Saratoga Investment Corp.
Q3 2021 Earnings Call Transcript

Published: 7 Jan 2021

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corporation’s Fiscal Third Quarter 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 third quarter 2021 earnings conference call.

[Christian Oberbeck:]

Thank you, Henri, and welcome everyone. Another volatile and challenging quarter across our businesses and the world, we continue to see improvement in market conditions and improve visibility in the immediate prospects of our portfolio companies. We continue to believe that Saratoga and our portfolio companies are positioned well at this point in time to weather potential future economic challenges. We look forward to presenting our most recent results and reviewing the solid structure of our capitalization and continued improvement in liquidity on today’s call. While no business can anticipate with clarity how long the displacement in the market and global economy will last, we have competence that are historically conservative approach to investing, strong capital structure, solid levels of liquidity, organization and management experience will enable us to effectively navigate this challenging current and uncertain future environment. To briefly recap the past quarter on slide two. First, we continued to strengthen our financial foundation this quarter by maintaining a high level investment credit quality, with nearly 93% of our loan investments retaining our highest credit rating after incorporating the impact of changes to market spreads, EBITDA multiples and/or revised portfolio company performance related to COVID-19. This is up from 90% in Q1. Importantly, more than two-thirds of the reduction in the valuation of the overall portfolio in the first quarter has been reversed since May 31, 2020, generating a return on equity of 11% on the trailing 12-month basis in Q3, net of the nine-month COVID-19 impact to the portfolio. This significantly exceeds the BDC industry average of negative 3.6% and registering a gross unlevered IRR of 16.6% on total realizations of $523 million.

[Henri Steenkamp:]

Thank you, Chris. Slide four highlights our key performance metrics for the quarter ended November 30, 2020. When adjusting for the incentive fee accrual related to net capital gains in the second incentive fee calculation, adjusted NII of $5.5 million was unchanged from last quarter and down 10% from $6.1 million as compared to last year’s Q3. Adjusted NII per share was $0.50, down $0.11 from $0.61 per share last year and up 1% from $0.49 per share last quarter. The decrease in adjusted NII from last year primarily reflects the non-recurrence of the $1 million income tax benefit recognized last year and the impact of lower LIBOR rates on the overall mostly variable rate portfolio. The decrease was partially offset by a higher level of investments with AUM up 12.3% from last year and lower interest expense following our repayment of the $74.5 million SAB baby bonds last year. Compared to Q2, slightly higher interest income generated from the increased AUM this quarter was mostly offset by lower other income and higher operating expenses. Of note is that this quarter does not include the full impact of the increased AUM as all of this quarters’ originations occurred in the second half of the quarter, with the repayments mostly in the first month of the quarter. Once all available cash is deployed, the impact of that cash will be fully accretive to NII. In addition to the above, the decrease in adjusted NII per share for the last year was due to the higher number of shares outstanding this year. Weighted average common shares outstanding increased by 11.3% from 10 million shares last year Q1 to 11.2 million shares for both Q2 and Q3 this year.

[Michael Grisius:]

