 4.8% last year and up from 7.2% last quarter and beating the industry average of 5.1%. Our NAV per share is $28.44 and up 0.6% from $28.27 last year and down 0.1% from $28.48 last quarter and substantially ahead of the latest 12 months industry average that is down 3.5%. And our NAV is up to $372 million from $338 million last quarter, including the $10 million raised in equity since quarter end. Henri will provide more detail later.
As you can see on Slide 3, our assets under management has steadily and consistently risen since we took over the BDC 13 years ago and the quality of our credits remains high with only 2 credits on nonaccrual. Our management team is working diligently to continue this positive trend as we deploy our available capital into our growing pipeline while at the same time being appropriately cautious in this volatile and 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 J. Steenkamp
Thank you, Chris. Slide 4 highlights our key performance metrics for the fiscal second quarter ended August 31, 2023, most of which Chris already touched on. Of note, the weighted average common shares outstanding of 12.2 million shares in Q2 increased from 12.0 million last year and 11.9 million last quarter.
Adjusted NII increased this quarter, up 89.0% from last year and up 2.4% from last quarter, primarily from: first, the impact of higher interest rates, both base rates and spreads, with a weighted average current coupon on non-CLO BDC investments increasing from 9.9% to 12.6% year-over-year, but down from 12.7% last quarter; second, average non-CLO BDC assets increased by 16.4% year-over-year and by 2.2% since last quarter; and third, other income included a $1.6 million dividend received from the Saratoga Investment joint venture. Adjusted NII yield was 15.0%. This yield is unchanged from last quarter but up from 8.2% last year.
Total expenses for this Q2, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes, decreased from $2.3 million to $2.1 million as compared to last quarter, an increase from $1.6 million from last year. This represented 0.7% of average total assets on an annualized basis, down from 0.8% at both Q2 last year and last quarter. Also, we have again added the KPI Slides 27 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 9 quarters and the upward trends we have maintained, including a 66% increase in net interest margin over the past year.
Moving on to Slide 5. NAV was $362.1 million as of this quarter-end, a $24.6 million increase from last quarter and a $24.9 million increase from the same quarter last year. This quarter, the main driver of the growth was the $24.3 million of equity issued under the ATM program with $14.0 million of net investment income fully offset by $6.0 million of net realized and unrealized losses and $8.4 million of dividends declared. In addition, during Q2, $0.75 million of stock dividend distributions were made through the company's DRIP plan. No shares were repurchased during this quarter.
This chart also includes our historical NAV per share, which highlights how this important metric has increased 16 of the past 22 quarters with Q2 slightly down by $0.04. Over the long term, our net asset value has steadily increased since 2011. And this growth has been accretive as demonstrated by the consistent increase in NAV per share. 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 adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was unchanged despite $0.03 of net dilution from the ATM equity offering with a $0.14 increase in non-CLO net interest income from higher AUM and rates offset by a $0.12 decrease in other income from lower originations this quarter and a $0.02 increase in base management fees driven by the higher AUM. On the lower half of the slide, NAV per share decreased by $0.04 primarily due to the $0.47 in unrealized depreciation and $0.70 dividend recognized in the quarter, offsetting the $1.15 in GAAP NII.
Slide 7 outlines the dry powder available to us as of quarter-end, which totaled $239.4 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facility. This quarter-end level of available liquidity allows us to grow our assets by an additional 22% without the need for external financing with $48.4 million of quarter-end cash available, and that's fully accretive to NII when deployed, and $161 million of available SBA debentures with its low-cost pricing, also very accretive.
We remain pleased with our available liquidity and our leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet. The fact that almost all our debt is long term in nature with almost no non-SBIC debt maturing within the next 2 years, and importantly, that almost all our debt is fixed rate in this rising rate environment. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed and with available call options in the next 2 years on the debt with higher coupons, important during such volatile interest rate times.
Now I would like to move on to Slides 8 through 12 and review the composition and yield of our investment portfolio. Slide 8 highlights that we now have $1.1 billion of AUM at fair value. And this is invested in 55 portfolio companies, 1 CLO fund and 1 joint venture. Our first lien percentage is 85% of our total investments, of which 30% is in first lien last-out positions.
