Saratoga Investment Corp.
Q3 2015 Earnings Call Transcript

Published: 15 Jan 2015

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's fiscal third quarter 2015 financial results conference call. Please note that today's call is being recorded. During today's presentation all parties will be in a listen-only mode. Following management's prepared remarks we will open the lines for questions. At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial Officer, Mr. Henri Steenkamp. Sir, please go ahead.

[Henri Steenkamp:]

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal third quarter 2015 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 Q3 2015 presentation in the Events & Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed yesterday. A replay of this conference call will also be available from 1

[Michael Grisius:]

Thank you, Henri, and welcome everyone. Our Chief Executive Officer, Christian Oberbeck, will not be on the call today, and Henri and I will take you through the presentation. Since we acquired Saratoga Investment Corp, we’ve been singularly focused on a strategy 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. As outlined on slide 2, the fiscal third quarter of 2015 was quite an important one for us in terms of achieving corporate milestones that underscore the efficacy of our work in executing our long term strategy. As discussed on our last call, these milestones include; first, our steadily growing asset base yield and return on equity have enabled us to adopt a policy to pay regular quarterly cash dividends. Second, we adopted a dividend reinvestment plan providing for the reinvestment of these dividends for those shareholders who wanted to participate. Third, we approved an open market share repurchase plan that allows for the repurchase of up to 200,000 shares of common stock at prices below net asset value. Although not yet utilized, this is an important tool for us to have. And finally, we amended and extended our revolving credit facility maturity date through September 17, 2022, reducing our borrowing costs by 150 basis points, lowering annual administrative costs, and ensuring the availability and flexibility of our liquidity resources. We hope to continue to expand and diversify our investor base through these strategic improvements. Within this quarter, we believe we have made strides in expanding our base of new institutional and retail ownership, and we will be focused on making further progress over the coming months and quarters. In addition to these corporate milestones, during this quarter, we continued on our path of further strengthening our financial foundation and building scale by expanding our assets under management a further 2% to $241 million from $237 million at the end of fiscal second quarter 2015, and increasing them 17% year-to-date. This increase is net of $27 million and $51 million of redemptions experienced over the past three and nine months respectively. Improving our investment quality and credit with 92% of our loan investments now having our highest rating, extending our base of liquidity, and increasing performance within our key performance indicators. As compared to last quarter, our adjusted NII is up 25%. Our adjusted NII yield, including dividend income, is up 170 basis points to 9.4%, and our ROE is up 90 basis points. We are very excited about these accomplishments and we’ll go into greater detail on each one on today’s call. As I’ve mentioned, we remain committed to further advancing the overall size and quality of our asset base. As you can see on slide three, our upper trend of quality and quantity of assets has continued. With $241 million in assets under management in our BDC as of November 30 2014, we have seen a 2% increase in assets since last quarter and a 17% increase in assets year-to-date, with over 92% of our loan investments holding the highest internal rating that we award. Thus, our overall loan quality continues to increase while growing assets by 17%. We continue to grow assets while doing it in a very measured way. The continued increase in assets during the quarter is also reflected in some of our key performance metrics this quarter compared to the quarter ended August 31, 2014, with adjusted net investment income per share increasing 23% from $0.43 to $0.53. Adjusted net investment income yield on net asset value, increasing 170 basis points from 7.7% to 9.4%. Excluding dividend income of approximately $400,000, which we do not view as recurring every quarter, our NII yield is now hovering in the mid 8% range. Return on equity increased 90 basis points from 10.6% to 11.5%. With that I would like to now return the call back over to Henry to review in greater detail our full financial results, as well as the composition and performance of our portfolio.

[Henri Steenkamp:]