Thank you, Henri. I will take a couple of minutes to describe the current state of the market as we see it and then comment on our current portfolio performance and investment strategy in light of the continued impact of COVID-19 and the unique economic environment. Market conditions continue to be affected by COVID-19, but to a far lesser extent than earlier in the crisis. We are seeing rebounding transaction volumes, tightening credit yields and a general lessening of risk aversion in the market. Earlier in the crisis, deals were mostly limited to existing portfolio companies either pursuing growth initiatives or seeking liquidity. This started a change in our Q2 and the trend we saw in Q2 of more originations with new platform companies continued into Q3. Quality deals are helping widen leverage and tighten pricing albeit not quite to pre-COVID levels. That said, Q4 was quite robust and there appears to be a positive outlook for 2021. Lenders in our market are for the most part staying disciplined with covenants and requiring deals to have healthy equity capitalizations. In uncertain economic times such as these, our underwriting bar remains higher than usual. Nonetheless, we are actively seeking and finding opportunities to deploy capital. We believe that compelling risk adjusted returns can be achieved by deploying capital in support of those highly select businesses that have demonstrated the strength and durability in the midst of this difficult environment. We have invested in 10 new platform investments since the onset of the pandemic, including five in this past calendar quarter alone. We also remain actively engaged with our portfolio companies. We have found that our portfolio companies have generally taken the right steps to help mitigate both the near- and long-term effects of COVID-19 on their businesses, and as we have mentioned before, many of them were 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 now Roscoe since this quarter. We have opted to keep it on non-accrual for now as it still has past due interest telling. Tokamak and My Alarm center or the other two investments that remain on non-accrual, there have been no new non-accruals during calendar 2020. We also recognize an additional $6 million in unrealized appreciation this quarter, which brings our recovery of the Q1 fair value reduction primarily related to COVID-19 to almost 70%. As an overall portfolio, the fair value of non-legacy assets originated by Saratoga has approximately recovered to its cost basis. We believe this strong performance reflects certain attributes of our portfolio that we expect will help us as we navigate through this economic environment and we remain confident thus far in the overall durability of our portfolio, 75% of our portfolio is in first-lien debt and generally supported by strong enterprise values and industries that have historically performed well in stress situations. We have no direct energy exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention, and however, there are still plenty of uncertainties and therefore potential future adverse effects of COVID-19 on market conditions and the overall economy, including but not limited to the related declines in market multiples, increases in underlying market credit spreads and company specific negative impacts on operating performance could lead to unrealized and potentially realized depreciation being recognized in our portfolio in the future. Now despite this lack of clarity, we continue to believe that our well-constructed capital structure and liquidity will help us to navigate the challenges presented by COVID-19. We believe sticking to our strategy has and will continue to serve us best especially in the market we currently face. Our approach has always been to focus on the quality of our underwriting and as you can see on slide 13 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 close to the top of the list of only eight BDCs that had a positive number over the past three years. Furthermore, a strong underwriting culture remains paramount at Saratoga. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to appear as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics. We always have sought durable businesses and invested capital with the objective of producing the best risk adjusted accretive returns for our shareholders over the long-term. Our internal credit quality rating reflects the impact of COVID and shows nearly 93% of our portfolio at our highest credit rating as of quarter end, up slightly as compared to last quarter. Now looking at leverage on slide 14, you can see that industry debt multiples are trending downward from calendar Q1 to Q3. We expect that trend to have continued in Q4. Total leverage for our overall portfolio was 4.03 times decreasing from last quarter reflecting strength in portfolio company capitalization and the lower leverage of certain new deals. As we frequently highlight rather than just considering leverage, our focus remains on investing in credits with attractive risk return profiles and exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment. In addition, the slide illustrates our strengthening ability to generate new investments over the long-term even in the midst of a difficult market dynamics. During the calendar year 2020, we added 11 new portfolio companies and made 26 follow-on investments, including eight follow-ons that supported portfolio companies’ liquidity during COVID-19. This is easily the year in which we have executed both the most new portfolio company investments and most deal closings, reflecting ongoing emphasis on broadening our origination capabilities. Moving on to slide 15, our team’s skill set, experience and relationships continue to mature and our significant focus on business development has led to new strategic relationships that have become sources for new deals. We recently hired an additional senior resource to continue to grow this important function and demonstrate our focus on this strategic priority. The number of new business opportunities has been greatly impacted by COVID-19, although we are beginning to see more active deal pipeline. But what is especially pleasing is that a quarter of our term sheets issued over the past 12 months and four of our 11 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 despite the decline in deal activity we can continue to grow our AUM steadily in this environment, as well as over the long-term. First, we continue to grow our reach into the marketplace as is evidenced by 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 16, our overall portfolio credit quality remains solid. On the chart to the right, you can see the total gross on levered IRR on our $502 million of combined weighted SBIC and BDC unrealized investments is 12.5% since Saratoga took over management. More than two-thirds of the Q1 markdown to bounce back since then and what remains is across a wide variety of companies. We do not believe that the remaining unrealized depreciation changes our view of their fundamental long-term performance. The three largest depreciations in art are in our Nolan Group, C2 Education and ArbiterSports investments. All three of which are more dependent on in-person human interaction. Our investment approach has yielded exceptional realized returns. The gross on levered IRR unrealized investment made by the Saratoga investment management team is 16.6% on approximately $523 million of realizations. Moving on to slide 17, you can see our first SBIC license is fully funded with $222.3 million invested at cost as of quarter end. Our second SBIC licenses already been funded with $69 million of equity, of which $98 million of equity and SBA debentures have been deployed. There is still a $0.7 million of cash and $112 million of debentures currently available against that equity. And looking back at Q3 and really the whole year, the way the portfolio has proved itself to be well constructed and resilient against the impact of COVID-19 really came to the fore in the past nine months, 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. This concludes my review of the market and I’d like to turn the call back over to our CEO. Chris?