On Slide 9, you can see how the yield on our core BDC assets, excluding our CLO, has changed over time, especially this past year. This quarter, our core BDC yield was down slightly 10 bps to 12.6%. The slight increase in rates during Q1 was more than offset by Pepper Palace going on nonaccrual. The CLO yield decreased slightly from 9.3% to 8.9% last quarter, reflecting the increase in value from improved market performance. The CLO is performing and current.
Slide 10 shows how rates have stabilized the past 3 months with the average 3-month SOFR used in our portfolio of 5.24%, close to both the average rates for Q2 of 5.31% and the quarter-end rate of 5.4%, which is also the price of SOFR recently. Despite SOFR not rising recently, with 99% of our interest-earning assets using variable rates, earnings will continue to benefit from these higher rate levels in Q3 and Q4 while all but $55 million of our borrowings is fixed rate and will not be impacted by these increases in base rates. There is uncertainty about the future of rates, but we stand to continue to gain as rates rise or stay elevated.
Slide 11 shows how our investments are diversified throughout the U.S. And on Slide 12, you can see the industry breadth and diversity that our portfolio represents, spread over 43 distinct industries in addition to our investments in the CLO and joint venture, which are included as structured finance securities. Of our total investment portfolio, 9.2% consists currently of equity interest, which remain an important part of our overall investment strategy.
Slide 13 shows that for the past 11 fiscal years, we had a combined $81.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This consistent realized gain performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long-term ROE.
That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our Chief Investment Officer, for an overview of the investment market.
Michael Joseph Grisius
Thank you, Henri. I'll take a few minutes to describe our perspective on the current state of the market and then comment on our current portfolio performance and investment strategy.
The overall deal market has remained relatively unchanged since our last update as it seems to be in a bit of a holding pattern to see what happens in the broader macro environment. While liquidity among private equity firms remains abundant, an opaque economic outlook, high financing costs and elevated levels of inflation continue to constrain the private equity deal market, which drives much of the demand for new credits.
Lenders, especially banks remain more risk-sensitive, backing off historically volatile sectors and taking a harder stance on the use of capital, which creates a lending vacuum for borrowers. Overall, lenders are requiring greater equity capitalizations regardless of the enterprise multiple and, in some cases, have reduced their pace of deployment as well as their hold positions. All of these factors are positive for us as we have been seeing more attractive opportunities come our way as we fill gaps that have arisen in the market. And we have a very actionable deal pipeline.
Leverage levels appear to have come down at the margin but remain full for strong credits. Absolute yields continue to grow with absolute SOFR increasing another 11 basis points during our fiscal second quarter and have remained there. The widening spread we had been experiencing in recent quarters appears to have stabilized. With fears of an economic slowdown dampening among some market participants, we have seen some lenders offer tighter spreads to win mandates.
And the Saratoga management team has successfully managed through a number of credit cycles. And that experience has made us particularly aware of the importance of, first, being disciplined when making investment decisions; and second, being proactive in managing our portfolio. We're keeping a very watchful eye on how continued inflationary pressures and labor costs, rising rates and the potential economic slowdown could affect both prospective and existing portfolio companies. A natural focus currently remains supporting on existing portfolio companies through follow-ons.
Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital. The first 9 months of calendar year 2023 was very strong deployment environment for us, already exceeding our origination efforts from last year. Follow-on investments in existing borrowers with strong business models and balance sheets continued to be a healthy avenue of capital deployment as demonstrated with 54 follow-ons since the beginning of calendar 2023, including delayed draws. In addition, we have invested in nine new platform investments so far this calendar year.
Portfolio management continues to be critically important. And we remain actively engaged with our portfolio companies and in close contact with our management teams, especially in this uncertain market environment. All of our loans in our portfolio are paying according to their payment terms, except for our Nolan investment that remains on nonaccrual as we have moved to PIK interest for a period of time, and Pepper Palace that we have placed on nonaccrual this quarter after missing its August interest payment.
After recognizing the net unrealized depreciation on our overall portfolio this quarter, Saratoga's core BDC portfolio is still 0.2% above cost. And its overall assets, including the CLO and JV, are now 1.4% below cost. Despite the significant write-down of one asset this quarter, we believe our overall strong performance reflects certain attributes of our portfolio that bolster its overall durability.
85% 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 or commodity 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.
Our approach has always been to stay focused on the quality of our underwriting. And as you can see on Slide 14, 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 only 1 of 12 BDCs that have a positive number over the past 3 years, currently fourth overall. Our internal credit quality rating reflects the impact of current market volatility and shows 98.2% of our portfolio at our highest credit rating as of quarter-end.