Thank you, Mike. Looking at our key performance metrics on slide four, we see that for the quarter ended November 30 2014, our net investment income was $2.7 million or $0.50 on a weighted average per share basis. Adjusted for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, our net investment income was $2.8 million or $0.53 per share. This represented an increase of $0.7 million as compared to the same period last year and $0.5 million compared to the quarter ended August 31, 2014. In our third quarter of fiscal 2015, we experienced a net gain on investments of $0.8 million or $0.14 on a weighted average per share basis, resulting in a total increase in net assets from operations of $3.5 million, or $0.64 per share. The net gain on investments comprised a net realized gain of $2.8 million and net unrealized depreciation of $2.0 million. Net investment income yield as a percentage of average net asset value was 9% for the quarter ended November 30, 2014. Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income yield was 9.4%, up from 7.7% last quarter. As Mike mentioned earlier, these results include dividend income of approximately $400,000 which we do not view as recurring every quarter. Excluding this income, our adjusted NII yield is now hovering in the mid 8% range. Return on equity was 11.5% for this quarter, up from 4.5% for the same quarter last year and up from 10.6% last quarter. These are all performance metrics that we feel are important indicators of how successful we are in pursuing our strategy of growing the asset base, building scale, and generating competitive yields while continuing to focus on the quality of our portfolio. As these metrics continue to improve, it demonstrates two important points about the value of our asset growth. Firstly, as our SBIC assets continue to grow as compared to our overall assets under management, the greater net investment income on these investments financed through lower cost SBA debt, contributes more to our bottom-line. Secondly, we see the benefits of scale becoming more visible as our operating expenses stabilize and reduce as a percentage of our total assets. Our total investment income for the fiscal third quarter 2015 was $7.3 million, an increase of $1.5 million or 25.9% compared to the same period last year and an increase of $0.8 million or 12.8% from last quarter. Our investment income was comprised primarily of $6.1 million of interest income, $0.4 million of management fee income associated with investment in our CLO, and $0.9 million of other income. Other income includes dividends received from portfolio companies, as well as origination, structuring, and advisory fee. Our total operating expenses were $4.6 million for the fiscal third quarter of 2015 and consisted of $1.9 million in interest and debt financing expenses, $1.9 million in base and incentive management fees, $0.5 million dollars in professional fees and administrator expenses, and $0.3 million in insurance expenses, directors fees, and general administrative and other expenses. For this fiscal third quarter 2015, total expenses increased by $0.2 million as compared to last quarter and $1.7 million as compared to the same period last year. This increase in total expenses was primarily attributable to higher interest and credit facility financing expenses, as well as increased management fees as our asset base continues to grow. The quarter ended November 30, 2013 also included an incentive management fee credit of $0.6 million calculated on the net unrealized losses of that quarter, offset in total operating expenses. While this quarter included a $0.1 million expense based on the quarter’s net unrealized capital gains, accounting for $0.7 million of the increase in total expenses from last year. Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees, actually decreased from $1.0 million for the quarter ended November this quarter, demonstrating the benefit of scale as our assets increased. Net Asset Value was $122.3 million as of November 30, 2014, a $2.5 million increase from an NAV of $119.8 million as of August 31 2014, and a $7.4 million increase from an NAV of $114.9 million as of February 28, 2014. This quarter’s increase is net of a $1.0 million decrease in NAV due to the payment of our first quarterly dividend in November. NAV per share was $22.74 as of November 30, 2014, compared to $22.27 as of the same time last quarter and $21.36 as of February 28, 2014. Again, the $22.74 NAV per share as of November 30 this year is net of a $0.18 dividend per share paid in November. Slide five outlines the dry powder available to us as of November 30, 2014. As of the end of fiscal third quarter 2015, we had $4.9 million outstanding in borrowings under our revolving credit facility with Madison Capital Funding and $79.0 million in our outstanding SBA debentures. Our baby bonds had a carrying amount and fair value of $48.3 million and $49.5 million respectively. With the $40.1 million available on the credit facility, $71 million additional borrowing capacity at our SBIC subsidiary and $0.8 million in cash and cash equivalents, we had a total of $111.9 million of available borrowing capacities or liquidity at our disposal as of November 30. This available liquidity equates to approximately 46% of the value of our investments, meaning we can grow our assets under management by a further 46% without any additional external financing. As a result, we are pleased with our liquidity position, especially taking into account the conservative composition of our balance sheet and the ability we have to substantially grow our assets without the need for external financing. In addition, this quarter we amended and extended our revolving facility with Madison Capital, extending the commitment termination and maturity dates by two and a half years and reducing the rate by a combined 150 basis points, while at the same time reducing the accompanying annual administrative costs by $150,000 annually. Finally, during December we also received a notice of a state dividend from the SEC on our N-2 shelf registration statement, further enhancing our flexibility in the capital markets. Now I would like to move on to slide six through eight and review the composition and performance of our investment portfolio. Slide six highlights the portfolio composition and yield of our portfolios at the end of the quarter. As of November 30 2014, the share value of the company’s investment portfolio was $241.2 million, principally invested in 36 portfolio companies and one CLO fund. Saratoga Investment Portfolio was composed of 10.2% of syndicated loans, 50% of first lien term loans, 15.2% of second lien term loans, 10.3% of senior secured notes, 2.5% of unsecured notes, 8% of subordinated notes of our Saratoga CLO and 3.8% of common equity. As of November 30 2014, the weighted average current yield on Saratoga’s portfolio for the three months ended November 30 2014, was 11.9%, which was compiled of a weighted average current yield of 6.4% on syndicated loans, 11.3% on both first and second lien term loans, 8.8% on senior secured notes, 14.2% on unsecured notes and 27.6% on our CLO subordinated notes. Despite downward pressure on yields due to continued competition, our yields have remained strong as compared to the previous fiscal quarter. Slide seven demonstrates how the yield on our core BDC assets, excluding our CLO and syndicated loans, has remained stable in the 11% range, while our asset base has continued to grow. Subsequent to the decrease in our CLO assets under management and higher refinancing costs over the past year related to this, the CLO’s yield has steadily increased or four quarters in a row. Syndicated yields remained largely stable during the same period. Moving on to slide eight, during the fiscal third quarter of 2015, we invested $30.6 million in new and existing portfolio companies and had $26.8 million in exits and repayments, resulting in net investments of $3.8 million for the quarter. As you can see on slide eight, our investments continue to be highly diversified by type, as well as in terms of geography and industry, with a large focus on business, consumer and healthcare services, as well as software were spread over 16 different industries. Of our total investment portfolio, almost 4% consists of equity interest. Successful equity investments are and will continue to be an important part of our overall investments strategy. This next slide, slide nine, demonstrates how realized gains from the sale of equity investments, combined with other investments, has helped enhance shareholders capital. For the past two years, we have had a combined $5.0 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality. That concludes my financial and portfolio review. I will now turn the call back over to Mike for an overview of the investment market.

