Saratoga Investment Corp.
Q4 2015 Earnings Call Transcript

Published: 21 May 2015

[Operator:]

Good day ladies and gentlemen, thank you for standing by. Welcome to Saratoga Investment Corporations year end and fiscal fourth 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 line for questions. At this time I would like to turn the call over to Saratoga Investment Corporations 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 year end and fourth 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 fiscal year end and fourth quarter 2015 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 be available from 1

[Christian Oberbeck:]

Thank you Henri and welcome everyone. As we reach our fiscal 2015 year end, we feel it important to look back over the past year and note on slide two some of the progress we’ve made during this productive year for Saratoga. Since we acquired Saratoga Investment Corp, we’ve been singularly focused on the long term objective of increasing the quality and size of our asset base, with the ultimate porpoise of building Saratoga Investment Corp into a best-in-class BDC. During fiscal year 2015 we achieved a number of important milestones that have marked a steep steady path towards realizing our long term objectives. To briefly recap; first, our steadily growing asset base, consistent yield and improving return on equity have enabled us to adopt a policy to pay regular quarterly cash dividends, which has increased by 22% every consecutive quarter since implementation. We also anticipate another dividend increase next quarter. We will also be talking more about a special dividend of $1 that our Board of Directors has recently declared later on this call. Second, we adopted a dividend reinvestment plan providing for the reinvestment of these dividends for those shareholders who want to reinvest in Saratoga’s ongoing growth. 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, we continuously assess deployment of this important tool for us. 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 successfully deployed a significant amount of the capital available to us through our SBIC license and received a green light and go forth letter from the SBA for a second SBCI license. And finally, we have significantly augmented our management team with the addition of four professionals. We continue to work on expanding and diversifying our investors and analyst coverage based on these important improvements. Within this year we have made strides in expanding our base of new intuitional and retain ownership and are aware of new institutional investors acquiring our stock. We remain focused on making further progress over the coming months and quarters. We also added analyst coverage this year, something we had sort for some time. In addition to these corporate milestones, during this year we continued on our path of further strengthening our financial foundation and building scale by expanding our assets under management to $241 million, a 17% increase from $206 million at the end of fiscal 2014. This increase is net of $73 million of redemptions experienced over the past 12 months. This growth is also 152% increase from $95 million at the end of fiscal year 2012, improving our investment quarter and credit with 94% of our loan investments now having our highest rating and increasing performance within our key performance indicators for fiscal 2015. As compared to last year, our adjusted NII is up 13% to $10 million, our adjusted NII yield is up 50 basis points to 8.5% and our return on equity is up 160 basis points to 9.3%. We are very excited about these accomplishments and will go into great deal 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 upward trend of quality and quantity of assets has continued. With $240 million in assets under management in our BDC as of February 28, 2015, we have seen a 17% increase in assets year-to-date with 94% of our loan investments holding the highest internal rating that we award, plus our overall loan quality continues to increase while we continue to grow assets while doing it in a very measured way. Although we had healthy originations last year, we also saw some significant redemptions offsetting these originations. We will talk more a little later about the originations we have had in our first quarter since year end. Focusing on the past quarter, our key performance metrics remain strong, actually increasing on a recurring basis as it did not include any significant non-recurring dividend income like last quarter. Adjusted net investment income per share of $0.50 was up 39% from 36% of the same quarter last year; adjusted net investment income yield on net asset value increasing to 8.8%, up 180 basis points from 7% last year; return on equity of 8.9%. With that, I would now like to turn the call back over the Henri to review in greater detail our full financial results, as well as the composition and performance of our portfolio.

