Saratoga Investment Corp.
Q1 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal Fourth Quarter and Fiscal Year 2018 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 up the line for your questions. At this time, I would now like to turn the call over to Saratoga Investment Corp'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 2018 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 2018 shareholder presentation in the Events & 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 be available from 1

[Christian Oberbeck:]

Thank you, Henri and welcome everyone. In reflecting on the longer term achievements during the past year in the context of our core objectives of credit quality, sustained growth and solid earnings; we're pleased to report that we achieved strong performance against all three over the past year building on a long-term trend we have maintained over many years. We are proud of the strong operating investment performance resulting from our team's efforts placing us at the top of the industry in terms of key performance indicators and in many categories far outpacing our competitors. We have deployed capital at below average multiples and maintain a moderate risk profile. Our flexible capital structure and diversified sources of cost effective liquidity continued to support our robust and growing pipeline of available investment opportunities, increased assets and greater scale. Importantly, we've accomplished this in a highly competitive and challenging market environment. We continue to progress towards our long-term objectives of increasing the quality and size of our asset base with the ultimate purpose of continuously generating meaningful returns for our shareholders. Slide 2 highlights our continued progress and achievements during the past quarter and fiscal year. To briefly recap; first, we continue the strengthening of our financial foundation this year by maintaining a high level of investment credit quality with 96.8% of our loan investments having our highest internal rating generating a return-on-equity of 13.2% on a trailing 12 month basis, outperforming the last 12 months BDC industry average of approximately 8.5%, and maintaining a gross unlevered IRR of 12.2% on our total unrealized portfolio with a gross unlevered IRR of 16.2% and $249.4 million of total realizations. Second, we expanded our assets under management to $342.7 million, a 17% increase from last year and a 1% increase from Q3. From a longer term perspective, our current AUM reflects a 328% from fiscal year 2011. In addition, this year is illustrative of the success of our growing origination platform. We originated investments totaling $108 million offset by repayments of $66 million. In Q4, $21 million of originations were matched by the same number of repayments. Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the fourteenth consecutive quarter. We paid a quarterly dividend of $0.50 per share for the fourth fiscal quarter of 2018 on March 26, 2018. This was an increase of $0.01 per share over the last quarter's dividend. All of our dividend payments exceeded by our adjusted net investment income for the same periods. As a result, we're comfortably overearning our dividend currently by 14% which distinguishes us from most other BDCs. Fourth, our base of liquidity remains strong and promises to improve. We continue to have significant dry powder to meet future potential opportunities in a changing credit and pricing environment. Our existing available year-end liquidity allows us to grow our current assets under management by 21% without any new external financing. And on April 16, 2018, pursuant to the Small Business Credit Availability Act, the non-interested Board of Directors of the Company approved the Company increasing it's leverage from 1.1 to 2.21 effective on April 16, 2019. This provides us potential future access to more than $100 million of additional borrowing capacity based on NAV at the end of fiscal 2018 allowing further potential growth of more than 50% of our current assets under management. And finally, we continued to opportunistically utilize our after-market, our ATM offering with Ladenburg Thalmann & Company as of February 28, 2018. The company had sold 348,123 shares with a principle of $7.8 million at an average price of $22.52. This year also saw continued steady performance within our key performance indicators as compared to the previous year ended February 28, 2017. Our adjusted NII of $13.7 million was up 39% from the previous fiscal year which was $9.8 million. Our adjusted NII per share of $2.27 per share was up 13% from $2.01 per share last year. Our NAV per share of 22.96 was up 5% from 21.97 last year, and our return-on-equity was 13.2%, up from 9% last year and beating the industry average of 8.5%. Looking at the quarter ended February 28, 2018 as compared to the quarter as I did November 30, 2017 and February 28, 2017; adjusted NII is $3.8 million this quarter, up 31% from $2.8 million last year and up 16% from $3.3 million last quarter. Adjusted NII per share is $0.60 this quarter, up 22% from $0.49 last year and up from $0.54 last quarter. And adjusted NII yield is 10.7% this quarter, up from 8.8% last year and up from 9.6% last quarter. Henri will provide more detail later on any significant variances. Overall, we remain extremely pleased with these accomplishments. As in the past, we remain committed to further advancing the overall size and quality of our asset base. As you can see on Slide 3, our assets under management have continued to steadily grow and the quality of our credits remain high. We look forward to continuing this positive trend. With that, I would like to now turn the call back over to Henri to review our financial results, as well as our composition and performance of our portfolio.