Part of our investment strategy is to selectively co-invest in the equity of our portfolio companies when we're given that opportunity and when we believe in the equity upside potential. This equity co-investment strategy has not only served as yield protection for our portfolio but also meaningfully augmented our overall portfolio returns as demonstrated on this slide and the previous one. And we intend to continue this strategy.
Now looking at leverage on Slide 15, you can see that industry debt multiples have come down this year from their historically high levels. Total leverage for our overall portfolio was 4.2x, excluding Nolan and Pepper Palace, while the industry is now around 5x leverage. In addition, this slide illustrates the strength of our deal flow and our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics. During the second quarter, we added another new portfolio company and made 15 follow-on investments.
Despite the success we're having investing in highly attractive businesses and growing our portfolio and the increased deal flow we are seeing, it is important to emphasize, as always, we're not aiming to grow simply for growth's sake, especially in the face of this uncertain macro environment. Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment is in a durable business and will be accretive to our shareholders.
Now Slide 16 provides more data on our deal flow previously discussed, demonstrating how our team's skill set, experience and relationships continue to mature and our significant focus on business development has led to multiple new strategic relationships that have become sources for new deals.
What is especially pleasing to us is 5 of the 9 new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts. The significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.
As you can see on Slide 17, our overall portfolio credit quality remains solid. The gross unlevered IRR unrealized investments made by the Saratoga Investment management team is 15.6% on $908 million of realizations. On the chart on the right, you can see the total gross unlevered IRR on our $1.1 billion of combined weighted SBIC and BDC unrealized investments is 10.6% since Saratoga took over management.
As of this quarter, we downgraded Pepper Palace from yellow to red. Nolan remains yellow. And these two investments remain our only non-green investments. Nolan has been yellow for a while now since COVID, being more dependent on in-person business interaction and on nonaccrual status since last year. There was no significant change to the mark from Q1. The current unrealized depreciation reflects the current performance of the company but does not change our view of the fundamental long-term prospects for the business.
Pepper Palace continued to suffer from poor performance. And this quarter's results resulted in a significant write-down to the mark of $15.4 million. This reduced the overall fair value to $7.9 million, which is about 1/4 of its overall cost, leaving the total depreciation at approximately $26.4 million since investment on our first lien term loan and equity investments.
This markdown reflects the current performance and cash flow issues the company is experiencing. We are actively engaged with the company and the sponsor to assess future options and execute on significant restructuring plans. The company has brought new resources to the business and is undertaking initiatives aimed at improving performance.
This quarter's $5.7 million net unrealized depreciation primarily reflects the $15.4 million of unrealized depreciation on the company's Pepper Palace investment, offset by approximately $3.9 million of net unrealized appreciation across the remainder of the portfolio, driven relatively evenly by current company performance and market spreads and $5.8 million of unrealized depreciation on the company's CLO and JV equity investments, reflecting the volatility in the broadly syndicated loan market as of quarter-end. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital.
Moving on to Slide 18. You can see our first and second SBIC licenses are fully funded and deployed. We are currently ramping up our new SBIC III license with $161 million of lower-cost undrawn debentures available, allowing us to continue to support U.S. small businesses.
This concludes my review of the market. And I'd like to turn the call back over to our CEO. Chris?
Christian L. Oberbeck
Thank you, Mike. As outlined on Slide 19, our latest dividend of $0.71 per share for the quarter ended August 31, 2023, was paid on September 28, 2023.
This is the largest quarterly dividend in our history and reflects a 37% and 31% increase over the past 2 years and latest 12 months, respectively. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis, considering both the company and general economic factors, including the near-term impact of rising base rates and increased spreads on our earnings.
Recognizing the divergence of opinions on the future direction of interest rate levels and overall economic performance, Saratoga's Q2 overearning of its dividend by 52% or $1.08 versus $0.71 per share this quarter provides substantial cushion in any circumstance, should economic conditions deteriorate or base rates decline.
Moving to Slide 20. Our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 16%, outperforming the BDC index of 12% for the same period.
Our longer-term performance is outlined on our next slide, 21. Our 3- and 5-year returns place us in the top quartile of all BDCs for both time horizons. Over the past 3 years, our 102% return exceeded the average index return of 70%, while over the past 5 years, our 66% return exceeded the index' average of 34%. Since Saratoga took over the management of the BDC in 2010, our total return has been 688% versus the industry's 224%.