[Michael Grisius:]

Thank you, Henry. I would like to take a couple of minutes to update everyone on the current market as we see it. The market dynamics I shared during the course of our calls this fiscal year have not fundamentally changed. Extremely competitive conditions persist as there remains an abundance of capital chasing a historically low volume of new investment opportunities. Last quarter we noted that middle market leverage now equals pre-crisis levels. As you can see on slide 10, this remains true with senior debt leverage now even exceeding pre-crisis levels. Middle market leverage and purchase multiples for Q1 through Q3 2014, increased from fiscal year ‘13 levels, with senior leverage, total leverage, and LBO purchase price multiples at 4.3 times, 5.4 times and 9.5 times respectively. These levels are up across the board compared to FY13. Excess liquidity within the private equity community and an increase in the number of debt platforms relative to the new deal opportunity set has helped drive debt and purchase multiple expansion. Against this backdrop, pricing remains under pressure as lenders compete for mandates. As mentioned earlier, the lower middle markets increased leverage is very much being driven by a combination of macroeconomic factors and pure investment opportunities. Slide 11 demonstrates how the number of transactions for deal sizes in the US below $25 million is significantly down, with 2014’s pace way below last year’s. The total as compared to global deals represents America’s lowest percentage of activity this decade, 38.3%. Not to mention its largest margin behind Europe, 43.4% in that time period. Despite the rise of middle market -- of market wide leverage, we have been able to invest in deals with relatively low multiples. In the chart on slide 12, you can see that nearly half of the market’s debt to EBITDA multiples were 4.6 times are higher. The majority of our closed deals are well beneath that level, with the average SAR leverage below four times the past couple of quarters. Furthermore, the majority of our investments are in senior secured debt, where our first dollar of risk capital resides in a safer place on our portfolio companies’ balance sheets. We are very careful to exercise extraordinary investment discipline and invest only in credits with attractive risk return profiles. In addition, this slide demonstrates the growth we have had in the number of executed investments. With a strong execution track record the past couple of quarters, as well as year over year growth, our executed investments doubled from seven last calendar year, to 14 this past calendar year. We achieved this growth in an extremely competitive market, while managing to reduce our average leverage at the same time. This speaks to the risk profile of our investment portfolio and the investment philosophy of the firm. We continue to believe our shareholders will benefit from our experience investment perspective and our measured approach to deploying capital. With all the [frothy] [ph] dynamics we’ve just discussed, we remain focused on the lower end of the middle market as the place to be on a relative basis, with the best risk adjusted returns. Despite challenging market dynamics, there are substantial opportunities found here as banks and other capital providers remain less focused on this end of the market. Our objective is to maximize our risk adjusted returns in a manner that utilizes the low cost of capital and the two to one leverage advantages we possess through our SBIC license. By focusing on this smaller, less competitive end of the market, we are able to reduce the risk profile of our portfolio while delivering highly accretive returns to our investors. As you can see on slide 13, as of November 30, 2014, over 80% of our SBIC investments are in senior debt securities, which is up from 77% in August 2014 and 74% in May 2014. The leverage profile of these investments is low, especially when compared to market leverage. Because of the leverage and low cost of capital advantages inherent in the SBIC program, we can achieve strong returns for shareholders without moving far out on the risk spectrum. Therefore, and as demonstrated this past quarter, we intend to grow our net investment income by continuing to dedicate the majority of our effort and resources to growing that portion of our portfolio. Moving on to slide 14, you can see how we’ve grown our SBIC assets to $137.6 million as of November 30, 2014. As a percentage of our total portfolio, SBIC assets have grown from 0% at fiscal year-end 2012 to 57% of our total portfolio this quarter. This growth in SBIC assets is an important part of our continued increase in net investment income as the lower financing costs help grow our NII yield at a healthy pace. Also, it's important to note that as of our quarter ended November 30 2014, we had $95.7 million total available SBIC investment capacity, of which $71 million is leverage capacity within our current SBIC license. If we were to obtain a second license, our leverage capacity would increase by another $75 million, with the ability of increasing assets by another $112.5 million. In our view, our origination platform is among the very best at our end of the market. Despite the competitive dynamics I described earlier, we are seeing a steady flow of SBIC eligible investments and are optimistic about our ability to grow that portfolio at a healthy rate, while remaining extremely diligent in our underwriting and due diligence procedures. This concludes my review of the market and I would like to turn to discussing company achievements and objectives. As I mentioned earlier on the call, during this quarter we were very pleased to meet an important milestone that has been a strategic goal for us since our inception, namely to commence the payment of a regular quarterly cash dividend. As outlined on slide 15, our first dividend was paid on November 28 2014 to stockholders of record on November 3 2014. The dividend of $0.18 per share provided shareholders the opportunity to participate in our dividend re-investment plan for the first time. This provided for the re-investment of dividends on behalf of our stockholders, unless the stockholder has elected to receive dividends in cash. Based on shareholder elections, the dividend consisted of $0.6 million in cash and 22,283 of newly issued shares of common stock. Our goal with this policy is to allow stockholders who want cash to receive their dividends in cash. However, it also provide the opportunity for many stockholders who we have spoken to who are interested in reinvesting there dividends, to receive additional shares of common stock. Experience has shown that those stockholders who hold their shares with a broker must affirmatively instruct their brokers prior to the record date if they prefer to receive this dividend and future dividends in common stock. The number of shares of common stock to be delivered shall be determined by dividing the total dollar amount by 95% of the average of the market prices per share at the close of trading on the 10 days immediately preceding and including the payment date. For more information, see the stock information sections on the company’s investor relations website. We also declared a second dividend of $0.22 per share for the quarter ended November 30 2014 that will be payable on February 27 2015 to all stockholders of record at the close of business on February 2 2015. We anticipate continue to increase the per share dividends subject to our net investment income in future quarters and will be prospectively announcing new dividends on a quarterly basis. During this quarter we also announced the approval of an open market share repurchase plan that allows us to repurchase up to 200,000 shares of common stock at prices below our net asset value as reported in our most recently published financial statements. Although no shares were repurchased by us this quarter, we will continue to assess this option on a regular basis. All of these initiatives are important corporate tools being employed by us in realizing a firm vision. And combined with our results for the quarter, we feel extremely positive about the company’s development and continued evolution. Moving on to slide 16, our final slide, we’ve accomplished a lot in the past few months and are happy to be able to provide you with all these updates. We were also very proud of the financial results generated by our accomplishments. These achievements however have not altered our objectives, but are complimentary to them and our objectives remain consistent with what we have discussed with you in the past. We continue to execute our long term strategy to expand our asset base without sacrificing credit quality, while benefitting from scale. We also continue to increase our capacity to source, analyze, close, and manage our investments by adding to our investment management teams and processes. Our primarily focus remains on maximizing the potential 20% plus returns on the equity invested in our SBIC and utilizing the two to one leverage that it provides. This is the optimal means to increase our assets under management and net investment income yields, enabling us to increase returns to shareholders and achieve growth in our net assets and stock values. 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 like to open the call for questions.