[Henri Steenkamp:]

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended February 28, 2018 and our usual presentation of this data. Across all these metrics this quarter again shows the positive impact of increased assets we have always spoken about. When adjusting for the incentive fee accrual related to net unrealized capital gains and the various impacts of the refinancing of the 2020 baby bonds in last year's numbers, adjusted NII of $3.8 million this quarter was up of 15.5% from $3.3 million last quarter and up 31.3% from last year's Q4. Adjusted NII per share was $0.60, up $0.06 from $0.54 last quarter and up $0.11 from $0.49 last year. The increase from last year reflects our higher level of investments and resultant high interest income with AUM up 17% from last year. The sequential quarterly increase was primarily due to additional interest income from accelerated OIB [ph] on certain early repayments, as well as additional other income earned from prepayment penalties and increased originations compared to last quarter. These factors lead to adjusted NII yield of 10.7% for the quarter, up 190 basis points from 8.8% last year and up 110 basis points from 9.6% last quarter. In addition, we experienced a net gain on investments of $2.2 million for the quarter or $0.35 per share resulting in total increase in net assets resulting from operations of $5.5 million or $0.89 per share. The $2.2 million net gain on investments was comprised of $0.2 million in net realized losses and $2.4 million in net unrealized appreciation. The unrealized appreciation includes $1.3 million related to out Taco Mac Restaurant Group investment restructured subsequent to year end. Moving on to Slide 5; you will find our 12 month key performance metrics for our fiscal year with comparable periods. We're looking at our numbers on an annual basis; the strength of our performance over the longer term becomes apparent eliminating any quarterly lumpiness. Year-over-year, all of our metrics are up, adjusted NII is up 18.5% to $13.7 million, adjusted NII per share is up $0.26 to $2.27 per share, and adjusted NII yield is up 110 basis points to 10.2%. As we've always reiterated, return-on-equity is an important performance indicator including both realized and unrealized gains. Return-on-equity was 13.2% for the year, up 420 basis points from 9.0% last year, and up 380 basis points from 9.4% for fiscal year 2016. This figure also easily beat the current BDC industry average of 8.5%. A quick note on expenses; total expenses excluding interest and date financing expenses, base management fees and incentive management fees increased slightly from $4.3 million last year to $4.8 million this year but it remained consistently at 1.4% of average total assets for both years. This increase is primarily due to one, increased professional fees from this year's Sarbanes-Oxley control activities, now that the company is an accelerated filer and requires an ordered opinion over the control environment which by the way was a clean unqualified ordered opinion issued by Ian [ph] for the year. And two, increased administrator expanses pursuant to the administrator agreement. For the quarters ended February 28, 2018 and 2017 these total expenses remained relatively unchanged at $1.2 million. The additional KPI slide and net interest margin analysis is again included on Slide 29 to 52 in the Appendix highlighting our BDC strong performance and continued increased results. Fiscal '18 is of particular note, demonstrating the earnings power of the most recent AUM growth as our cash and SBA debentures were further deployed during the year. As you can see on Slide 6; NAV this year was $143.7 million as of year-end, a $16.4 million increase from NAV of $127.3 million last year, and a $5.1 million increase from $138.8 million last quarter. NAV per share was $22.96 as of year-end compared to $21.97 as of last year and $22.58 as of last quarter. NAV changes for the year includes $12.7 million in net investment income and $4.9 million of net realized and unrealized gains earned offset by $11.4 million of dividends declared. In addition, $2.4 million of stock dividend distributions were made through the drip [ph] and $7.7 million sold throughout at the market equity offering. In addition, our NAV increase is net of $7.7 million realized write-down of our legacy, My Alarm Center investment, partially offset by $1.8 million in other realized gains, mainly from the sale of on our Mercury Network investment in Q2. Net unrealized appreciation for the year was due primarily to $1.9 million unrealized depreciation on our CLO equity investment, $1.9 million unrealized appreciation on our Easy Ice preferred equity investment, $2.6 million unrealized appreciation on our Elyria equity investment, and net unrealized depreciation being adjusted to zero to reflect the recognition of the net realized loss on the two realizations above. Our net asset value has steadily increased since 2011 and we continue to benefit from our history of consistent realized gains. Moving on to our waterfall Slide 7; you will see a reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis; this helps breakdown the numbers into a couple of more manageable variances. Starting at the top, NII per share increased from $0.54 per share at Q3 to $0.60 per share at Q4. The significant movements were a $0.05 increase in