[Henri Steenkamp:]

Thank you, Chris. Looking at our quarterly key performance metrics on slide four, we see that for the quarter ended February 28, 2015, our net investment income was $2.9 million or $0.53 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 $2.7 million or $0.50 per share. This represented an increase of $0.7 million as compared to the same period last year and a decrease of $0.2 million compared to the quarter ended November 30, 2014. However, last quarter included approximately $400,000 of dividend income that we view as non-recurring. In our fourth quarter of fiscal 2015 we experienced a net loss on investments of $0.2 million or $0.03 on a weighted average per share basis, resulting in a total increase in net assets from operations of $2.7 million or $0.50 per share. The $0.2 million net loss on investments was largely comprised of $0.3 million net unrealized depreciation on investments. Net investment income yield as a percentage of average net asset value was 9.5% for the quarter ended February 28, 2015. Adjusted for the incentive fee accrual, the net investment income yield was 8.8%, up from 7% last year and down from 9.5% last quarter. Excluding the dividend income we view as non-recurring loss quarter, adjusted NII yield of 8.8% was up from the mid eights last year. Return on equity was 8.9% for this quarter. Looking at our key performance metrics for the fiscal year on slide five, we will also focus on our balance sheet metrics. We see that for the ended February 28, 2015, our net investment income was $9.7 million or at $1.80 on a weighted average per share basis. Adjusted for the incentive fee accrual related to net unreleased capital gains in the second incentive fee calculation, our net investment income was $10 million or $1.85 on a weighted average per share basis. This represented an increase of $1.2 million or $0.06 on a weighted per share basis as compared to last year. In fiscal 2015 we experienced a net gain on investments of $1.3 million or $0.24 on a weighted average per share basis, resulting in a total increase in net assets from operations of $11 million or $2.04 on a weighted per share basis. The net gain on investments was comprised largely of $3.3 million net realized gains, offset by $1.9 million in net unrealized depreciation. Net investment income yield as a percentage of average net asset value was 8.2% for the year ended February 28, 2015. Adjusted for the incentive fee accrual, the net investment income yield was 8.5%, up from 8.0% last year. Return on equity was 9.3% for this year, up again from 7.7% last year. These are all performance metrics we feel are important indicators of our successful 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 each quarter, 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 debentures contributes more to our bottom-line. And secondly, we see the benefit of scale becoming more visible as our operating expenses stabilize and reduce as a percentage of our total assets. Our total investment income was $27.4 million and $7.5 million for the fiscal year and fourth quarter 2015 respectively. Total investment income for the fiscal year increased $4.5 million or 19.6% compared to the last year, and increased $1.8 million or 31.0% compared to last year’s fourth quarter. Our total investment income for the year was comprised primarily of $24.7 million of interest income, $1.5 million of management fee income associated with the investment in our CLO and $1.2 million of other income. For the quarter, total investment income was comprised primarily of $7 million of an interest income, $0.4 million of management fee income associated with the CLO and $0.1 million of other income. As a reminder, other income includes dividends received from portfolio companies, as well as origination, structuring and advisory fees. Our total operating expenses was $17.7 million for the fiscal 2015 and consisted of $7.4 million in interest and debt financing expenses, $6.7 million in base and incentive management fees, $2.3 million in professional fees and administrator expenses and $1.3 million in insurance expenses, directed fees and general administrative, excise tax and other expenses. For this fiscal year 2015 total operating expenses increased by $3.7 million as compared to last year. This increase in total operating expenses was primarily attributable to higher interest and credit facility financing expenses, as well as increased management and incentive fees as our asset base continues to growth and outperform. Total expenses when you exclude interest and debt financing expenses, base management fees and incentive management fees actually decreased from $3.7 million for the year ended February 28, 2014 to $3.6 million for this year. This represents a decrease from 2.1% of average assets under management for last year to 1.6% for this fiscal year. For the quarter ended February 28, 2015 this percentage actually went down further to 1.5%. This demonstrates