Saratoga Investment Corp.
Q4 2017 Earnings Call Transcript

Published: 17 May 2017

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.’s Fiscal Fourth and Fiscal Year 2017 Financial Results Conference Call. Please note that today’s call is being recorded. Today's presentation, all parties will be in a listen-only mode. Following management's prepared remark, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp.’s Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Please go ahead.

[Henri Steenkamp:]

Thank you. I would like to welcome everyone to the Saratoga Investment Corp.’s fiscal fourth and fiscal year 2017 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 and fiscal year-end 2017 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 from 1 p.m. today through May 24. 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 Oberbeck:]

Thank you, Henri, and welcome everyone. As we consider our accomplishments during this most recent fiscal year, I am pleased to note the success of our activities and pursuit of credit quality growth and earnings and the strong operating and investment performance that is resulted from these efforts. In addition, we've achieved certain millstone how to serve to expand and enhance our capabilities. Saratoga Investment has risen to and remains at the top of the industry in terms of key performance indicators and in many categories, far outpacing our competitors. Importantly we have accomplished this in a highly competitive and challenging market environment. We continue to progress towards our long-term objective of increasing the quality and size of our asset base with the ultimate purpose of building Saratoga Investment Corp into a best-in-class, BDC, 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 94.1% of our loan investment having our highest rating, generating a return on equity of 9% on a trailing 12 month basis, outperforming the last 12 months of BDC industry average of approximately 7.5%. Excluding the 1.6 million realized and unrealized losses in our legacy investments in Targus Group International and Elyria Foundry Company, LLC over the past 12 months as well as the loss associated with the extinguishment of our 2020 notes and the interest paid on the 2020 notes during the call notice period. Our return on equity for the last 12 months ended February 28, 2017 was 11.3%. Both Targus and Elyria are legacy investments that pre-date Saratoga's management of the BDC, and generating our gross unleveraged IRR of 17% on 108 million of realizations for the fiscal year. Second, we expand our assets under management to 292.7 million, a 3.1% increase from 284 million as of February 29, 2016 and a 5.4% increase from 277.5 million as of November 30, 2016. From a longer term perspective, our current AUM reflects a 208% increase from $95 million at the end of fiscal year 2012. In addition, this year is illustrative of success of our growing origination platform. In fiscal year 2017, we originated investments totaling $126.9 million, offset by repayments of 121.2 million experienced this year. This is inclusive of 41.1 million of originations and 26.5 million of repayments in Q4. Our growth in AUM over the past few years is evidence of our continued long term upper trajectory in asset growth despite the significant repayments we've had to outpace this year and also reflects the growth we are seeing in our pipeline. Third, we recently completed two significant refinancings that are important to our long-term objectives and strategy. On November 15, 2016, we completed the second refinancing of the Saratoga CLO extending its reinvestment period to October 2018 as well as its legal maturity date to October 2025. And on December 21, 2016, we issued $74.5 million in aggregate principal amount of 6.75% fixed rate notes due 2023 for net proceeds of approximately $72.1 million after deducting underwriting commissions and offering costs. The issuance was 7 year fixed rate covenant free notes extends the maturity of this part of our capital structure by almost 4 years and reduces interest expense by 75 basis points. Our existing 2020 notes were repaid in January. Fourth, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the 10th consecutive quarter. We paid a quarterly dividend of $0.46 per share for the fourth fiscal quarter of 2017 on March 28, 2017. This was an increase of $0.01 per share over the past quarter’s dividend of $0.45 per share. All of our dividend payments have been exceeded by our adjusted net investment income for the same periods. As a result, we are comfortably over-earning our dividend currently by 9%, which distinguishes us from most other BDCs. Fifth, our base of liquidity remains strong and promises to improve. The new baby bond issuance extends the maturity of our capital structure and reduces our weighted average financing costs. And 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 36% without any new external financing. This incremental investment capacity places us in the leading position vis-à-vis our competitors whose existing capacity averages 12.9%. And finally, on March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which Saratoga may offer for sale from time-to-time, up to $30 million of its common stock through an aftermarket or ATM offering. As of May 16, 2017, the Company sold 60,679 shares for gross proceeds of $1.4 million at an average price of $22.49. Aggregate net proceeds was $1.3 million net of transaction cost. This year also saw continued steady performance within our key performance indicators as compared to the previous year-ended February 29, 2016. Our adjusted NII and adjusted NII per share of $11.5 million and $2.01 per share, respectively, was up 6% from the previous fiscal year, which was $10.6 million and $1.90 per share respectively. Our adjusted NII yield of 9.1% was up 50 basis points from 8.6% for fiscal year of 2016. And our last 12 months return on equity for February 28, 2017 was 9% or 11.3%, excluding the items I mentioned earlier beating the industry average of 7.5%. Looking at the current quarter and at February 28, 2017, as compared to the quarters ended November 30, 2016 and February 29, 2016, adjusted NII is 2.9 million this quarter versus 2.5 million last year and 3.1 million last quarter. Adjusted NII per share is $0.49 this quarter as compared to $0.45 last year and $0.53 last quarter. And adjusted NII yield is 8.8% this quarter versus 8% last year and 9.5% last quarter. Henri will provide more detail later on any significant variances. Overall, we remained extremely pleased with these accomplishments. As we have mentioned often in the past, we remained committed to further advance in the overall size and quality of our asset base. As you can see on Slide 3, on a year by year comparative basis, our assets under management have steadily risen and a quality of our credit remains 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 the composition and performance of our portfolio.

