Saratoga Investment Corp.
Q3 2014 Earnings Call Transcript

Published: 15 Jan 2014

[Operator:]

Good day, ladies and gentlemen and welcome to Saratoga Investment Corp. Third Quarter 2014 Earnings Conference Call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. Now, I would like to turn the call over to Rich Petrocelli. Mr. Petrocelli, you may begin.

[Rich Petrocelli:]

Thank you. I'd like to welcome everyone at Saratoga Investment Corp's fiscal third quarter 2014 earnings conference call. Before we begin, I need to remind everyone that this conference call contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual outcomes and results could differ materially from those forecasted due to many factors, which are described in the company's filings with the U.S. Securities and Exchange Commission. We do not undertake to update our forward-looking statements unless required to do so by law. A replay of this conference call will be available from 1 pm today through January 21st. Please refer to our earnings press release for details. I would now like to introduce our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

[Christian Oberbeck:]

Thank you, Rich. And welcome, everyone. In the fiscal third quarter of 2014, our origination and deal execution team combined with our growing pipeline enabled us to make another $22.3 million of investments in new and existing portfolio companies. The credit quality of the portfolio company of the portfolio continues to improve and we have increased both the amount and proportion of strong internally-rated credit. As we look at our growing pipeline, we continue to see and capitalize upon opportunities for investment in leveraged loans and mezzanine debt issued by U.S. middle-market companies. I will return shortly with a review of our portfolio, but I would like now turn the call back over to Rich to review our financial results.

[Rich Petrocelli:]

Thanks, Chris. Saratoga Investment Corp's net investment income for the fiscal third quarter ended November 30, 2013 was $2.9 million or $0.60 per share. Net loss on investments was $1.6 million or $0.34 per share, resulting in a net increase in net assets from operations of $1.3 million or $0.26 per share. Net asset value per share was $20.67 as of November 30, 2013 or $24.03 before the effect of the December dividend compared to $23.77 as of August 31, 2013. The decrease in reported net asset value per share from August 31, 2013 was primarily the result of the $12.5 million cash and stock dividend consisting of $2.5 million in cash and 649,500 shares of common stock declared by the company’s Board of Directors on October 30th, and paid on December 27th. In accordance with GAAP, the number of shares outstanding is to calculate NAV per share as of November 30, 2013 was retroactively adjusted to reflect the additional shares issued in connection with the cash and stock dividend. Our total investment income for the quarter was $5.8 million, an increase of approximately $1.8 million or about 44% compared to the fiscal third quarter of 2013. Our investment income was comprised primarily of $5 million of interest income, $421,000 of management fee income associated with the investment in the CLO and approximately $381,000 of other income. Our total operating expenses were $2.9 million during the quarter and consisted of $1.6 million in interest and credit facility expenses, $876,000 in base management fees, $313,000 in professional fees, a $118,000 in insurance expenses $250,000 in administrator expenses and $296,000 in directors’ fees and expenses, general administrative and other expenses, as well as an offset of approximately $561,000 due to the reversal of accrued capital gain incentive fee expense. For the three months ended November 30, 2013, total operating expenses compared to the three months ended November 30, 2012 increased by nearly $1.4 million, the majority of this increase is due to increased costs in debt financing. On November 30, 2013, we had $48.3 million in notes payable outstanding, $44.0 million of borrowings under our $45 million revolving credit facility with Madison Capital Funding, a $3.4 million in cash and cash equivalents and $1.6 million in cash and cash equivalents in reserve accounts. As of December 31, 2013, the company’s small business investment company subsidiary had $32 million in regulatory capital and $50 million of SBA guaranteed debentures outstanding. With the $45 million credit facility and upto a $150 million in borrowing capacity of the SBIC subsidiary, Saratoga Investment has a $195 million of total borrowing capacity. That concludes my financial review. I’ll now turn the call back over to Chris.

[Christian Oberbeck:]

Thanks Rich. Before we open for questions, I’d like to review the composition and performance of our investment portfolio. At the quarter ended November 30, 2013, the fair value of the company’s investment portfolio was a $198.8 million, principally invested in 36 portfolio companies and one CLO fund with $320 million of assets under management. Saratoga Investment’s portfolio was composed of 18.8% of middle market loans, 35.5% of first lien term loans, 13.9% second lien term loans, 15.1% senior secured notes, 2.7% unsecured notes, 4.4% of equity interests and 9.6% of subordinated notes of the CLO. At the end of the fiscal 2014 third quarter, we had no investments in senior unsecured loans. During the 2014 fiscal third quarter, Saratoga Investment Corp invested $22.3 million in new or existing portfolio companies and had $9.9 million in aggregate amount of exits and repayments, resulting in net investments of $12.4 million for the quarter. The CLO was refinanced in October of 2013 and since then Saratoga invested $21.4 million in new or existing portfolio companies and had $12.8 million of exits and repayments. As of November 30, 2013, the aggregate weighted average current yield on Saratoga Investments’ portfolio was 10.8%, which was comprised of a weighted average current yield of 11.1% on first lien term loans, 11.2% on second lien term loans, 14.2% on senior secured notes, 15.1% on unsecured notes, 11.7% on the CLO subordinated notes and 6.4% on middle market loans. The company’s new investments during the quarter included [Pen-Link], Bristol Hospice, [AR Sloan] acquisition, PATS Aircraft and a follow-on investment in National Truck Protection. In closing, I would again like to thank all of our shareholders for their ongoing support. We are excited about the growth and profitability that lies ahead for Saratoga Investment Corp. I would now like to open the call for questions.