[Christian Oberbeck:]

Thank you, Mike. As outlined on slide 18, following Saratoga Investments recent capital raises and the current performance of its portfolio, the Board of Directors has decided to declare a $0.42 per share dividend for the quarter ended November 30, 2020. This reflects a $0.01 increase from last quarter. The Board of Directors will continue to reassess this on at least a quarterly basis considering both company and economic factors. Moving to slide 19, our total return for last 12 months, which includes both capital appreciation and dividends is generated total returns of negative 12% in line with the BDC index of negative 12%. Latest 12 months total return was impacted by COVID-19, which has caused volatility, severe market dislocations and liquidity constraints in many markets, particularly impacting the smaller BDCs with average latest 12-month returns for BDCs with NAV below $300 million closer to negative 15%. Our longer term performance is outlined in our next slide 20. Our three-year and five-year returns place us in the top 15 and top two respectively of all BDCs for both time horizons. Over the past three years, our 17% return outperformed the 4% return of the index and over the past five years, 123% return greatly exceeded the index’s 33% return. On slide 21, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics. We remain above the industry average across diverse key and key categories including interest yield on the portfolio, latest 12 months return on equity and latest 12 months NAV per share growth. We continue to focus on our latest 12 months return on equity and NAV per share outperformance, which are top two and first respectively, and reflects the growing value our shareholders are receiving. Not only are we one of the few BDCs have grown NAV, we have done it accretively by also growing NAV per share, one of only two BDCs have done that in the past year. Moving on to slide 22, all of our initiatives discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics outlined 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, which -- with which to support our portfolio and make accretive investments, receipt of our second SBIC license providing sub-2% cost liquidity, a BBB investment grade rating and active public and private baby bond issuance, solid restored earnings per share and NII yield, strong and industry leading historic return on equity accompanied by growing NAV and NAV per share putting us at the top of the industry for both, high quality expansion of assets under management and attractive risk profile. In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries including oil and gas industry. We remain confident that our experienced management team, historically strong underwriting standards and tested investment strategy will serve us well in battling through the substantial challenges 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’d again like to thank all of our shareholders for their ongoing support. And I would like to now open the call for questions.

[Operator:]

Thank you. Our first question comes from the line of Casey Alexander with Compass Point. Your line is open.

[Casey Alexander:]

Hi. Good morning. Can you hear me?

[Christian Oberbeck:]

Yes.

[Michael Grisius:]

We hear you fine, Casey? Good morning.

[Casey Alexander:]

All right. Terrific. Mike, a couple of questions for you. There was a $20 million quarter-over-quarter increase in control investments. Can you give us some idea what changed at Netreo that caused it to become a control investment or was it investment decision that you made? And give us some sort of feel of what kind of company it is?

[Christian Oberbeck:]

Yeah. Casey, so I’ll just quickly first jump in just on the classification. So Netreo has always been a control investment. We actually have quite a substantial ownership on that. Mike can talk through that in more detail. The change that you are probably seeing in dollars in the control category is the additional $20 million that loan -- unsecured loan that we invested in our CLO warehouse potentially in advance of our refinancing of our CLO. So that’s the change in dollars. Mike do you want to expand just a little on our equity ownership in Netreo?

[Michael Grisius:]

Yeah. Happy too. Good morning, Casey. The Netreo investment is one where we have a significant equity ownership. There’s no change that occurred in the quarter as it relates to that. It’s a business that we feel very good about and feel like it’s got a lot of confidence that we can grow the enterprise value over time. The market that it operates in is one that has -- is right for expansion and we feel that company is really well-positioned in the products that it’s offering.

[Casey Alexander:]

Great. Thank you for that clarification. Secondly, there was an increase in unsecured term loans and those term loans are at a yield that is pretty far below the weighted average yield of the entire portfolio. So did you guys grab an investment in a broadly syndicated loan during the quarter or what caused that change?

[Michael Grisius:]

No. No. Casey, that’s actually exactly that $20 million CLO warehouse loan. So because it’s an unsecured loan, any loan that you put into your CLO warehouse it falls into that category and so that’s exactly to my earlier point, that’s reason that category increased as well. So it’s an additional investment in our CLO warehouse ahead of the refi.

[Casey Alexander:]

So does that give you the flexibility to buy some new paper prepping for the refinance of the CLO, is that what that’s for?