[Henri Steenkamp:]

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended February 28, 2017 and our usual presentation of these data. Net investment income of $1.1 million or $0.19 on a weighted average per share basis was down as compared to the quarter ended November 30 and February 29 2016. There are a couple of adjustments necessary this quarter to get our adjusted metrics. In addition to the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation that we always adjust for, the refinancing of our 2020 baby bonds also resulted in two additional adjustments namely, a $1.5 million loss on extinguishment of the baby bonds as well as the interest and deferred financing cost of $0.3 million on the old baby bonds during the call notice period while the 2023 baby bonds were already issued and outstanding. Both these expenses are directly attributable to the issuance of the 2023 notes and the subsequent repayment of the 2020 notes and are deemed to be non-recurring in nature and not representative of the operations of the business. When adjusting for these items, adjusted NII per share was $0.49, up $0.04 from $0.45 per share last year and down $0.04 from $0.53 per share last quarter. The increase from last year primarily reflects with 3% higher level of investment and results in higher interest income while the decrease from last quarter is driven by a couple of factors. First, interest income is slightly down with our Taco Mac investment on non-accrual this quarter while the increase investments were primarily closed in the last month of the quarter thereby not really benefitting interest income much yet. Second, increased interest expenses from our new 2020 baby bonds are not yet fully deployed. And third, increased administrative cost and $45,000 in excise tax accrued in Q4 consistent with prior years. These impacts resulted in NII yield of 8.8% for the quarter, up 80 basis points from 8% last year, but down 70 basis points from 9.5% last quarter. For this fourth quarter, we experience a net gain on investments of $0.2 million or $0.03 per share, resulting in a total increase in net assets resulting from operations of $1.3 million or $0.22 per share. The $0.2 million net gain on investments was comprised of $0.1 million in net realized gains and $0.1 in net unrealized depreciation. The unrealized depreciation was net of a $2.3 million unrealized loss on our My Alarm Center investment, reflecting decline in fundamental, which we will discuss in more detail later. This loss was more than offset by unrealized gains in meaning of our other investments. Moving onto Slide 5, you will find our 12 months key performance metrics process for our fiscal year. We're looking at our numbers on an annual basis. The steadiness of our performance over the long-term becomes apparent despite the fact the performance cannot be lumpy when viewed on a quarterly basis. Year-over-year, all of our metrics are up. Adjusted NII as at 8% to $11.5 million, adjusted NII per share is up $0.11 to $2.01 and adjusted NII yield is up 50 basis points to 9.1%. I'd like to continue to highlight return on equity as an important performance indicator, which includes both realized and unrealized gains. Return on equity was 9% for the year, this is slightly down from 9.4% last year and 9.3% for fiscal year 2015. However, this includes the significant Q4 items Chris and I highlighted earlier; excluding these items our return on equity for the last 12 months ended February 28, 2017 was 11.3%. This figure beats the current BDC industry average of 7.5% and we expect this figure to continue to improve as we deploy cash and we grow assets for the benefits of scale becoming more visible and our operating expenses stabilizing and diminishing as a percentage of assets. A quick note on expenses, total expenses excluding interest and debt financing expenses, base management fees and incentive management fees increased slightly from $4.2 million last year to $4.3 million this year but it remained consistently at 1.4% of average total assets for both years. For the quarters ended February 28, 2017 and February 29, 2016 these total expenses actually decreased from $1.25 million to $1.16 million. As you can see on Slide 6, NAV this year was $127.3 million as of February 28, 2017, a $2.2 million increase from last year. NAV per share was $21.97 as of year-end compared to $22.06 as of the end of last year and $22.21 as of November 30, 2016. NAV includes $11.1 million of dividends declared offset by $9.7 million in net investment income and $1.7 million on net realized and unrealized gains. In addition $5.1 million of stock dividend distributions were made offset by $3.3 million in share repurchases. In addition our NAV increase is net of a $1.6 million unrealized write-down of our legacy Elyria and Targus investments and the $2.3 million unrealized write-down of our investment in My Alarm Center. Our total investment and target in Elyria is down to $1.8 million at fair value as of year-end. Our net asset value has steadily increased since 2011 and we continue to benefit from our history of consistent realized gains. Moving onto our relatively new waterfall Slide 7 you'll 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 decreased from $0.53 per share