On Slide 22, you can further see our performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on long-term metrics, such as return on equity, NAV per share, NII yield and dividend growth, all of which reflects the growing value our shareholders are receiving.
While NAV per share decreased 0.1% this quarter, we are only down 0.6% year-over-year, while the BDC industry is down 3.5%. We continue to be one of the few BDCs to have grown NAV over the long term. And we have done it accretively. And despite the Pepper Palace and CLO markdowns this year, our latest 12 months return on equity of 9.6% is almost double the industry's 5.1% average.
Moving on to Slide 23. All of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 13%, ensuring we are aligned with our shareholders.
Looking ahead on Slide 24. We remain confident that our reputation, experienced management team, historically strong underwriting standards and time- and market-tested investment strategy will serve us well in navigating through the challenges and uncovering opportunities in the current and future environment and that our balance sheet, capital structure and liquidity will benefit Saratoga's 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
(Operator Instructions) And our first question, coming from the line of Bryce Rowe with B. Riley.
Bryce Wells Rowe
I wanted to maybe ask about the use of the equity ATM since the end of the last quarter. Can you speak to maybe the decision to go ahead and use that equity ATM, especially with the stock still trading slightly below NAV? And then wanted to kind of get a sense for, I guess, the level at which the manager will continue to subsidize those equity raises at NAV.
Christian L. Oberbeck
Sure. Well, thank you for that question. I think in our view, looking at our overall business, we are really turning away a lot of tremendous opportunities, given what we see out there. And so the key to -- for the growth is -- one of the keys is more equity. And so we thought it was a very good investment from the point of view of our shareholders to issue such equity to help support, I think, what we've described as a very robust new issuance opportunity set for the company.
And so we saw the opportunity. We saw the opportunity in significant size. $34 million in a quarter is a very substantial amount. And with that opportunity, our judgment was that it was a good idea. And from the manager standpoint, we were happy to support and subsidize what was a slight discount to NAV, which we covered from the manager's pocket, if you will. Whether those opportunities arise and how often they arise in the future is something we can't predict. But we saw some interesting interest in demand, and we decided to meet it.
Bryce Wells Rowe
That's helpful, Chris. And maybe a follow-up there. It sounds like there's clearly a healthy pipeline and a discerning eye at Saratoga. You've seen -- you saw balance sheet leverage kind of come down here in the quarter with the ATM usage. Is there a particular target? Do you think we'll see leverage kind of creep back up again as you put money to work? Or do you feel more comfortable operating with, I guess, a lower level of leverage than we saw maybe the last -- over the last couple of quarters?
Christian L. Oberbeck
Well, I think that, that is kind of a dynamic situation. I think as we've said in past quarters, we have to balance a lot of things. And we have balanced our opportunities. And as you correctly pointed out, our leverage did increase a fair amount over the past year really to address what we saw as some greater opportunities. Clearly, over time, we want to balance the magnitude of our leverage with our opportunity set. And when we have opportunities to raise equity, we do. And we really haven't had many opportunities in the last period of time.
And just recently, we did. And so we decided to take advantage of that. And we obviously remain balanced in terms of how much leverage we're going to absolutely put on versus how much equity we're able to raise. And again, it's a dynamic situation that we can't -- there are two different markets, right, the market for our equity is one thing and the market for our new originations as something else. And we're not necessarily able to precisely match them in time. But over time, we want to keep ourselves in a very solid balance sheet position.
Operator
And our next question, coming from the line of Casey Alexander with Compass Point Research.
Casey Jay Alexander
Yes. Your gross leverage is still around 2x. Your net leverage is around 1.5x. So to a certain extent, one could argue that, at least right now, without repayments, you're sort of loaned to the limit. What is the outlook for repayments for the balance of the year?
Because we're going into a period that traditionally, the end of the year is generally a fairly robust period of time for originations. So are you going to be able to participate in that? What is the outlook for repayments? And also, what is the remaining capacity in the JV for you to be able to originate investments and put investments there as well?
Christian L. Oberbeck
Maybe I'll start with that. Again, I think as I just mentioned to Bryce's question, we don't 100% determine the flow of origination opportunities. And we have a group of sponsors that we've been working with, sponsors that we want to work with. And the exact flows that come off of those opportunities are things that we want to manage to keep growing and keep supporting, as we have been, our base.