[Christian Oberbeck:]

Casey, this is Chris. Yes. That’s what we used it for.

[Casey Alexander:]

Okay. Great. Thank you. Mike, also could you expand some, C2 Education, you mentioned that there was a markdown there and that seems to be a vertical that has done well during the pandemic? Although I see it’s a tutoring and college prep business. Could you give us a little more color as to what’s going on there, what led to the markdown and what the prospects are C2?

[Michael Grisius:]

Happy too. And of course, I have got to limit my remarks, as I typically remind folks these are obviously private companies, so we can’t get into all the nitty-gritty. But this is a business that provides tutoring services to high school students that are looking to get into top colleges. It’s not just SAT prep, but it’s also tutoring around the application process and things of that nature and helping them with AP exams and so forth. But their model has historically been predicated upon in-person meetings with tutors direct in-person meetings. That part of their business is naturally been challenged. The business has I think reacted very well and they have introduced much more remote sessions and that’s worked very. The biggest challenge that they are facing now is really attracting new customers, because the parents that are engaging their kids to do that typically want to have a one-on-one in-person interaction before they sign on to that. There -- they are -- we think holding up quite well under the circumstances and this is a business that we feel really good about. We have been in it for quite some time. We are in a really good spot in the balance sheet. It’s one of the key players in the industry. Its outcomes are which is what we always look out when we look at education deals are very strong. So we have come in as good sponsors, good sponsorship support as well. So we feel good in the long-term, but certainly it’s a business that’s been challenged. We have not really materially changed our valuation in recent quarters. We certainly devalued it on -- with the onset of the pandemic recognizing that it would be a business that would face some headwinds. And with -- the evaluation that you see now reflects continuing experience that the companies having in that respect.

[Casey Alexander:]

Okay. Great. Thank you. Lastly, Chris, I think, I guess, I will ask this for you. Noting that the significant capital gains tax, can you explain for us again is -- will there be a capital gains distribution or is there some manner of deferring that capital gains distribution to shareholders?

[Christian Oberbeck:]

Yeah. That’s a good question, Casey. I think, as you recall historically, from when we took over the BDC, we had some capital loss carry-forwards significant amount and over time those are before used to shelter the significant capital gains that we have had and build our NAV and NAV per share. In this past set of realizations last year primarily coming from Easy Ice, we utilized a portion of the final remaining amount of those capital loss carry-forwards and then we incurred what would be a capital gain under the tax rules for RIC. For RICs there’s a choice. You can distribute that or you can -- or at the BDC level you can pay a 21% capital gain and retain them. As our historical practice has been to retain our capital gains we have done so with this payment. And so what it does is allows an increase in the net asset value of the company without incurring any the costs of selling additional equity for example and a further benefit because of the way RICs are structured is that if that were distributed those shareholders who pay state taxes those people not fortunate to live in a few of the five states that don’t pay state taxes. They do not incur that state tax. So by retaining it there is only a federal tax paid at the BDC level. And so to answer your final part of your question, that will be retained and there will not be a capital gain distribution.

[Casey Alexander:]

Okay. Great. Thank you. That’s all of my questions and I appreciate you are taking my questions this morning.

[Christian Oberbeck:]

Thank you, Casey.

[Operator:]

Thank you. Our next question is from Mickey Schleien with Ladenburg. Your line is open.

[Mickey Schleien:]

Good morning, everyone. I hope everyone is doing well. I want to ask about liquidity at the borrowers. It’s been -- we are getting close actually to a year of the onset of the pandemic. Obviously, at the beginning of that timeframe, there was a lot of liquidity provided through PPP and by private equity sponsors. I’d like to understand how you are generally viewing liquidity amongst your borrowers now that we have been through several quarters of the pandemic and we are still in a stage where the pandemic is increasing rather than decreasing and do you think they have enough liquidity to make it through to the end?

[Michael Grisius:]

Good morning, Mickey. I will take that question. You are right. The majority of our portfolio companies took advantage of the PPP program and that was quite helpful as they were managing liquidity through the early stages of the pandemic. We are actually quite pleased and we are monitoring this very carefully and it’s something that we switch to as job one when things started in March is managing and making sure that we are on top of the liquidity position of each and every one of our portfolio companies. But as things have settled in general, except for the handful of deals that you see that have material write-downs and we have discussed them. The other portfolio companies are actually -- the performance of the other portfolio companies have stabilized significantly, and by and large we feel very good about their liquidity position. Even those businesses where we have a significant write-down, we have worked with management and the ownerships to make sure that we understand their liquidity needs and we feel good about the position that they are in in that respect. We have got sponsorships that’s very good or the company as you know put themselves in a position where they have reduced their cost and managed to keep their profitability that’s appropriate for the environment that they are dealing with right now.