[Operator:]

[Operator instructions] our first question comes from the line of Casey Alexander from Gilford Securities

[Casey Alexander:]

Good morning. Congratulations on a really good quarter. Can you explain the other income component, which was up considerably from last quarter? And also, is there a seasonal component to the other income because it seems to be higher in Q1 and Q3 than it is in Q2 and Q4?

[Henri Steenkamp:]

Thanks Casey. Hi. Hope you’re doing well. Yes, you are right. First, the other income is up and it includes -- a very big chunk of it relates to dividend income as we mentioned in our prepared remarks. And although dividend income I think is part of our business if we receive, we definitely don’t view it as recurring every quarter and that’s why we highlighted it. It’s interesting you asked about the seasonality because as we’ve looked back over the last couple of years, it does seem that seasonally our Q3 is a quarter where generally dividend income is higher. We had higher dividend income last year for the third quarter as well. So it does seem that there’s a bit of a trend there in that as well.

[Michael Grisius:]

I would point out Casey that it is an important part of our strategy to co-invest and we are giving that opportunity in many of the businesses that we provide debt capital to. And while there may be some seasonality there, if you look at the dividends that we’ve received from there, historically they’ve been from recapitalizations that has taken place, and it’s a little bit hard to say that those are going to follow a seasonal pattern.

[Casey Alexander:]

So it’s more coincidental?

[Michael Grisius:]

I would say it’s more coincidental.

[Casey Alexander:]

Okay. All right. That’s great. Thank you. Secondly, one of your slides is showing that deals below $25 million are down, and it is sort of materially down year to date. Does that just refer to the debt portion of the deal and why do you suppose that is? Is that because lenders and then in maybe in particular BDCs are migrating upscale or focusing more on unitranche deals and so there aren’t chunks of deals that fall underneath that guideline? What is it that you ascribe to cause that because you would assume that for what more of the year has been described as an improving economy would have increased the deals of smaller companies?

[Michael Grisius:]

No, I think it’s a good point. We haven’t been able to make complete sense of it either. I think if you look at the historical trend, it is interesting because it sort of, if you look at it from a broader level, not just as current year, it shows that I think the lower end of the middle market is maturing a bit, so you do see more activity there. Once upon a time, the smaller deal market was not certainly as active as it is today. But in terms of the year to date activity, we can’t ascribe a lot of -- we can’t come up with any particular reason why the activity is down, but we certainly are seeing it in the marketplace. Most of the deals that we see have some pretty intense competition, and we are certainly winning our share and we talked about that in todays’ call. But we are feeling like there’s more capital out there than there is deal flow unfortunately.

[Casey Alexander:]

Okay. Secondly or thirdly I guess, were you surprised at the adoption rate of the dividend re-investment program, and it looked like only about a third of the investors choose the re-investment program. And do you think that was investor choice or perhaps investors missed the toggle switch to make sure that they were involved?