at Q3 to $0.49 per share at Q4. The significant movements were a $0.02 decrease in total interest income, a $0.01 increase in interest and debt financing expenses and a $0.02 increase in operating expenses offset by a $0.01 increase in other income resulting in a $0.04 total decrease. At the slide's footnote, a higher weighted average shares outstanding had a very minimal impact and all changes are shown net of incentive fee. Moving onto the lower half of the slide, this reconciles NAV share from $22.21 at Q3 to $21.97 for this quarter. The major change here is the $0.25 loss on extinguishment on our baby bonds otherwise the $0.44 generated by our NII for the quarter, a $0.16 net impact of stock dividends and share issuances and a $0.3 net depreciation on investments were offset by the $0.45 dividend declared for Q3 with a Q4 record date and a $0.17 dilution from an increased share count. Slide 8 outlines a dry powder available to us as of year-end which is $104.4 million in total. We have recently added some information to this chart that gives you a better sense of how in managing our asset liabilities, we have positioned our investments and our capital structure within this rising rate environment. You will immediately note there is a couple of important characteristic of our capital base. First, all of our long-term capital is fixed rate with only our revolver being variable and zero outstanding on net currently. Second, following our successful baby bonds issuance in December 2016, where we both reduced our interest rate by 75 basis points and extended our maturities by four years, our debt is currently all long-term in nature and five years plus in maturity, which sets us up well for our long-term goals and strategies. We have therefore primarily fixed our interest cost in this rising rate environment. 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 56% without the need for external financing. At the same time over 80% of our investments have floating rates and although they have LIBOR flows we are through all but three of them already, which means we will be a big beneficiary of a 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 which will remain constant for a full fiscal year and no actions were taken to all to the existing interest rate term, a hypothetical change of 1% in interest rate would increase our interest income by approximately $2.2 million. This is all incremental to our existing earnings so that any other changes. Moving on to Slide 10, this summarizes the impact of our recent baby bond issuance, certain aspects which we mentioned earlier. There are two non-recurring financial impacts related to the baby bond refinancing. First, there was a write-down of the first financing cost related to the previous baby bonds in ATM program of approximately $1.5 million. This is disclosed as a loss on extinguishment of debt in the income statement on its own line, separate from operating expenses that was in NII and excluded from the incentive fee calculation. And second there was additional interest and the third financing expenses related to the capital management decision to only call the 2020 bonds once the 2023 bonds had been issued. We purposely delayed the calling of our existing bond until the new bond reissued. The required call period was 50 days and the impact of the traditional interest while having both baby bond issuances outstanding was $0.3 million in Q4 of 2017. Now I would like to move onto Slide 11, 313 and review the composition and yield of our investment portfolio. Slide 11, as our usual slide highlighting the portfolio composition and yield at the end of the fiscal year. Our composition and weighted average current yields remain consistent with the past with 293 million invested in 28 portfolio companies and one CLO fund and more than 64% of our investments first lien. On Slide 12 you can see how the yield on our core BDC assets, excluding our CLO and syndicated loans as well as our total assets yield, have remained consistently around 11% for the past several years. Despite high levels of repayments and the need to continue to replace these assets. The CLO yields have decreased slightly reflecting the higher CLO interest expense on the CLO refinancing we discussed last quarter. Turning to Slide 13, during the fourth quarter, we made investments of $41.1 million in five new or existing portfolio companies and had $26.5 million in five exits and repayments, resulting in a net increase in investments of $14.6 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, a fact that has served us extremely well. Of our total investment portfolio, 6.5% consist of equity interest. Equity investments remain an important part of our overall investment strategy. As you can see on Slide 14, our net realized gains for fiscal year 2017 were $12.4 million significant in comparison to past years, and for the past five fiscal years, we have also had a combined $17.7 million of net realized gains from the sale of equity investments or sale or early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality and has helped to grow our NAV. That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our President and Chief Investment Officer, for an overview of the investment market.