the benefit of scale as our assets continue to increase, while our cost structure remains consistent. Our total operating expenses were $4.6 million for the fiscal fourth quarter 2015 and consisted of $1.9 million in interest and debt financing expenses; $1.5 million in base and incentive management fees; $0.6 million in professional fees and administrative expenses; and $0.5 million in insurance expenses, directors fees and general administrative excise tax and other expenses. For this part quarter total operating expenses increased by $0.4 million as compared to the same period last year. But as previously mentioned this increase was primary attributable to higher interest and credit facility financing expenses, as well as higher management and incentive fees as our asset base continues to grow. Net Asset Value was $122.6 million as of February 28, 2015, a $9.2 million increase from an NAV of $113.4 million as of last year end. NAV per share was $22.70 as of the end of this year, compared to $21.08 as of the same time last year. As you might have noted, our prior period numbers have been revived to reflect adjustments outlined in our notes to the financial statements included in our Form 10-K, including the early adoption of a new accounting standard. Slide six outlines the dry powder available to us as of February 28, 2015. As of the end of the fiscal year, we had $9.6 million outstanding in borrowings under our revolving credit facility with Madison Capital and $79 million in outstanding SBA debentures. Our baby bonds had a carrying amount and fair value of $48.3 million and $49.5 million respectively. With the $35.4 million available on the credit facility, $71 million additional borrowing capacity at our SBIC subsidiary and $20.1 million in cash and cash equivalents, we had a total of $126.5 million of available liquidity at our disposal as of this year end. This available liquidity equates to approximately 52% of the value of our investments, meaning we can grow our assets under management by a further 52% without any additional external financing. We continue to be 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. We do continue to assess all our various capital and liquidity sources and will manage our sources and uses on a real time basis to ensure optimization of liquidity. And finally, during December we also received a Notice of Effectiveness from the SEC on our N-2 shelf registration statement, further enhancing our flexibility in the capital markets. This enables as current excess to the capital markets relatively quickly when it makes sense. Now I would like to move on to slide seven through nine and review the composition and performance of our investment portfolio. Slide seven highlights the portfolio composition and yield of our portfolio at the end of the quarter. As of February 28, 2015, the fair value of the company’s investment portfolio was $241 million, principally invested in 36 portfolio companies and one CLO fund. Our portfolio was composed of 60.4% of first lien term loans, 14.8% of second lien term loans, 7.6% of syndicated loans, 1.8% of unsecured notes, 7.6% of subordinated notes of the Saratoga CLO and 8.4% of common equity. As of year-end the weighted average current yield on Saratoga Investments Portfolio for the three months ended February 28 this year was 11.8%, which was comprised of a weighted average current yield of 11% on first lien term loans, 11.2% on second lien term loans, 6.2% on syndicated loans, 13.7% on unsecured notes and 25.2% 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. To further illustrate this point, slide eight demonstrates how the yield on our core BDC assets, excluding our CLO and syndicated loan has remained consistently above 11%, 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 remained strong for four quarters in a row. Syndicated yields have remained largely stable during the same period. Moving on to slide nine, during the fiscal fourth quarter of 2015 we invested $20.9 million in new and existing portfolio companies and had $20.5 million in exits and repayments, resulting in net investments of $0.4 million for the quarter at our BDC. During the full fiscal year 2015 we invested $104.9 million in new and existing portfolio companies and had $73.3 million in exits and repayments, resulting in net investments of $31.6 million for the year. As you can see on slide nine, 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 while spread over 15 different industries. It is worth noting that we have no significant exposure to the oil and gas industry. Of our total investment portfolio, 8.4% consists of equity interests. Equity investments are and will continue to be an important part of our overall investment strategy. Slide 10 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 $5.1 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 over to Michael Grisius, our President and Chief Investment Officer for an overview of the investment market.