[Henri Steenkamp:]

I think it’s a couple of things, Casey. In talking to other folks, I think firstly they say that generally your first dividend under a drip plan generally has a lower participation just because people have to change the actions, they have to do something. And so generally they sometimes miss the first quarter and only really realize how to actually get the drip going into the second quarter. I think we’ve definitely seen that in general when people put a drip plan in place, there is low participation the first time. I think secondly what we discovered was the fact that people actually have to affirmatively let their brokers know that they want to participate and that they want to participate through the drip plan, not through a repurchase in the market. I think definitely that did impact some people, where either the brokers didn’t execute correctly for them or we even heard that some brokers don’t actually even let clients participate in the drip plan. So I think that did impact it. I think our expectation is that we’ll hopefully have a slightly higher participation in the next round, especially obviously at the price we feel we are trading at, at the moment.

[Casey Alexander:]

Okay. Lastly, the $0.18 dividend, now $0.22 dividend versus adjusted NII of 53 or reported net investment income of $0.50 is a little less than 50%. I’m not quite sure how that qualifies as meeting the 95% test. Obviously, I think there’s clearly room for dividend growth over time and we are happy to see it and we love the fact that the company is paying a dividend. I’m just not sure that I understand how it meets the test.

[Henri Steenkamp:]

What I think we’ve said in the past, the test is you have to declare your dividends by October 15. For us October 15 next year, that’s when the actual test is performed. And so by October 15 next year, I’m sorry, this year I guess now, but next fiscal year, but October 15 of 2015, we will ensure we meet our RIC requirements and declare sufficient dividends so that we meet that 90% RIC requirement test.

[Casey Alexander:]

Okay. So you will do a catch up at your fiscal year end of some type, either a stock dividend or whatever you guys decide to do.

[Henri Steenkamp:]

Well, I think -- we haven’t communicated whether it would be a catch up or I think as we’ve indicated, we will be growing our dividend over the next really three quarters to meet that RIC requirement. I think the form we haven’t really communicated yet.

[Casey Alexander:]

Go ahead, Mike.

[Michael Grisius:]

The message Casey is, -- the message is that our NII yield continues to grow. We’re pretty bullish on our ability to continue to grow that in this coming year and we expect our dividend to follow suit.

[Casey Alexander:]

Well, I think you guys are heading in the right direction. Thanks for taking my questions. I appreciate it.

[Operator:]

Our next question comes from the line Mickey Schleien from Ladenburg

[Mickey Schleien:]

Good morning Mike and Henry? Casey asked several good questions. I have some more. I want take the flipside view on the oil and gas market. Everybody is talking about how difficulty it has been, but is it presenting any opportunities for you in terms of perhaps some distress companies out there looking to restructure their balance sheet?

[Michael Grisius:]

That’s a really good question because we have our eyes open to opportunities. We haven’t seen -- we can’t point to any as of yet and I think some of that is because from what we understand there are a lot of these businesses where they’re continuing to produce despite some of the challenges that are out there in the macroeconomic environment. But you’ve got to believe that that may present some opportunities in the future. When we look at those, we look at them very carefully. We tend to avoid volatility, but when you experience volatility and you have a very stable balance sheet like we do, that sometimes puts you in a position where you have an opportunity to invest capital and get an outsize return. So we’ve got our eyes wide open to it. I think on the flipside of that, we are spending a lot of time thinking about what will be -- where the areas I the economy that will benefit from lower energy prices. Certainly there are a number of consumers who are feeling very good about lower energy prices and their disposable income is up as a consequence. And so you see certain sectors of the economy that you’d expect to benefit from that as well do it. But we haven't seen any of that in terms of near term deal flow, but I wouldn’t expect that that to necessarily be the case so soon. I would expect over the next few months or so that there will be some opportunities out there.

[Mickey Schleien:]

Okay, that’s fair enough. Can you tell me when the board’s going to meet to consider the next dividend declaration?

[Henri Steenkamp:]

The board will meet as part of our normal quarterly cycle I guess in about two months, two and a half months from today, Mickey. We obviously have regular discussions with them about our projections and our dividends, but the next meeting will be as part of the next quarterly cycle.

[Mickey Schleien:]

So they won’t discuss -- they won’t consider the dividend until two and a half months from now?

[Henri Steenkamp:]

Well, we will continue to discuss it, but I think the actual declaration will be consistent for the quarterly cycle that we are now trying to get into now. As you know, the first dividend announcements, we make two back to back, but I think going forward we are going to be doing the quarterly declarations on a continent cycle so we now have a routine.

[Michael Grisius:]

We’ve talked about our expectation of dividends following our growth in net investment income and we are evaluating that continuously, but also in a measured way. I mean one of the things that you heard us talk about is that it is a very competitive environment too. So we are taking that into account as we think about our portfolio. I think year to date our investment activity we feel has been very strong, but one of the things that you might have also noted is that we’ve had an awful lot of redemptions as well. We are expecting that our dividend will grow consistent with our growth in net investment income, but we’re also watching all the numbers carefully and making sure that we’re taking a measured approach.

[Mickey Schleien:]

Okay. In terms of the dividend income this quarter, was that a dividend recap or what drove that this particular quarter?

[Michael Grisius:]

In this case, I think they were two, right?

[Henri Steenkamp:]

A couple more, I think. There’s probably about three or four dividend incomes we received.