total interest income, primarily from increased prepayment penalties and accelerated amortization of OID resulting from early repayments. As the slide shows a higher weighted average shares outstanding had a $0.02 dilutive impact and all changes are shown net of incentive fees. Moving on to the lower half of the slide; this reconciles NAV per share from 22.58 at Q3 to 22.96 for this quarter. The $0.53 generated by our GAAP NII for the quarter and a $0.59 net appreciation on investments were offset by the $0.49 dividend declared for Q3 with a Q4 record date, as well as a $0.05 dilution from an increased share account. Slide 8 outlines the dry powder available to us as of year-end which is $71.1 million in total; this is spread between our available cash, undrawn SBA debentures and undrawn Madison facility. All our borrowings except from Madison facility is fixed rate debt in this rising interest rate environment with at least six years of maturity remaining. We are pleased with our liquidity position; especially taking into account the overall conservative nature of our balance sheet and the ability we continue to have to grow our assets by 21% without the need for external financing. At the same time almost 80% of our investments have floating rates and although they have LIBOR flows, we are through all of them already which means we will be a big beneficiary of rising short-term rates. As you can see on Slide 9, we have analyzed the potential impact of changes in interest rates on interest income from investments assuming that our investments as of year-end were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate terms, a hypothetical change of 100 basis points in interest rates would increase our interest income by approximately $2.3 million; this is all incremental to our existing earnings without any other changes. Now I would like to move on to Slides 10 through 12 and review the composition and yield of our investment portfolio. Slide 10 is our usual slide highlighting the portfolio composition and yield at the end of the fiscal year, but our composition and weighted average current yields remained relatively consistent with the cost with $342.7 million invested in 30 portfolio companies and one CLO fund, and approximately 58% of our investments in first lien. On Slide 11 you can see how the yield on our core BDC interest earnings assets excluding out CLO and syndicated loans, as well as our total portfolio yield has remained consistent around 11% for the past several years despite high levels of repayment and the need to continue to replace these assets. Our core BDC asset yields increased slightly reflecting increased one and three months LIBOR rates offset by slightly tighter spreads. Year-over-year the CLO yield has increased significantly as the CLO term moves closer to the end of it's reinvestment period in October 2018. Turning to Slide 12; during 2018 we made investments of $107.7 million in five new and nine existing portfolio companies, and had $66.3 million in eight exits and repayments resulting in a net increase in investments of $41.4 million for the year. Our investments remain highly diversified by type, as well as in terms of geography and industry spread over 10 distinct industries with a large focus on business, consumer and healthcare services. We continue to have no direct exposure to the oil and gas industry, the fact that it served us extremely well. And other total investment portfolio 8.7% consist of equity interests; equity investments remain an important part of our overall investment strategy. As you can see on Slide 13, realized losses this year was $5.9 million, primarily from the $7.7 million loss on our My Alarm Center investment we have previously discussed. Despite this onetime loss, for the past six fiscal years we had a combined $11.8 million of net realized gains from the sale of equity interests or the sale of early redemption of other investments. This consistent performance reflects the quality of our product credit has outgrown our NAV and is reflected in our healthy long-term return-on-equity. 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 will take a couple of minutes to describe the current market as we see it, then I will comment on our portfolio performance and investment strategy. The market has only gotten more competitive since our last earnings call in January. Slide 14 shows the continued downward trend in the number of transactions per deal sizes in the U.S. below $25 million. The number of transactions in the 12 months ended February 28, 2018 is even less than 2017 which was already down 18% from the previous year reflecting continued early weakness in 2018. Opportunities and closings continue to decrease in this market and it is not just volume, total transaction value for the same periods are down as well. In the midst of these market dynamics industry participants are competing for strong credits in an extremely aggressive fashion. The supply and demand imbalance has fueled continued pricing pressure and aggressive leverage for quality deals in the broader market -- the broader middle market as it has been for some time. While our experience is that the lower middle market, our target market segment is still the most attractive one to deploy capital and delivers the best risk-adjusted terms. We have seen spreads and terms historically reserved for significantly