[Mickey Schleien:]

Mike, in terms of those, let’s call them problem deals, are those all sponsored transactions?

[Michael Grisius:]

The three that we referenced are all sponsored transactions. Of course, we invest in non-sponsor transactions as well, but my comments on the portfolio overall apply to both.

[Mickey Schleien:]

Okay. And amongst those sponsors, are these three investments deals that they believe will ultimately survive the pandemic and do you think they are willing to write more equity checks to keep those businesses afloat until later this year when the backdrop improves?

[Michael Grisius:]

Well, I think, the important thing and I want to make sure that we make this message clear, because we have referenced those three businesses and they are -- they constitute the largest portion of our remaining devaluation in the portfolio due to COVID. Each one of those businesses, we feel very good about their long-term prospects. In Nolan’s case and in Arbiter’s case, they are each the absolute leader in their market niche and both supported by very good sponsorship and their liquidity position is strong. In C2’s case also sponsored, they are not the absolute leader in their space, it’s a space that has some other competitors, but it’s one of the leading companies in its space. And in each one of these businesses and this is really important because this is now we think about underwriting on the front-end. The value proposition that they are making for their customers has fundamentally not changed. So we don’t feel like if the world returns to any sense of normalcy that these companies won’t recover. We think that they will be right back to where they had been before. Now there’s never certainty around that, but that’s our expectation and we think that they are all adequately capitalized to ride the storm, if you will.

[Mickey Schleien:]

That’s -- excuse me. That’s very helpful, Mike. Thank you for that. Turning to the CLO, I have a couple of questions. I noticed that the CLO equities estimated yield increased quarter-to-quarter and I realize it’s at the end of its reinvestment period. Was there anything we should understand in terms of the dynamics of that investment that caused the estimated yield to go up?

[Christian Oberbeck:]

It’s really primarily a reflection of the performance of the CLO this past three months past quarter Mickey, CLO had a really strong performance and as you could see it was actually up quarter-over-quarter in valuation. And actually would have been up in valuation even more if not for the fact that we did change one of our assumptions. We increased our prepayment rate from 10% to 20% reflecting the information we are getting from the desks and the prepayment trends over the past quarter or so, which offset some of the increase in value. But the full impact of the strong performance came through in the actual cash flows and that in the effect of interest rates.

[Mickey Schleien:]

Okay. And Henri at a high level, what -- it looks like you are -- do you expect the CLO to be upsized upon refinancing and what sort of timing are we looking at in terms of the refinancing?

[Christian Oberbeck:]

Mickey, maybe I will step in for that one. We do have a warehouse attached to our CLO and as we discussed earlier, we have funded into that and so do have assets in the warehouse. And so we already have some assets that could allow us to upsize and we also have additional leverage which we have not fully utilized in the warehouse. And so we are prepared to upsize should the market environment be conducive to that from -- in our judgment. In terms of the refinancing, we -- as you have seen over the years, generally speaking this is the time zone in which we would seek to refinance and so we are in the process of engaging with the market. As you can also appreciate over the last six months the market has evolved very dramatically. So six months ago basically it was closed and then now its more -- much more robust than it has been.

[Mickey Schleien:]

I definitely agree with that Chris. And given sort of market terms available right now in CLO, can you give us a sense of what level of estimated yield we might see on that CLO once its refinance and what level of fee income the manager or the BDC can earn from the upsize CLO?

[Christian Oberbeck:]

Well, Mickey, I think, it’s a little preliminary for us to actually know that, well let alone communicate that. So we are still not in the marketplace right now. So it’s just a little early. I think in our next conversation we would have, probably have it done by then hopefully.

[Mickey Schleien:]

Okay. And just sort of last housekeeping question maybe for Henri. What is the level of the undistributed ordinary taxable income per share?

[Henri Steenkamp:]

I don’t have an exact amount for you, Mickey. But I guess a way to think about it is we sort of went into the year with no spillover. So basically break even. And then, of course, we have declared now this is the third dividend. We have declared since then and obviously had three quarters and has over earned by between $0.06 and $0.08 each quarter the dividend thus far. So I think hopefully that gives you sort of a parameter and sort of how to think about what the current amount is.