So that's not necessarily something that we can predict in this fourth quarter precisely. In terms of leverage, we do have a -- what we feel is a significant improvement in our leverage position, given the equity issuances. And in terms of repayments, Mike, do you want to...
Michael Joseph Grisius
Yes, Casey, let me try to take that. The rule of thumb I always apply, I think you've heard me say this before, is that the portfolio of our type should generally turn over about 1/3 a year roughly. But then it never really turns over at that level. That's kind of just a rule of thumb. And in really dynamic markets where everybody is feeling super bullish, it can turn over a lot faster than that.
In this market, our shareholders are getting the benefit of us not experiencing as much turnover. And so we've got a really healthy portfolio where the owners are continuing to pay us interest and the companies are performing well. But they're deciding now is not the best time to sell because there's a disconnect between generally in the market, where sellers feel there's value and where it was historically and where buyers are willing to pay for things. And so we are getting the benefit of fewer payoffs.
Now having said that, we're bound to have payoffs. We certainly are aware of some that are on the horizon that are meaningful. I think the important thing though to also recognize, and I think Chris mentioned this as well, is that we have very significant availability under our SBIC license. And we don't feel that as being a constraint for us at all.
If we see a really good opportunity to invest capital through that vehicle and it's a business that's really strong, we're going to take advantage of that. I think when you get outside of the SBIC license, we're sort of balancing, as Chris mentioned, capital availability, leverage, how much we like the deal, some of those factors. And certainly, the amount of payoffs that we get will be part of that equation as well.
Henri J. Steenkamp
Yes. And Casey, you probably noticed we repaid $27 million of our SBIC I debentures. And although that doesn't obviously impact the net leverage, that did free up capacity there just from a gross leverage perspective as one sort of thinks about the SBIC III deployment. And you also asked about the joint venture. We have no need or requirement to put additional capital into the joint venture at this point in time.
So there's not going to necessarily going to be a drain of liquidity on the joint venture in the near term. It's sort of operating at a steady state now. And obviously, it's subject to the volatility of the broadly syndicated loan market. But you see the dividend income that it's generating at the moment, now 2 quarters in a row. And that's becoming more of a steady-state return, if you will, at this point in time than unusual or nonrecurring.
Christian L. Oberbeck
And just picking up a little bit on what Mike said about the absence of sort of normalized repayments, I mean, in effect, what's happening is that the percentage of prior investments or seasoned credits in our portfolio is growing. And so these are credits that we know, we have a lot of experience with. And so those are very solid credits that we're involved with and are producing what we feel is pretty tremendous earnings. Our earnings yield at 17% is very substantial earnings yield across our portfolio. And while we do have some...
Casey Jay Alexander
But which is accompanied with a high level of leverage, Chris, I mean...
Christian L. Oberbeck
Correct, correct.
Casey Jay Alexander
I mean, it's -- you're not in a business that investors are necessarily going to be comfortable with an unlimited amount of leverage. I mean, whether the gross leverage is the same as your regulatory leverage, that number can't go to a number that makes investors uncomfortable or it will be counterproductive, right, no matter what your earnings are. I think that you have to keep that in mind.
Christian L. Oberbeck
We understand that. Yes, we absolutely do keep it in mind. And I think as you've heard us on many of our conference calls in these discussions, gross leverage for one BDC is not the same as gross leverage for another. And our gross leverage, given the term structure of our leverage, the duration of our leverage, the absence of covenants, the absence of amortization rates and things like that, we believe makes our leverage quite manageable in the context of our portfolio.
Casey Jay Alexander
Yes, okay. Secondly, for Mike, you said that you're looking forward to some type of broad restructuring of Pepper Palace. Do you think you guys are going to end up with the keys here? Or are you just going to be -- continue to be in a supportive role? And should we expect where your mark is at to likely turn into some form of equity here?
Michael Joseph Grisius
Casey, obviously, it's a private company, so I can't get into all the details. But certainly, we are working with the sponsor right now trying to improve performance, recently brought some additional resources to bear to that end. Is it possible that we could end up with the keys? I mean, it's uncertain because it's a challenging situation. I've certainly been -- we've been in this business for a long time. There are a lot of lenders who are perhaps overly fearful of taking ownership position when maybe that's the best thing to do. And so that's certainly something that we would consider under the right circumstances.