larger issuers creep into our space; terms are become increasingly borrower-friendly. Thankfully, LIBOR has continued to increase this quarter and has provided some counterbalance to spread compression. As we frequently highlight, the lower middle market appeals to us because the sheer number of companies at this end of the marketplace allows us to shift through and find transactions that we believe are most likely to deliver the best risk-adjusted returns to our shareholders. It is worth pointing out that our commitment to study risk-adjusted performance has also positioned us well for market downturns should they occur. We believe that successful investing rests on sound judgment and steady continuous discipline taking one decision at a time. In the chart on Slide 15, you can see that debt multiples remain high in 2018 with two-thirds of market multiples above 5x; lenders remain aggressive in putting money to work. Against this backdrop, we have been able to achieve our results while maintaining a relatively modest risk profile. Our total leverage is 4.37x, up slightly from the previous quarter reflecting both, the repayments this quarter of numerous lower leverage deals, as well as the add-on so our existing investments increasing their immediate leverage profile. Nevertheless, we continue to focus on investing of 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, this slide illustrates our consistent ability to generate new investments despite difficult market dynamics. With continued healthy originations in the calendar first quarter of 2018 we are maintaining an origination level that is consistent with past years despite a more challenging environment and not relaxing our investment criteria. Moving on to Slide 16; our team's skillset, 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. 50% of these deals come from companies without institutional ownership, underscores the importance of proprietary relationships in our deal sourcing. Although 80% of our term sheets issued are still for transactions with private equity sponsors, we are also seeing more deals from a greater variety of sources. This chart illustrates our discipline over the past three years plus. While the size of the funnel at the top has increased significantly deals executed have not increased but rather remain relatively steady throughout. In this market, we find ourselves having to work harder to maintain the same measured pace of growth. But no matter how many deals we see, the overarching goal is to maintain the same high level of credit quality. In the last 12 months since February 28, 2018; our transaction volume reflected a healthy mix of follow-on and new portfolio company investments. We take pride in the success we have had making initial investments in portfolio companies and then supporting many of those companies with additional debt and equity capital to fuel their continued growth. Examples of current and past portfolio companies where we successfully deployed follow-on capital include Easy Ice, Health Media Network, Community Investors, Vector, Mercury, Identity Automation, Expedited and many others. Looking at our growing base of investment relationships and our current perspective investment pipeline we are confident that we can continue to add new portfolio companies to our portfolio that in turn will become a source of follow-on investment activity. Our overall portfolio quality is strong and is even stronger when taking into account only the assets originated by us since taking over the BDC management in 2010. As you can see on Slide 17, the gross on leveraged IRR on realized investments made by the Saratoga Investment management team is 17.3% on approximately $177.5 million invested in our SBIC, and 13.3% on approximately $71.9 million invested in the rest of our BDC. On a combined basis, the gross unlevered IRR is 16.2% on $249.4 of invested capital. These numbers include $66.3 million of realizations in fiscal 2018 including the realized loss on our My Alarm Center investment discussed earlier. On the chart to the right, you can also see the total gross unlevered IRR on our $349.4 million of combined weighted SBIC and BDC investments. It's 12.2% since Saratoga took over management. The track record numbers just discussed also include a $9.8 million first lean and revolver investment called Taco Mac. As of our last discussions with you all, this investment carried a $1.5 million unrealized depreciation reflecting declining business fundamentals. But shortly after year end, these investments were restructured in a change of controlled transaction with Saratoga Investment receiving $7.3 million in cash and a $2.2 million subordinated term loan. This transaction resulted in $1.3 million of unrealized appreciation for the quarter ended February 28, 2018 with the investment being fair valued in our financial statements at year end to reflect the value of the transaction shortly after year end. A $0.2 million loss is to be realized for the three months ended May 31, 2018. This realized loss will be accounted for as a reclassification from unrealized to realized resulting in no net impact to the financial statements in the first quarter. As a reminder, this year is a good example of how a solid high quality portfolio interacts as a whole. Despite the recognition of $7.7 million loss on My Alarm Center, our year-to-date net realized