[Mickey Schleien:]

But Henri there was also one quarter where you didn’t pay a dividend, so I am assuming …

[Henri Steenkamp:]

Correct.

[Mickey Schleien:]

…taxable and the undistributed taxable income is fairly meaningful right now?

[Henri Steenkamp:]

Well, exactly as you said. Yeah. I mean there’s the one quarter and then there’s probably $0.06 to $0.08 for the other quarter, so…

[Mickey Schleien:]

Right.

[Henri Steenkamp:]

…that’s more or less what the -- yeah, amount. Now having said that, there is obviously still unknown, the CLO refinancing, CLO’s consolidated for tax purposes. So that could also obviously impact that as that progresses over the next couple of months.

[Mickey Schleien:]

Right. And Henri can you just remind us then on under RIC rules, when are you required to either distribute that or consider…

[Henri Steenkamp:]

Sure.

[Mickey Schleien:]

…options for that spillover?

[Henri Steenkamp:]

Sure. So we went into the year with no spillover. That means this full year’s taxable income through February 2021, so the end of this coming February, only has to be distributed eight and a half months after this February. So only, I think, it’s a middle November of this year. So there’s still quite a period until the February spillover amount would have to be distributed. And all of the dividends post-February would obviously count towards that as well.

[Mickey Schleien:]

Right. Right. Okay. That’s it for me this morning. Thank you and congratulations on your performance.

[Henri Steenkamp:]

Okay. Thank you.

[Christian Oberbeck:]

Thank you, Mickey.

[Operator:]

Thank you. Our next question is from Serge Beckham with B. Riley Securities. Please go ahead.

[Unidentified Analyst:]

Hi. Good morning and thanks for taking my question here. Just wondering what sectors or industries are you guys currently seeing the most opportunities to recycle capital. I suppose especially in light of increased prepayments and the rate environment? Thank you.

[Christian Oberbeck:]

Good morning. I will take that. I think we are -- the way we think about it is more the flip side of that, which is where are we not seeing opportunities or where are we avoiding investing capital and certainly there are generally the obvious ones in the COVID environment. So we are avoiding anything and doing anything new in the hospitality space and the travel and leisure space, certainly, restaurants. Those types of industries that are most greatly affected in COVID and those happen to be those industries that require a good deal of human interaction and especially group interaction. Those are areas where we have avoided. I think, by and large, any of the businesses that are holding up well and there certainly are significant subsets of the economy that have held up really well, some have even flourished in this marketplace. We see lots of activity increasing activity there. If anything what’s happened in the marketplace for those businesses that have performed well in this environment, there is even greater interest. You start to see valuation multiples expand and kind of the fair amount of aggressiveness toward lending to those business models that have proven themselves. One example there would be businesses that are delivering their product through a SaaS platform, so software-as-a-service platform. That happens to be an industry sector or a business model type that we have particular expertise in and we are seen quite a bit of activity in that space for example. But I would point out and this is one of the things that we are super excited about as we build out our business development group and further penetrate the lower end of middle market. Two of the last three port -- new port -- there are three new portfolio companies in this last quarter that we invested in, two of them were in businesses that weren’t in the software space. There are businesses that are, one is a dental practice management company, another one is a heating and air conditioning business for residential customers. And those are businesses that are holding up exceedingly well, but it’s very much case specific.

[Unidentified Analyst:]

Got it. Thanks for that color. And can you maybe make some comments regarding kind of the interest rate environment and what you are seeing on spreads given the bulk of the portfolios floating?

[Christian Oberbeck:]

Well, as Henri pointed out, the good news on spreads is that all of our assets are at their floor. So we have got -- if there’s any further erosion in LIBOR, which we won’t experience it in our portfolio. But what we have witnessed is that, the marketplace is getting very aggressive on spreads and I would say that for strong credit, spreads have returned to kind of pre-COVID levels. And there is certainly a distinction people are drawing between businesses in the kind of the sectors that I already described. But for those businesses that are performing people are being quite aggressive in lending to those businesses and we are kind of back to pre-COVID levels by and large.

[Unidentified Analyst:]

Thank you. That’s all for me.

[Christian Oberbeck:]

Thank you.

[Henri Steenkamp:]

Great. Thank you, Serge.

[Operator:]

Thank you. And this concludes our Q&A session for today. I will turn the call back to Christian Oberbeck for his final remarks.

[Christian Oberbeck:]

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

[Operator:]

Thank you for your participation in today’s conference. You may now disconnect.