[Michael Grisius:]

That’s right. And so I think that the two this quarter were both dividend recaps, one of which was a deal that we have been fully repaid on the debt and still own the equity and now have received all of our initial equity capital back but own -- still own our percentage piece of the company. And another was recapitalization of the business that we own, equity end but we also consummated the recapitalization.

[Henri Steenkamp:]

But to both your and Casey’s point, Mickey, we’ve really called that out because we want people to know that we don’t review that as recurring every quarter. It’s nice to get, but not recurring every quarter.

[Mickey Schleien:]

I understand. This quarter if I’m not mistaken there was one new portfolio investment and everything else was follow on, which certainly is in line with your description of the market as being difficult. So I’m just curious what you can tell us about the pipeline and the backlog going into this calendar year.

[Michael Grisius:]

No, it’s a good point. One of the nice things that we are pleased to see as our platform develops is that we are continuing to have opportunities to invest more capital in our portfolio companies. I think we’ve done a good job of selecting quality companies that have good growth prospects. There is no better way to deploy a capital than to do it in businesses that you know well, that you know the management team and have a lot of faith in them. You understand the business model and you know the owners et cetera. We did have the opportunity to deploy a healthy amount of capital in our existing portfolio Company. But no question, the marketplace is difficult. And so you see that reflected in the number of new platforms companies that we invest in. Having said that, we do have and we’ve said this, we have a healthy pipeline of deal opportunities and we’re feeling good about our prospect for continuing to grow our investment portfolio.

[Mickey Schleien:]

Mike, given what you’ve just said, how would you characterize were we might be in the credit cycle at this point in time? I know it’s a 30,000 foot level question, but with so many different aspects to the economy that are volatile right now, uncertainty in terms of interest rates and there’s moving the price of oil, but GBP growth at least here strong. I’m trying to get a handle on how you are viewing your investments within the backdrop of where you think the credit cycle is today.

[Michael Grisius:]

Yeah, that’s also a very good question. The one thing I would say is that the approach that we take is a little bit different than one where we try to figure out where we are in the credit cycle and follow the momentum of the cycle. Instead, we tend to just to look at each company as a standalone business and get very comfortable that it will hold up under a downturn. Every investment that we make, we are always doing a lot of rigorous analysis to try to do some down side scenarios. If you do go through a down cycle economy, is it a business that will hold up reasonably well relative to the capital structure that we are proposing? I would say, having been through so many of these cycles and also saying that I can’t really predict the cycles, I wish I could. The one thing that the approach that we are taking as a firm is that when you find yourself at a point in the cycle like this where you have lots of competition for deals and then quite honestly, in some cases I think people miss-pricing risk. We are just being careful and cautious. We are not going to stretch out on the risk spectrum to get an extra 100 basis points. And one of the advantages that we have unlike many of the other folks with BDC platforms, with our SBIC license, we don’t really need to do that and you saw that evidenced in our numbers this quarter. If we keep deploying capital in the SBIC, and we do that in a large measure in senior secured instruments, we can make that very accretive to the shareholders. And despite the marketplace being very competitive; the pricing is still pricing that works in spades within the SBIC subsidiary for sure.

[Mickey Schleien:]

In terms of the new deal that you bought on this quarter, was that something directly originated? Was it a club deal? Was it a sponsor deal that was brought to you or what was the nature of that investment?

[Michael Grisius:]

That was a directly originated transaction sourced from a new relationship and sourced really from a hybrid, not only a new bank relationship that we continue to grow, but has also introduced us to a new sponsor that we’ve built a good relationship with and are talking to about other transactions.

[Mickey Schleien:]

It was a sponsored deal, but it was brought to you by a bank?

[Michael Grisius:]

Yeah, that’s correct.

[Mickey Schleien:]

Okay. Just a few more questions. You put [Aleria] [ph] on non-accrual. I just wanted to get a -- to the extent you can tell us what to expect in terms of that company. Are you going to sell it? Is it going to be sold? Are you going to re-finance it? What’s going on there?

[Michael Grisius:]

Well, I can tell you that the debt securities have now been converted to equity securities. And the majority ownership of that company feels good about the prospects of the company. They intend -- their intension in taking control of the company through that conversation was to and is to realize a healthy return on their investment. And so they expect the enterprise value of that business to grow. So that’s the status of things now. I think, I don’t know if you want to comment on how we approach the interest component.

[Henri Steenkamp:]

So the restructuring, Mickey we had spoken about previously has been completed now and as you have seen in the financials, we have put it on reserve basis. So our NII does not include the last quarter’s interest and as Mike said, obviously now the equity was not included going forward.

[Mickey Schleien:]

Okay, I understand. I noticed that Group Deco’s evaluation it’s not in distress, but it is falling. Can you tell me what’s going on there?

[Michael Grisius:]

Yeah. I think in that case EBITDA has declined. And so that’s one that we are watching and monitoring carefully.

[Mickey Schleien:]

Okay. And I guess you re-financed and did follow-ons and expedited travel and community investors, but the interest rates on the debt increased. Does that reflect trouble at these companies or what drove those higher rate?