[Michael Grisius:]

Thank you, Henri. I'll take a couple of minutes to describe the current market as we see it. Then I'll comment on our portfolio performance and investments strategy. The market’s extremely competitive conditions persist. Slide 15 indicates the continued downward trend in the number of transactions for deal sizes in the U.S. below $25 million. The number of transactions in the last 12 months ended February 28, 2017 is already down significantly as compared to calendar 2016. Total transaction value for the 12 months ended February 28, 2017 is the lowest that it has been for compared to 12 months period since 2013. Opportunities in closings continued to decrease strong credits remained aggressively sort after. As a result, pricing in the broader middle market remains under pressure driven by an intensely competitive environment. Generally, we have seen less change in spreads in the lower middle-market where we operate. In fact, our experience is that the lower middle market is still the most attractive market segments to deploy capital and the most likely to deliver the best risk adjusted returns. In addition we believe long-term secular trends bode well for the BDC industry as a whole. In the chart on Slide 16, you can see that debt multiples in the industry seem to have created somewhat of a borrowed bell. With lower leveraged credits below 3.5x increasing or higher leverage credits above 5x increase as well. However, irrespective of the fluctuation of markets leverage levels historically we have been able to invest in deals with relatively low multiples. Our total leverage is four in the quarter up slightly from previous quarter. This reflects both the repayment this quarter of numerous lower leverage deals as well as the add-ons to our existing investments increasing their immediate leverage profile. Nevertheless, the majority of our close deals remain the need overall market levels. We are careful to exercise extraordinary investment discipline and invest only 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 consistent ability to generate new investments despite difficult market dynamics with healthy originations in the calendar first quarter of 2017 including three new portfolio companies, we have already established in origination level that outpaces past years, while remaining unchanged in our investment criteria. Moving on to Slide 17, our team's skill set experience and relationships continue to mature and our significant focus on business development has led to new strategic relationships that have become sources for new deals. This slide highlights that the number of deals we have sourced and evaluated has increased materially over the past couple of years, despite comparative market conditions. 50% of these deals come from companies without institutional ownership. The rest comes from private equity sponsors. The chart also illustrates our discipline over the past 15 months. Oversize of the funnel, the top is increased. Term sheets and deals executed haven't increased in the same percentage. No matter how many deals we see, the overarching goal remains to maintain the same high level of credit goal. One of our strength is that we have been able to grow to the current soft market for quality deals in three main ways. First, by building targeted new relationships with top quality investors and deal sources; second, breaking the repeat businesses in our business from existing relationships; and third, by deploying capital and support the existing portfolio companies that are healthy and growing. In the last 12 months since calendar quarter 2017, our transaction volume reflected a healthy mix of all three of these avenues of growth. One example of our ability to support existing portfolio companies and the value of add-ons is our current investment in Easy Ice. This is the business we really like with an exceptional business model that offers a terrific value proposition to its customers. As a result, it produces strong cash flow and is growing rapidly. We have supported the Company and management since our initial investment in 2013 and have again done so this past quarter. We increased our first lien investment to $26.7 million to facilitate a change of control transaction and also invested $8 million in significant preferred equity position. Our ability to answer the call and help facilitate the growth of healthy portfolio companies that we know well has