and unrealized gains and losses equal a gain of $4.9 million. As you can see on the Slide on 18; the mix of securities in our portfolio is conservative with 59% of our investments comprised of senior debt first lien investments, and the leverage profile of these 20 investments remain relatively low at 4.57x, especially when compared to overall market leverage. Our favorable cost of capital for this program allows us to deliver highly a accretive returns for our shareholders without stretching out on the spectrum [ph]. Now moving on to Slide 19; you can see our SBIC assets are relatively unchanged at $217.1 million as of February 28, 2018. It's important to note as well that as of year-end, we had $19 million total available SBIC investment capacity including cash, of which $12 million is leveraged capacity within our current SBIC license. Overall, we feel this quarter's continued strong results demonstrate the strength of our team, platform and portfolio while remaining extremely diligent in our overall underwriting and due diligence procedures. This culminates in high quality asset selection within a tough market. Credit quality remains our top focus. 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 20, following the most recent increases to our fourth quarter dividend to $0.50, our quarterly cash dividend payment program has grown by 178% since the program launched in September 2014. This includes 14 sequential quarterly dividend increases. Despite these consistent increases, we continue to over earn our dividend by approximately 14% giving us one of the higher dividend coverages in the BDC industry. As you can see on Slide 21, we've had a year-over-year dividend growth of 8.7% which easily places us at top of all BDCs, not only our peers. And only one of seven BDCs have grown dividends in the past year. This list also includes some BDCs at the top of the list that have variable dividend policies, therefore, not really comparable. While we've had 14 sequential quarters of dividend increases, most BDCs have either had no increases or decrease as the size of the dividend payments. We believe our continually increasing dividend has truly differentiated us within the marketplace. We are also pleased to see that SAR continued -- to see SAR continuing to outperform the industry, both short and long-term. As highlighted on Slide 22, our total return for the last 12 months which includes both capital appreciation and dividends has generated total returns of 2%, significantly beating the BDC index of negative 9%. As compared to the last three years, as well as since we took over the management of the BDC SAR's total return has beaten the index by a significant margin. For the past three years Saratoga's total return of 72% beat the industry's 11% total return; and for the period since Saratoga took over management of the BDC, Saratoga's return beat the industry by 302% versus 93%. Turning to Slide 23; when viewed over a longer time horizon our three and five-year return places us in the Top 1 and 2 of all BDCs respectively. On Slide 24; you can further see our outperformance placed in the context of the broader industry. We continue to achieve high marks across the diverse categories including interest yield on the portfolio, latest 12 months return-on-equity, dividend coverage, dividend growth, NAV per share, and investment capacity. As we continue to grow our assets our expense ratio is trending closer to the industry averages while we are easily beating the industry and most of the other metrics. We believe our return-on-equity and NAV per share outperformance are the most important metrics reflecting the growing value our shareholders are receiving. Moving on to Slide 25; all of our initiatives we have 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 the addition of more institutions. These characteristics include maintaining one of the highest levels of management ownership in the industry, industry leading return-on-equity, a strong and growing dividend, ample long-term liquidity with which to grow our asset base, solid earnings per share, and NII yield with substantial growth potential, and a track record of steady high-quality expansion of assets under management. Importantly, Saratoga has an attractive risk profile with protection against potential interest rate risk from it's almost 80% floating rate portfolio, and fixed rate liabilities structure. Our high credit quality portfolio contains a minimal exposure to cyclical industries. With this overall performance, Saratoga investment has achieved standing among the premier BDCs in the marketplace. Finally, looking at Slide 26; we've accomplished a lot this year and are proud of our financial results. We remain on course with our long-term goal to expand our asset base without sacrificing credit quality while benefiting from scale. We also continue to increase our capacity to source, analyze, close and manage our investments by adding to our management team and capabilities. Continuing to execute on these simple and consistent objectives should result in our continued industry leadership and shareholder total return performance. In closing, I would again like to thank all of our shareholders for their ongoing support. We're excited for the growth and profitability that lies ahead for Saratoga Investment Corp. And I would now like to open the call for questions.