[Michael Grisius:]

No, not at all. In fact in both cases we’re very excited about the growth and developments in both of those businesses. In one case, in expedited case we were fortunate in being able to support management in the company’s acquisition of another competitive platform. And as part of that we were also able to co-invest in the equity. And in stepping up and consummating that acquisition we were also able to negotiate an increase in price. And then in the community case, we structured that in a way where -- and that was also to support an acquisition and the business continues to perform very well, but we were able to structure that in a way where we share our first lien position with the senior lender, but we were last out in that structure. So we’ve created somewhat of a synthetic junior capital position and that’s the reason the yield is healthy as it is.

[Mickey Schleien:]

Okay, just the two more. You didn’t repurchase any stock in the quarter and I thought you put that repurchase plan to place to offset the potential dilution from the drip, but there was hardly any drip going on. So if my thinking is correct and there’s more drip in the coming quarters, do you expect that you’ll repurchase more stock to offset that or how should we think about that process?

[Henri Steenkamp:]

I think Mickey to your point, it’s not necessarily going to be a direct correlation on the drip. I think we wanted to put that tool in place so we have the ability to potentially use that. But at the moment it's an option that we’re considering to use our capital. We have not made a decision yet on what level of repurchase we might do if we do. A-Michael Grisius So we certainly have it in place for a reason and we do think as we’ve mentioned, we think it's an important tool for us to have. As we consider the use of our capital, we also take into account what are the opportunities that we have to deploy capital in the SBIC and delivery the returns that we’ve talked about as well as the benefits of continuing to grow the portfolio which we think is an important part of our development as a business. There’s obvious benefits of scale there relative to bringing our operating expenses as a percentage of our assets down also. We’re balancing those but certainly are evaluating that on an ongoing basis.

[Mickey Schleien:]

Okay and my last question is just if you could clarify, what do you mean by deal in slide 11? I mean that could mean many things. Is that M&A transactions or all financing? What is a deal in that slide?

[Henri Steenkamp:]

I think it’s all financings, right Mike?

[Michael Grisius:]

Deal cap, that’s right. Those are M&A transaction. They could include a change in control. They could also include a recapitalization as well. The way we think about the market opportunity is when we are deploying capital, it's often in conjunction with a change in control, but it also can be a situation where a company is just accessing more capital for one reason or another and that’s what that deal count reflects.

[Mickey Schleien:]

So that’s all inclusive? It's M&A and recapitalization, new financings for growth, what have you?

[Michael Grisius:]

That’s correct.

[Mickey Schleien:]

Okay. Those are all my questions. I appreciate your time this morning.

[Operator:]

Thank you. Our next question comes from the line of Andrew Kerai from BDC Income Fund.

[Andrew Kerai:]

Good morning and thank you for taking my questions. The first I had on the valuation of the equity tranche of the CLO that you guys hold on balance sheets. So I noticed this quarter you took up the discount rate from I think 7.5% to 10%, but you left the reinvestment rates spread at L plus 375. Just given that we have had a back in the liquid low markets granted which was in December, obviously after you guys were reporting for your November quarter end. But just given that dynamic, I'm not sure why you would -- certainly the discount rate makes sense to me, but then why not also take up the re-investment spread assumption as well?

[Michael Grisius:]

I think when we looked at it, we certainly reflected the changes in the equity return expectations and that’s reflected in the value as well. But in general we are being on the conservative side in terms of how we approach the value of the CLO.

[Andrew Kerai:]

Okay. So I guess said differently then, I mean if we were to say well, I mean obviously the valuation the gap down this quarter was driven by the higher discount rate. However if the investment spread which just given that I believe the reinvestment period if I’m not mistaken ends about a year and half from now. Is that correct?

[Michael Grisius:]

Yeah.

[Andrew Kerai:]

So assuming you can deploy capital at higher rates as spreads have widened here, then all things equal there could be some upside to where you have the mark early. Is that correct?

[Michael Grisius:]

That’s right and I think what you should know just as a general approach, we think that it’s important to take into account changes in equity returns when we are looking at valuation of the CLO, just as one would if you are looking at multiple changes in multiples for the value of a business for instance. That’s changing constantly in the marketplace and we spend a lot of time focusing on that quarter to quarter as we revalue our portfolio. As it relates to the CLO and the marketplace there and all the other drivers that come into play, so the reinvestment spreads, the default scenario et cetera, we tend to be more careful and not change those underlying assumptions quarter to quarter. We tend to take an approach that is over the life of this investment, which is a long-term, long duration asset. Some of those things will move quarter to quarter, but by and large they’ll probably follow certain patters and the changes are more reflected in that equity return, which will be assurance of what we had changes in the multiple drivers of a company. It would be sort of similar to looking at a business and saying for one quarter their margins are down a little bit. You don’t necessarily take that and say, let me project that forward forever. But what you will do is say, or in this case the margins are up. But what we do, do is we do change the valuation based on what the expected equity returns are in the marketplace.

[Andrew Kerai:]

Sure and just in terms of obviously looking out, October of next year your reinvestment period ends. What are your plans obviously as the tranches pay down to reinvest those proceeds? Is it a new CLO or do you just plan on winding down that vehicle and redeploying the principal payments in the new middle market loans?