produced generous returns for our shareholders. Easy Ice is an example we are optimistic about the outsized growth potential of the business although the size of the investment is larger than normal for us, we made the investment with tested confidence that we can downsize our position. As part of a further recapitalization, currently in advance stages there is expected to be a repayment of the significant portion of the first lien investment in the near term. Our overall portfolio quality is strong and it's even stronger when taking into the account only the assets originated by us, I am talking over the BDC management in 2010. As you can see on Slide 18, the gross unleveraged IRR on realized investments made by the Saratoga Investment Management team is 17.5% and approximately $138.5 million invested in our SBIC and 13.1% on approximately $71.1 million invested in the rest of our BDC. Similarly for the fiscal year 2017, we've seen 18 realizations for a total of a $108 million of invested capital which generated a gross unlevered IRR of 17%. This included five realizations this past quarter. Of note is that our repayments have been outsized this past year with almost 43% of our portfolio turning over the past year. This is higher than the industry where the most BDCs have seen between 15% and 30% of their portfolio repaid. While repayments naturally curtail our asset growth, we believe repayments are also a strong indicator of the strength of our investment team and our investment selection process. On the chart to the right you can also see the gross unlevered IIR on our $254.2 million of SBIC unrealized investments is 15.6%. In addition, our gross returns in the SBIC have remained consistently strong across vintage years including 18.1% this past year. The total gross unlevered IRR on the rest of our BDC unrealized investments since Saratoga took over management is 11.8% on $14.3 million of investments for a total of 15.1% on $294.5 million of investments across our combined SBIC and BDC. Now within the track record numbers discussed above our two investments worth discussing further; first is a $9.3 million first lien investment called Taco Mac that currently carries a $0.9 million of unrealized depreciation, reflecting declining business fundamentals. We put this investment on non-accrual in Q4 as discussed on last quarter's earnings call. While there have been developments in the past couple of months, we continue to work closely with the Company and the other first lien lenders to pursue various options. We'll keep this investment on non-accrual until this is resolved. Second is a $9.4 million second lien investment called My Alarm Center that currently carries $2.3 million of unrealized depreciation also reflecting declining business fundamentals. Subsequent to quarter end, we were notified by management and the sponsor that they will postpone the payment of interest from March onwards and we'll put this on non-accrual in Q1. There're currently various restructuring and sale options being pursued. With respect to our SBIC, our objective remains to maximize our risk adjusted returns in a manner that utilizes the low cost of capital and the two to one leverage advantage we possess through our SBIC license. This less competitive end of the market allows us to reduce the risk profile of our portfolio while delivering highly accretive returns to our investors. As you can see on Slide 19 the mix of securities in our portfolio is conservative with 62% of our investments first lien and the leverage profile of these 20 investments remains low at 4.3 times especially when compared to overall market leverage. We continue to have discussions with the SBA about the timing of the potential second license. Moving onto Slide 20, you can see our SBIC assets increased to 221.5 million as of February 28, 2017, up from 200.6 million as of February 29, 2016. It's important to notice well that as of February year-end -- year-end February 28, 2017, we had 41.8 million total available SBIC investment capacity including cash of which $37 million is leveraged capacity within our current SBIC license. We continue to feel exceptionally good about our team, platform and portfolio while remaining extremely diligent in our overall underwriting and due diligence procedures. Credit quality remains our top focus. This concludes my review of the market and I would like to turn the call back over to our CEO Chris.