For now, we're working with the sponsor, and we're working to improve the performance. I think the thing that's really important to note is that its challenges are unique to it and are not connected to anything that we're seeing in the broader portfolio, and that I'd add additionally that the vast majority of our portfolio is -- experienced performance that's up -- at or up prior quarters. So we're feeling very, very good about our portfolio. This is a unique circumstance that we're working on hard.
Casey Jay Alexander
Yes, okay. And then lastly, are you guys afraid that investors will misunderstand the ATM equity sales, seeing as that where you're actually executing them is below NAV, you're adding back the difference? And are these investors ought to want to know whether or not these are being bled out into the market or these are single point institutional trades that are not impacting the day-to-day trading of the stock?
Christian L. Oberbeck
I think that's obviously a very astute question and interesting. It's not precisely something I think we can comment on. I think there will be more evidence of what exactly happened when the 13Fs are filed shortly. But it's something that we don't have 100% of visibility on. And we will be reporting and have been reporting on according to the SEC standards on what's happened. But we have different periods of time. We have as of quarter-end and what's happened since and then some of the confidentialities of who's doing it. So it's difficult for us to give you a precise read on exactly what happened in terms of the trading volumes.
But I mean, I think as you can see, there's quite a few big blocks. And then some of the volume responses after trades were quite good. After the main trades were done, I think the stock price rallied pretty well. Perhaps you can tell us why people aren't valuing our stock at a higher rate than they are right now because you have a better perspective on it. But given all things, improving leverage and 17% earnings yield, dividend yield, portfolio stability and all those type of things, we would think that there would be maybe more interest in the stock than there has been apparently.
Casey Jay Alexander
Well, I'll reserve my answer to that question for my report. I'm not here to educate the other analysts on the call.
Operator
And our next question, coming from the line of Mickey Schleien with Ladenburg Thalmann.
Mickey Max Schleien
Mike, appreciate your comments on Pepper Palace. I just want to understand if the issues that are -- that, that portfolio company is confronting in terms of its exposure to the consumer is also being manifested anywhere else in your portfolio with respect to companies that are retail-oriented?
Michael Joseph Grisius
That's a good question, Mickey. As I said, the vast majority of our portfolio is performing exceptionally well and is up -- is certainly at or up prior periods. We don't really have that many companies in our portfolio that are direct to consumers. I'm scratching my head to even think of one. Almost all of our portfolio is B2B generally, so -- and to answer your question directly, no, we're not seeing any evidence of that.
Mickey Max Schleien
Okay, that's helpful. How about in the health care sector, Mike, are there further issues developing there at all? Or is that -- or are your investments relatively insulated from the wage inflation and reimbursement risk that we've been seeing developing over the last several quarters?
Michael Joseph Grisius
We have not experienced that. I think the areas that we focus on and one of the reasons that we've been attracted to the health care market is that it's been our experience that the persistency of demand for those services is quite strong, so not as affected by any larger macro trends, if you will. We also tend to steer clear of generally health care deals where they're directly dependent on reimbursement rates. Those are generally not the businesses that we focus on if you look at some of the areas that we're investing in health care. So that's not an experience that we've had as well either.
I would say it is a broad challenge that almost any middle market, really any business is experiencing now, which is that the labor markets are difficult. And so labor rates are high. And that certainly is constraining margins to some degree. For our portfolio companies, thankfully, these are high value-add businesses. It's one of the things that we look at very hard in underwriting. So they tend to have a lot of pricing power and they usually can manage through that in a way where they can preserve their margins. And that's certainly what we've seen in the performance of our portfolio.
Mickey Max Schleien
That's helpful, and actually is sort of a segue into my next question, which is interest coverage. Can you give us a sense of where the portfolio's average interest coverage ratio is? And do you have a meaningful amount of portfolio companies with an interest coverage ratio below 1?
Michael Joseph Grisius
No, no. And we look at that in underwriting. I can't give you the total portfolio number. That's certainly something that we can look at. But we feel very comfortable that the interest coverage across the portfolio is quite strong.
Henri J. Steenkamp
Yes, Mickey, no, it's just sort of looking at some -- just very high level, I mean, the impact of the interest rate change has probably resulted in like 0.5 turn of interest rate coverage change. It's not as significant, I think, as one -- as some people perhaps think it might be because of the change in rates over the last year or in our portfolio.