[Michael Grisius:]

That will depend at the time. I think from our perspective, we have a very strong platform here and we have folks within our management team who are expert at investing in and managing CLOs. There’s certainly capacity for us institutionally to grow that portfolio. But we are like anything else, always evaluating that relative to what opportunities there are in the marketplace and whether there are better uses of our capital. So we’ll take that into account.

[Andrew Kerai:]

Sure. No, that certainly makes sense. Then also to your baby bonds are callable now in May of 2016, given that they’re trading above par, it’s a relatively expensive source of funding compared to the SBA debt and then obviously on the facility site, right? What is your appetite to call those bonds and lower your cost of debt next year?

[Michael Grisius:]

Well, I think just anything else we’ll evaluate what our opportunities are. Obviously if we can access cheaper sources of capital, we’ll certainly evaluate that accordingly. The baby bonds have been an important source of capital for us. The terms on the baby bonds as you know are very friendly. And so that’s something that we take into account as well. They’ve been an important source of essentially equity capital for us to fund our expansion of our SBIC. And if we are to expand that further we want to make sure that we have plenty of capacity to do that. The baby bonds are one of the sources that we can use to do that effectively. On a relative scale it’s very cheap equity capital for the SBIC.

[Andrew Kerai:]

Sure. No, that makes a lot of sense. Then, I know this has been talked about certainly a decent amount from Casey and Mickey, but just wanted to maybe if I could ask maybe put a bit of another point on it. Obviously you have the 200,000 share buyback authorization in place with your stock trading at roughly a 35% discount right now. Given that as you obviously raise your dividends to match your RIC requirement, assuming that the call of the opt in, the number of shareholders that do participate in that program, to the extent that that’s a higher amount of participation as well as a higher dividend level, that could be a greater drag on NAV if you don’t use the buyback authorization to repurchase shares and simply issue new shares, right? How do you guys weigh that in your decision making process, not only based on where the stock is trading, but based on the potential NAV dilution as you raise your dividend and also have a greater percentage of buying from shareholders?

[Michael Grisius:]

Well, I think we take into account all of those factors when we are deciding how to deploy capital. I would say that by and large we are very confident that as we continue to deploy capital, especially through the SBIC vehicle, but just in general in the BDC, that we can grow our NII and that that will be reflected in the stock price. We certainly do take into account the near term stock price as well and think about what the consequences of a repurchase could have at a point in time. But we are of course balancing that against our overall corporate objectives and we’ve talked about that a bit. We do feel like we’ve got plenty of opportunities to deploy capital effectively and very actively through the SBIC specialty and that the company certainly will benefit and has benefited from scale. We think that that’s a direction that’s positive. We are balancing those two influences when we are thinking about whether we use some of that stock repurchase capability.

[Andrew Kerai:]

Okay, sure. Fair enough, thank you.

[Operator:]

[Operator instructions.] Our next question comes from the line of Doug Crimmins from Relative Value Partners

[Doug Crimmins:]

Thanks for taking my call. A lot of my specific questions got answers and I appreciate that. But I was just wondering if you could follow up on the previous question strategically. You are trading at a pretty meaningful discount in the market. What is the board, what is management thinking and trying to do to really close that discount? The drip is obviously dilutive. You are obviously heading in the right direction. You’ve done a wonderful job, but the stock still trades extraordinarily cheap and I was just curious if you could give an update on the strategic issues that are going on at the company to improve that.

[Michael Grisius:]

Absolutely. We think the stock is at a value price. We are very bullish on the stock and its prospects for the future. I think the theme that you heard us talk about earlier in the call and we have a great amount of confidence in this. If we keep sticking to our needing and that is deploying capital especially through the SBIC vehicle in a way where we can offer very healthy risk adjustment returns and very strong, absolute returns in the SBIC, that will manifest itself in higher NII yield and will ultimately as we’ve indicated, we expect that our dividend is going to follow suit. When that happens we have confidence that the stock price will follow in line with that. In terms of our strategic objective, it’s just as we’ve stated, continue to deploy the capital in the manner that we have and we’ve started to pay a cash dividend. We expect that that will follow suit with our growth in NII and we think the stock will follow that same path.

[Doug Crimmins:]

Right and strategically, why offer the drip plan? Why not just pay a cash dividend and not dilute?

[Henri Steenkamp:]

I think part of the discussion, Doug was around the fact that we have had this focus over the last two to three years of growing the assets, ensuring we have quality assets and deploying our capital to reach scale. I think that process is not complete yet. We are still busy completing it, but we heard everyone’s need who want cash dividend. And then there were many who want to continue reinvesting. We are trying to meet two needs that were out there while still completing this strategy of growing assets and reaching scale that’s not yet complete. You are seeing the results now. We’re up in the 8% what we view as recurring right now from an NII yield perspective, but we feel like our job is not yet done.

[Doug Crimmins:]

Okay, thank you.

[Operator:]

Thank you, and that concludes our question-and-answer session for today. I would like to turn the conference back to Mike Grisius for any closing comments.

[Michael Grisius:]

Well, thank you everyone for joining us today. We look forward to speaking with you in the next quarter, our fiscal year end.

[Operator:]

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