[Christian Oberbeck:]

Thank you, Mark. As many of you know, our quarterly cash dividend payment program has grown by 156% since the program launched. As outlined on Slide 21, during the fiscal year 2017 we declared and paid dividends of $1.93 per share gradually raising the dividend to the year. In addition during the beginning of fiscal year 2018, we paid an additional dividend of $0.46 per share continuing the trend of raising the dividend every quarter. We have now had 10 sequential quarters of dividend increases. We are also still over earning our dividend by 9%, giving us one of the higher dividend coverage's in the BDC industry. We are also pleased to see our relative standing in the industry consistently improved overtime. As you can see on Slide 22 and reflecting our strong key performance indicators we have discussed earlier, our total returns of last 12 months which includes both capital depreciation and dividends has generated total returns of 47%, significantly beating the BDC index at 27% after the rally the industry has seen over the last couple of months. Turning to Slide 23, when viewed over a longer time horizon such as six years, which is when we took over the management of the BDC, our three and six year return places us on the top two of all BDCs. Moving on to Slide 24, you will see how our dividend yield has dramatically improved relative to the rest of the industry over the last couple of years. We have moved from consistently below the BDC average to now beating internally managed BDCs in line with the total BDC index and the externally-managed BDCs index. And Slide 25 highlights how our dividend growth has been the highest year-over-year quarterly dividend growth in the whole BDC industry with only two other BDCs also growing dividends during this period while all others have either zero growth or were shrinking. On Slide 26, you can see our outperformance placed in the context of the broader industry. We continue to achieve high marks across a diversity of categories including interest yield on the portfolio, latest 12 months’ return on equity, dividend coverage, dividend growth and NAV per share and investment capacity. Latest 12 months’ NII yield is also now very much in line with the industry actually beating the mean. Moving on to Slide 27, all of our initiatives as 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 on this slide will help drive the size and quality of our investor base, including the addition of more institutions. These characteristics include the strong and growing dividend; industry leading return on equity; ample low cost available and long-term liquidity with which to grow current asset base, solid earnings per share and NII yield, with substantial growth potential; steady high-quality expansion of AUM and an attractive risk profile, with protection against potential interest rate risk. The high credit quality of our portfolio is buttressed by our minimal exposure to the cyclical industries including oil and gas. Importantly, our stock trading volume has increased substantially from an average of 11,300 shares traded per day last year to 35,000 shares per day during the most recent quarter thereby providing increased liquidity for our investors. With this overall performance, Saratoga Investment remains solidly on the path to being a premier BDC in the marketplace. Finally, looking at Slide 28, we have accomplished a lot this quarter and are proud of our financial results. We remain on course and there is no change to our simple and consistent objectives continue to execute our long-term strategy 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 objectives should result in our continued industry leadership in the shareholder return performance. In closing, I would again like to thank all of our shareholders for their ongoing support. We are 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:]

Thank you. [Operator Instructions] And your first question comes from Casey Alexander with Compass Point Research. Your line is open.

[Casey Alexander:]

First of all, as it relates to Easy Ice, you said this was a change of control. So this was almost -- this was a re-underwriting where the previous commitment was considered paid off, the previous '16, and this is a new commitment of $26.7 million, is that right?

[Christian Oberbeck:]

Casey, basically our Easy Ice I think we notice in your write-up from last night that I mean clearly you are correct Easy Ice has been a really solid performing investment for us for many years. There management has certain investments stake and they had a majority owner that we were able to help company to fluctuate a change of control where in effect management and we were able to takeout this in other equity investor and that was the transaction. So, it was not a refinancing of all our position per se, but there was incremental capital that we contributed in support of our management team facilitating an increase in both their equity share and our equity share of the Company by taking out the majority of shareholder.

[Casey Alexander:]

Right. Okay. And what percentage is your equity share? Because I noticed it was moved from non-controlled to a controlled investment

[Christian Oberbeck:]

Some of that's just the in the way the accounting regs are, it's less than 50%, but I think the way that disclosure works is that if you have more than 25% it falls into that categories. So, we are not in a controlled position as if you were little find that by having greater than 50%, but it is the significant equity position; actually structured at preferred equity as well, so there is some safety in the structure that we divides in this case.

[Casey Alexander:]

Right. That's -- but it would be fair to call it somewhere between 25% and 50% then?

[Christian Oberbeck:]

That's correct.

[Casey Alexander:]

Secondly, in Slide #3, we now have -- one loan is listed as underperforming and one loan is listed as payment default risk, and I assume that those refer to Taco Mac and My Alarm Center, but can you tell us which is which?

[Henri Steenkamp:]

It's actually -- it's a little bit of scale here Casey, actually both of those are what we call our underperforming. So both Taco Mac and My Alarm Center I believe are in underperforming. I know here it’s a showing -- I guess it's a scale issue really we only have the small little residual. I think it's like $25,000 of MC Communication at legacy investment that’s in the payment default risk category. I believe that both are underperforming.

[Casey Alexander:]

Okay. So it's just a way it looks on the slide representatively?

[Michael Grisius:]

Yes, it will -- we can fix. The point is that both of those are nonaccrual.

[Casey Alexander:]

Okay.

[Henri Steenkamp:]

We're still on accrual at year-end, but it's now for Q1 and that will be a non-accrual.