Mickey Max Schleien
Okay, that's interesting. And just lastly, sort of a housekeeping question, there was a modest decline in portfolio weighed on average. And I suspect it's due to Pepper Palace. But I just want to confirm if that's the case.
Henri J. Steenkamp
Yes, that's right. Yes, that's why I highlighted in my comments as well, Mickey. You had a slight decrease from the rate change. But obviously, a lot of the change happened really Q1-ish. But then that was offset by Pepper Palace, the impact of putting that on 0%, obviously, which drives the overall yield down to like 20 bps or so.
Operator
And our next question, coming from the line of Sean-Paul Adams with Raymond James.
Sean-Paul Aaron Adams
One quick question back to Pepper Palace. It looks like it's been a troubled asset for a while. But was the major markdown at all the result of any sponsor support relationship deteriorating? Or was it just a continued company-specific problem?
Michael Joseph Grisius
There's been no change in the relationship with the sponsor. We're working together to try to improve the performance. What did happen though is that the performance declined significantly enough that the sponsor stopped paying our interest in August. And so it needed to go on nonaccrual as a result. But the write-down in valuation was reflective of the continued challenges that the business is having.
Sean-Paul Aaron Adams
Okay. And regarding the spillover, do you guys have any idea of a special dividend or declaration sometime in 2024 because it is going to be quite high by the end of this year?
Christian L. Oberbeck
Yes. I mean, I think the spillover is increasing. I think as we've mentioned in prior calls, we've been conservative in our spillover management. And so we don't have any spillover owed this November. And the next time to reconcile spillover will be by November of 2024. And we haven't fully determined our plans relative to managing that. But clearly, there's BDC and RIC rules determining what one does with one's earnings and spillover.
Operator
And our next question, coming from the line of Erik Zwick with Hovde Group.
Erik Edward Zwick
Wanted to just start out with the commentary that the origination volume in was kind of slower than it had been in prior quarters, primarily due to a number of the opportunities you've reviewed not meeting credit standards. So maybe kind of two questions there.
One, were there any commonalities between kind of the shortcomings versus your criteria and what you're reviewing? Or was it kind of diverse across the company? And two, has that improved so far this quarter? Are you seeing more opportunities that would potentially meet your criteria to add to the portfolio?
Michael Joseph Grisius
I would say that, that the experience with one new platform company was more reflective of just the nature of the business that we're in, where it's not something where you can look at trends in 1 quarter and assign too much to that. I think we overall feel very good about the quality of the pipeline that we have and expect that we'll continue to deploy capital in new portfolio companies kind of at a consistent pace with what we've done in the past. While deal flow in general is down in the market for all the reasons that we've outlined, we're certainly benefiting from the fact that banks have retreated in a pretty significant way.
And so we have people even reaching out to us unsolicited, trying to form a relationship with us. And that certainly increased our pipeline in a meaningful way. And so that plus all of the efforts that we've made on the business development side have kept our pipeline pretty full. So there's not really anything that I could point to that would say, "Oh, thematically, we're seeing x in the marketplace, and we're not comfortable with that." We're taking the same approach to underwriting that we have historically.
Erik Edward Zwick
That's helpful. And then the only other question I had, a little bit kind of going back to the debt service coverage ratio discussion from a couple of questions ago, curious kind of looking at it from the other perspective or kind of other side of the coin, curious if you could just give any color or characteristics in terms of recent EBITDA growth for your portfolio companies or average or other kind of KPIs that you look at that have helped these companies maybe offset higher interest burden as well as inflationary pressures.
Michael Joseph Grisius
If there's one theme I would say that is common across our portfolio is that we look for businesses that have differentiated business models and often benefit from secular growth trends, i.e., they have a better mousetrap and they're performing well. And therefore, even if the macro environment is a bit challenged -- now this isn't 100% the case across every portfolio of the company, but thematically, in general, those businesses that we gravitate toward are ones that are going to perform pretty well even in a challenging environment. And that's what we're seeing in our portfolio.
Erik Edward Zwick
So it's safe to assume that you are seeing kind of growth across the portfolio in terms of EBITDA and other metrics?
Michael Joseph Grisius
Yes, I think as I've said, the vast majority of our portfolio is up -- at or above where they were than prior periods.
Operator
And I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Oberbeck for any closing remarks.
Christian L. Oberbeck
Well, we want to thank everyone for joining us today, and we look forward to speaking with you next quarter. Thank you.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