[Operator:]

[Operator Instructions] The first question is from Casey Alexander of Compass Point.

[Casey Alexander:]

First of all, you gave your ATM statistics for the year; did you sell any shares to the ATM during the fourth quarter? And if so, how many and at what average price?

[Christian Oberbeck:]

Casey, off the top of my head I don't know exactly the average price, there was a small amount sold at the beginning of the quarter but as you probably were aware, our share price lost a little bit of value over the last couple of months and we were below NAV. So there were small amount of sales and it was sort of all in the beginning of the quarter. I can get back to you on the exact amount.

[Casey Alexander:]

Secondly, Michael, I am just wondering the weighted average yield quarter-over-quarter went from 11.3% to 11.1% and there was very little portfolio activity and yet the benchmark for your floating rate loans rose the previous quarter. So I'm kind of curious why the weighted average yield would have declined by 20 bips?

[Michael Grisius:]

I have not done the calculus on that exactly. I would say this, as I referenced in our prepared remarks, the marketplace is incredibly competitive right now, there are not as many deals as there have been in the past and there is a lot of capital out there. So we are finding ourselves having to be really careful as we deploy capital and the approach that we've taken as we have always is to make sure that we feel comfortable that our principle is saved. So I would expect as I went back and try to do the math there, it's probably reflective of some of the newer deals that we booked, how the tighter spread -- and even though the LIBOR has grown within that market or within this market, it's reflective of some of the new deals having tighter spread. Now, if you look at that return profile overall, we feel pretty comfortable that that's sustainable, time will tell but the thing that we do most importantly is just make sure that we feel like we're getting risk-adjusted returns that make sense. And with the SBIC program in particular but just looking at our cost of capital, we can deploy money below that level and still make it very accretive to our shareholders.

[Casey Alexander:]

And lastly -- and I know I've asked you this before; PIK income is a little better than 10% of interest income. Is that still related to Easy Ice? I mean, is there a point in time where you see them transitioning to cash payments?

[Michael Grisius:]

I don't know the exact numbers, Casey. But I would tell you that the vast majority of the PIK income and particularly in Q4 was related to Easy Ice, there are some other credits that have PIK income but that's the outlier for sure. And the perspectives that we have on Easy Ice just so you know -- we've communicated this before, we are really bullish on this business, you can see how well it's performed overtime and continues to perform very well for us and our shareholders. If we were to dial back the PIK income and make more of that cash, it would take some capital away from the business which would otherwise be used to grow the platform and grow the enterprise value of that company. And so our collective decision along with management is to structure the deal that way because it's certainly paid for our shareholders in space as it relates to the intention going forward. For the time being that's the mix that we're focused on, the longer range plan, but I wouldn't want to put any -- specific timeframe on it is that as we continue to grow the platform and EBITDA grows; it's -- the expectation is that we would want to move to a stronger mix of cash versus PIK but wouldn't want to put a timeframe on that because we think it's a much better way to deploy our capital right now is to let that money go back into growth of the business.

[Christian Oberbeck:]

Just one other little [indiscernible] before and Henri is going to give you the exact number on the PIK Casey. In addition as Mike said to providing more capital to business, it also helps us manage the absolute cost of capital in the business because it allows our senior debt to be priced very favorably, us having this be PIK. I mean, we could have chosen to have more cash and our senior leverage would have been maybe a little lower and more highly priced; so there is also some economy to doing it. And as Mike has said, we're very comfortable about the coverage of the PIK earnings from Easy Ice.

[Henri Steenkamp:]

And just to add some color on the numbers, Casey; so -- the nice thing is Easy Ice was outstanding now for the full fiscal year of '18, it's also a controlled investment, so it's pretty easy to pick it out sort of what proportion of our PIK is Easy Ice, on both, the face of our income statement, it's on that PIK control investment line; that's all Easy Ice, as well as in the schedule of investments, Easy Ice is PIK is -- interest is broken out separately as well. And for the full year, it was about 8% of our interest income, more than two-thirds therefore of the total PIK is Easy Ice, and so you sort of strip Easy Ice out the remaining PIK interest of ours is around 3% now of our total interest income.

[Operator:]

[Operator Instructions] The next question is from Christopher Testa of National Securities Corporation.

[Christopher Testa:]

Just to start off, I would just like your take on a few things regarding the ability for you guys have reduced asset coverage starting next year. I just want to know are you guys looking to do more lower middle market loans like you currently do that just don't fit because of the pricing on them or is this something where you'd consider moving up market in terms of what you've put on the balance sheet?

[Christian Oberbeck:]

I think that's a very good question and that's something that obviously, we talked about extensively with our independent directors before we elected to take this -- to make that election for the increased leverage. I think as we -- as one looks at our history, the bulk -- Henri, what percentage of our portfolio is SBIC?

[Henri Steenkamp:]

More about 65%.

[Christian Oberbeck:]

So about 65% of our portfolio is in our SBIC. And our SBIC has been operating with the 2

[Christopher Testa:]

And also just sticking with 2

[Christian Oberbeck:]

That's not something that has come up in our discussions or our plans.

[Christopher Testa:]

And should we be expecting maybe less ATM usage even if you guys are above NAV as you're able to increase the balance sheet leverage and improve your ROEs even more?