[Casey Alexander:]

From a strategic standpoint, as you continue to create originations, you still have some capacity in the SBA subsidiary, that you have nothing outstanding on the revolver, where would new leverage likely to come from as you expand originations? Would you start to tap the revolver or -- because the SBA balance hasn't moved in quite a while.

[Christian Oberbeck:]

Casey, yes, well that's true. Those debentures are callable debentures and so that would be a source of capital and the revolver, and it'd be you have to do with the characteristic of the investments, but those are both sources of capital for the deployment.

[Michael Grisius:]

But just to add a little bit clarity to that, so if it's in SBIC qualified investment, you would expect that we would avail ourselves to the SBIC debentures and continue to leverage assets that leverage first. And then when we through that leverage the next source of capital would be the revolver.

[Casey Alexander:]

And how much cash you have available on the SBIC subsidiary?

[Henri Steenkamp:]

So, well, we have about -- as of year-end, we had about 4 million of cash Casey, but to Chris and Mike's point, we have the debentures callable and available to 37 million that makes up the 41 you described. And we are able to then either invest in the SBIC or actually distribute the cash out of the SBIC subsidiary, drove the debenture and distribute there the read out of the SBIC subsidiary to our BDC.

[Casey Alexander:]

Right, but I think in previous quarters, you had a lot more cash than 4 million in that subsidiary. Then you've -- you've successfully gotten some of that put to work?

[Henri Steenkamp:]

Correct. Yes, in Q4 we had a couple of new investments, three new portfolio companies and although we had some repayments, we had some -- our new investments exceeded the repayments and we utilized some of that cash.

[Casey Alexander:]

Right okay.

[Henri Steenkamp:]

A lot of it was towards the end of the quarter as I mentioned in my remarks.

[Casey Alexander:]

And Mike, the total portfolio leverage, your attachment point of 4.25, how does that compared to previous quarters?

[Michael Grisius:]

I think the exact number is up over the last six months. And there is certainly noise in that number. We don’t view that as a long term trend necessarily. As you know we have so much turn over in our portfolio which reference 43% of our portfolio turnover last year that can vary quarter-to-quarter. We continue to see a healthy amount of first lien unitranche deals. We also see deals that are quite attractive were in the second lien position and depending on the mix of those securities that's going to affect that number.

[Casey Alexander:]

And how do you view the sort of velocity of repayments? I mean, we are hearing that across the space, the velocity of repayments has increased. Is -- how do you view it going forward? Are you starting to assume a higher velocity of repayments? And are you seeing that because of some sort of change in the competitive dynamics?

[Michael Grisius:]

We do not expect to have 43% of our portfolio turnover this year, that could happen, but we're not planning on it; and it's interesting we asked ourselves that question, is there something fundamental about our business model or the way that we're approaching or the deals that we're selecting that is causing a higher than average repayment experience? And the answer that we conclude is no, that it's just it's somewhat of an anomaly. Most of the repayment experience that we had was due to sales of the Company, so we exited because the Company was sold in most cases and I think that was 75%. And so a lot less to do with robust capital markets and people just refinancing us. So, I think from our perspective we expect to see less repayment, the most important thing is that with all of the resources that we're dedicating to business development especially in the lower end of the middle market where we operate and there's many more companies at the lower end of the middle market that we think that the number of opportunities that we'll generate and looks that we'll get if you will, will exceed what we've had in the past and we'll still be able to outpace our repayments.

[Casey Alexander:]

Henri the ATM sales, did those primarily take place in the second quarter? You gave them as a date as of yesterday in second calendar quarter, excuse me.

[Henri Steenkamp:]

Yes, that is correct, right. [Indiscernible] that calendar quarter because we also -- we intend to as the market allows it to continue to do that, but we also go into a blackout period around our earnings as well and then where you have to sort of just wait.

[Operator:]

Your next question comes from Mickey Schleien with Ladenburg. Your line is open.

[Mickey Schleien:]

Just a couple of more questions on Easy Ice, could you expand on the expected further recapitalization for that company or how is that going to work? Are you looking for a credit line or another strategic investor? Can you just give some color there?