[Operator:]

(Operator Instructions) Our first question is from Casey Alexander of Gilford Securities. Line is now open.

[Casey Alexander:]

Hi. Good morning.

[Christian Oberbeck:]

Good morning.

[Casey Alexander:]

When you look at your nine months’ year-to-date appreciation and depreciation, we’ve seen that the vast amount of depreciation came from revaluing the old Saratoga CLO. How much of that was -- how much of the third quarter specifically depreciation was related to the CLO versus other investments?

[Rich Petrocelli:]

The CLO was about $0.5 million for the quarter, little north of that.

[Casey Alexander:]

Was most of the rest of is Elyria Foundry?

[Christian Oberbeck:]

Elyria, small amount of Elyria, as well as Targus.

[Casey Alexander:]

Elyria and Targus, okay. You haven’t bought -- almost 20% of your portfolio is in middle market loans which traditionally has pretty decent yields and yet your press release says that it’s a 6.4% yield on middle market loans. Why is the yield so low on that sector of your portfolio?

[Christian Oberbeck:]

Well, those loans -- when we did our baby bond offering of $48 million in May, we obviously received $48 million of cash. And while we were in the process of putting that capital to work, we felt that we would rather than have it sit in a cash account earning less than 1% that we would invest in highly liquid strong credits that we could get out of readily as a way to -- as a place to put the money on a temporary basis and as we put that money to work. And so those middle market loans are -- basically represent right now $37 million, Rich?

[Rich Petrocelli:]

$37 million.

[Christian Oberbeck:]

$37 million, basically of the cash that we received from that baby bond offering that we are in the process of deploying.

[Casey Alexander:]

So, it's really senior syndicated stuff?

[Christian Oberbeck:]

Exactly. And so it's an enhanced -- it's substantially enhanced over what one would get if one went into sort of money market instruments. It's consistent with the type of credits and companies that we invest in. And the lower yield kind of reflects a combination of credit quality and liquidity in those investments. But importantly, it's a substantial amount of return while we deploy that capital.

[Casey Alexander:]

Alright, okay. That's fair. In the -- there was an interview that was published about a month ago or so where you stated that the company's objective in the future is to payout a 100% cash dividends and we sort of understand why you've been where you're at thus far. But how do you see the evolution from how you distribute income today to getting to that point where you distribute a 100% cash dividends? And are there intermediate steps where you could take say just the BDC portion of the portfolio, the non-CLO portion of the portfolio and start paying quarterly dividends off of that?

[Christian Oberbeck:]

Sure. Well first of all, I mean as we said in that article and as we said in our calls, it is our intention and desire to pay a full cash dividend on our shares, so that’s clear. In terms of the key metrics for the health and the progress of the BDC in getting towards that goal such as growth in assets under management, growth in net investment income and net investment income as a percentage of assets under management, I think if you lay out all the quarters since we were involved -- we took over the management in July of 2010, we’ve made a steady progress in that direction. In terms of those metrics and in terms of important milestones, getting the SBIC license, the baby bond offering and most recently refinancing the CLO which adds a level of stability although at a lower level than it had been in earnings. So, we are on the path to lay the foundation for paying a full cash dividend. In terms of the metrics as we see them and we talked about this specifically in a call last year, it looks to us that if we can reach assets under management in the high $200 million range and provided that we earn sufficient net investment income on that assets -- on those assets under management and we’re on the track to do that, we believe that would be a time when we could get to our goal.

[Casey Alexander:]

Okay. I understand that. Given what Rich said was a $195 million of available borrowing capacity, would you say then that you have the fire power to achieve those metrics now without having to do a equity offering which as the stock is trading right now would obviously have to come with a discount or does the stock need to get to a premium and allow you to raise equity in order to achieve those metrics?

[Christian Oberbeck:]

Well, that's a very good question. And it’s a very important point, which is right now, we believe within the BDC itself we do have the [waiver-fall] to achieve the goal without raising external capital. And importantly the $195 million of capital, a $150 million of that is in our SBIC. We have funded $32 million of our SBIC, but in order to access that capital we need to invest an incremental $43 million of equity into our BDC, into our SBIC subsidiary, I am sorry. And so we have the [waiver-fall] to be able to do that now. And so what we want to do and we have the capability to do is to make sure that we don’t put ourselves in a position where we are reliant on the outside capital markets to raise capital to reach our goal. We have noticed that a large proportion of the BDC industry right now is trading at or below NAV and therefore any equity offerings would come at a discount. And we are not in a position of having to do that right now. And we think we’re well positioned to basically internally be able to reach our goal.

[Casey Alexander:]

Well, if the opportunities were available to you in the SBIC, you could take down something from the Madison account and put it into the SBIC as equity, which would open up new borrowing capacity in the SBIC, could you not?

[Christian Oberbeck:]

We could. But it’s important to note that we would then be leveraging BDC assets with that line of credit.

[Casey Alexander:]

I understand that. You’re also, presumably as long as those are good assets, we would be producing an improved rate of return for investors?

[Christian Oberbeck:]

That’s correct.

[Casey Alexander:]

Okay, great. I appreciate you taking my questions.

[Christian Oberbeck:]

Well, thank you.

[Operator:]

At this time, I’m not showing any questions. Please proceed with any further remarks.

[Christian Oberbeck:]

Well, there being no more questions, we thank you all for your interest and support. I think we as a management team are enthusiastic about the current performance and the prospects for Saratoga Investment Corp and we are excited to be carrying this forward and reaching our long-term and near-term growth goals. Thank you very much.

[Operator:]

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