[Christian Oberbeck:]

Well, I don't know that -- we're getting into a forward-looking statement or not, it turns our attention. I think we want to be careful about that, I think the stated policy of our ATM is to sell -- is to raise equity capital as -- when available at favorable prices above NAV. I think as we've talked about in this call and historically, our objective is to continuously grow our total portfolio assets under management and obviously, we have the ability to increase leverage but we also want to grow and be prudently financed throughout our opportunity set that lies ahead of us and equity is clearly an important building block in our capital structure. So much like -- I think what this -- the way we're looking at this 2

[Michael Grisius:]

I think this past year, actually Chris, is just a great example of that -- how you know strong underwriting can really drive strong performance. I mean, this is the year in which we raised $8 million of equity and we've posted probably our highest return-on-equity yet.

[Christopher Testa:]

And just -- with the dividend obviously, congratulation on another sequential increase; you guys have been doing that for quite some time -- the earnings are of course a bit lumpy and they are with a lot of your peers do the OID [ph] acceleration in fees and whatnot. I'm just wondering how are you looking at the dividend going forward? And are you looking to continue with these stair -- step this up or is there a point where you take a pause because you don't want to risk under earning and then the event fee income comes in light or the balance sheet becomes under levered if there is not enough attractive investment opportunities for you?

[Christian Oberbeck:]

Well, I think the last few parts -- the last things you said in the last part of your question are things we consider all the time, right. We absolutely want to make sure that we're never in a position where we have to move backwards on our dividend. And so we look at this very carefully and we do not want to get ahead of ourselves and in a position where we're squeezed. And so I think our raises historically -- we've been really careful about talking about the future but I think if you look at our policy historically is, we've -- over the past, we've raised it quite rapidly in the beginning and then more recently we've been fairly measured in our increases and that has been reflective of us. I mean, if you look at the amount by which we've been overearning our dividends on a trend line basis, recognizing with what you said absolutely, earnings can be lumpy; but if you look on a trend line basis, we've had a pretty good cushion above our payouts. And you can also notice that -- I mean in prior years, we had special dividends to cover our RIC requirements, and I think now we've got ourselves into a position where we're not paying special dividends and we're able -- and so we're getting into a balance between our RIC requirements and what our dividend is. And so -- I guess, we can't give you a concise precise answer on what we plan to do next quarter or the quarter after the quarter after because we analyze [ph] those things at the moment and at that time; but I think if you look at the way we've done it historically, we've tried to be prudent and not getting in a position where we're over extending ourselves. And again, our management's total desire is to never have to backtrack on our dividend.

[Christopher Testa:]

And you guys have mentioned that the CLO is the reinvestment period ends relatively soon. Just wondering if there's an inclination on your behalf to do a reset on that?

[Christian Oberbeck:]

Again, I think if you look in the past, we reset it twice and each reset -- it's kind of like a refinancing. And you know, a lot of new CLOs have four-year investment period and we've elected to go with two-year investment periods because we felt that the overall pricing made us more competitive at two-year investment period and so it has been -- the CLO has been a terrific performer for us and we would like to keep it healthy and moving forward, and part of our portfolio in the future. Obviously, we are subject to the market environment as to what that terms and pricing are, and then we have to make decisions at the time when that's available.

[Christopher Testa:]

And given that you guys have the experience with the CLO and risk retention seems just about dead for the decision from the appellate court the other month; I'm just wondering if you guys are considering securitization as another part of the financing flexibility that you were discussing with regards to the increased leverage?

[Christian Oberbeck:]

I think that's a very interesting approach. As we've discussed earlier, we're just into this new era if you will of BDC finance, and all approaches to financing are open to us and like we've had meetings on it, we've made a much longer list of what we used to have in terms of how to go about our financing going forward and that's certainly on that list.

[Christopher Testa:]

And last one for me if I may. Henri, how much acceleration of unamortized OID [ph] was there during the quarter?

[Henri Steenkamp:]

I think between the acceleration of OID [ph] and the prepayment penalties for the two sort of effect as I mentioned, it was about between $0.03 and $0.04.

[Christopher Testa:]

That's all for me. Thanks for taking my questions.

[Operator:]

Thank you. This concludes the Q&A session. I'd like to turn the call back over to Christian Oberbeck for closing remarks.

[Christian Oberbeck:]

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

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Everyone have a great day.