[Christian Oberbeck:]

It's a private company so we got to be a little bit careful about what we can say in terms of what's going on with the business and so forth, but we can say that when we made that investment it was opportunistic, we feel like we added a lot of value by stepping up and taking advantage of really interesting opportunity for ourselves as well as for management and so we jumped in and bridged the transaction if you will and have a lot of confidence that -- and there's ongoing discussions now that we can refinance a portion of the first lien securities with the traditional folks that you might imagine and so we're in active discussions around that right now.

[Mickey Schleien:]

Mike, does that imply that you are going to keep the preferred? And to those preferred at Easy Ice include a contractual dividend?

[Michael Grisius:]

We are going to keep our investment in the preferred for sure and that’s one of things that we are really excited about. Again think that the business is just a fantastic business, have known it since 2013 of known management that long as well and we are excited to be supporting the business, glad to be in increasing our exposure to the business and having some equity outside as well.

[Mickey Schleien:]

And to those preferred required them to pay a dividend?

[Michael Grisius:]

Not cash dividend. There is a pick component to the preferred.

[Mickey Schleien:]

Moving on to Elyria, I see that was refinanced. Could you walk us through that and the thesis for not holding more of the new second lien which has a very high coupon?

[Michael Grisius:]

Well, I think that was done on a pro data basis, so we were taking out of the first lien position by an ABL lender, traditional senior lender, and a portion of what we have in first lien was putting to the second lien security and shared for those that were in the first lien that piece per share pro-data, so that’s essentially what we got. Just didn’t really have an opportunity to upsize that.

[Mickey Schleien:]

And lastly just I think in your prepared remarks you talked about your history of equity investments and the potential to increase NAV down the road. I see that your equity investments are marked at about 20% above their cost as of the last fiscal quarter. Do you believe there is scope for that valuation decline even more?

[Michael Grisius:]

For that value -- oh, okay. I was trying to understand -- do we feel like the return on the equity investments could grow to a higher level, yes. We feel good about the equity investments in our portfolio on a general basis. And when we make those equity investments we do it with the intent of -- we are getting up -- returns that’s quite nice as we have in the past.

[Mickey Schleien:]

Those are all my question for today. I appreciate your time. Thank you.

[Michael Grisius:]

Let me add one thing Mickey, I think both you and Casey asked the question in terms of Easy Ice. The Easy Ice investment is certainly not at the departure from a playbook that we have used very successfully since we have taken over management of the SBIC. If you look at some of our best investments there have been situations where we supported either our management team our entrepreneur in some cases a private equity sponsor and in investment. And then we upside that investment overtime in some cases increased our equity investment and the return experience that we have had in situations like that has been terrific. In fact we -- because of that track record we win deals in the market place when they called folks and get references on us. If you were to start to just think about our existing portfolio and some of the deals that we have exited, expedited MTP, HMN, community, identity, automation, Emily Street or Notocon. Those are all deals that we made an initial investment in the Company came to know the business actually doing well and then took advantage of an opportunity to leverage the relationship that we informed with the management team and our knowledge of the business to make up increasing investment and then deliver exceptional returns for our shareholders. So we do intend to continue to do that, we did it in a Easy Ice case and there the dollar amount of our investment is above where our typical hold will be and so we are working to downsize that, that exposure on that credit but we are super excited about being in that position.

[Mickey Schleien:]

That's helpful. And I do see that Easy Ice is now almost 12% of the portfolio serve value, so just from a risk management perspective, I can see why you would want to reduce that and we look forward to learning more about that in the next quarter.

[Operator:]

[Operator Instructions] And you do have a follow-up from Casey Alexander. Your line is open.

[Casey Alexander:]

Yes, Mike I just wanted to clarify because in your original remarks when you discuss the Easy Ice, you said that it was your intention to downsize the position. But in answer to one of Mickey's questions, it sounded I can't tell whether or not the intention is to fully takeout the first lien loan or just to downsize the position in the first lien loan plus keeping the equity position off course?

[Michael Grisius:]

We're going to downsize our position based on the best deal that we can negotiate in the marketplace and the portion that we hold will be in a junior capital position as you can imagine. So that doesn’t necessarily mean that a 100% of what is now characterizes first lien will go away, but the capital structure will be change to reflect the deal that we negotiate in the marketplace.

[Operator:]

[Operator Instructions] And I am not showing any further questions at this time. Now, I would like to turn the call back to Christian Oberbeck for any further remarks.

[Christian Oberbeck:]

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

[Operator:]

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.