[Mike Grisius:]

Thanks Henry. I’d like to take a couple of minutes to update everyone on the current market as we see it. The market’s 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 equaled pre-crises levels and we’ve seen that multiples for both senior and total debt have been trending upwards since 2012. Excess liquidity within the private equity community, as well as an increase in the number of middle market lenders relative to the quantity of new deal opportunities have helped drive debt and purchase [multiple expansion] [ph] . 41% of all middle market deals last quarter were leveraged over 4.6 times. Against this backdrop pricing remains under pressure as lenders compete for mandates. We also watched yield closely across deals, but despite pressure that some BDCs are having, are experiencing on their investment portfolios, we have yet to observe any significant increase in yields in the marketplace. As mentioned earlier, the lower middle markets increased leverage has very much been driven by fewer investment opportunities. Slide 11 demonstrates how the number of calendar year 2014 transactions for deal sizes in the U.S. below $25 million was down about 15% from the previous year. Calendar year 2015 is off to a slow start as well. Only 153 debt deals in that size range closed as of March 2015, with the first quarter 2015 run-rate down 47%. Despite this, we remain optimistic, not only of our own pipeline and originations, but at the outlook for our market. We continue to believe that the lower middle market is the most attractive market segment to deploy capital and the fundamentals here remain strong. Slide 12 outlines the strength of the lower middle market in terms of employment growth, business confidence and valuation multiples. In 2014 employment growth at lower middle market businesses was almost three times that of larger corporations. According to a survey of over 600 C-Suite executives, the companies with annual revenues between $10 million and $100 million, 62% of lower middle market executive expect it nationally common to expand in the next year, while 73% expect to further own companies revenues. Finally, while deal multiples have remained high, the most reasonable are to be found at the lower end of middle market. 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. Additionally, the share quantity of businesses at this end of the market make is less efficient and less competitive. Despite the rise of market wide leverage, we’ve been able to invest in deals with relatively low multiples. In the chart on slide 15, you can see that 56% of the market’s debt to EBITDA multiples were 4.1 times or higher. The majority of our closed deals are beneath that level, with the average SAR leverage below four times this past year. 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 a number of executed investments. With a strong execution track record in the past couple of quarters, as well as year-over-year growth, our executed investments doubled from seven last year to 14 in calendar year 2014. In the first quarter of calendar year 2015 we saw four deals close, a number on pace with previous quarters. 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. I would also like to note that although we had healthy originations last quarter, we also saw some significant redemptions offsetting these originations, thereby causing our assets to basically be flat quarter-over-quarter. Looking at the current first quarter fiscal 2016, we are seeing our originations match our historical trend with only minimal redemptions thus far this quarter. I’d like to go into a little bit more detail regarding our pipeline. Our deal flow remains robust. Since 2012 the number of deals that we’ve looked at has increased materially. 64% of these coming from companies without institutional ownership and the remainder from private equity sponsors. As you can see on slide 14, in 2014 we looked at 456 deals and executed on 14. Over the past couple of years the number of deals we sourced has continued to increase and we believe it shows the significant impact or efforts it had in growing our origination platform. We have also made great strides in expanding our relationships and are confident these relationships will create high origination activity in the future. Since taking over management of the BDC, we have understood the importance of getting the assets right. As a consequence, our highest priority was to build one of the premier execution teams in the business. We believe we have accomplished that. We are now dedicating additional resources to our origination effort, which we believe will allow us to accelerate our growth while maintaining our disciplined investment approach. I’m most focused on the deals they’ve actually done. As a change of pace I thought it might be helpful to give you a sense of Saratoga’s investment style by talking about the types of deals we haven’t done or won’t do and give you an idea of the thought process by which we turned down 442 investments, of those that we reviewed this past year. As many of you know already, we never embraced the energy boom and have very little exposure to that segment relative to many of our BDC peers. A recent LCD news article noted that of the $2.2 billion of distressed assets held by BDC, 23% are in the energy sector. Many of the opportunities reviewed in that sector have pricing that was appealing to the BDC model and lower debt to EBITDA multiples, at least at the time. Deploying capital in that sector would have been quite easy, however during underwriting we always struggled with risks like short operating histories, customer concentration and unjustifiably high margins, concerns that ultimately proved to be well founded as pricing pressure transformed the landscape. Moreover we fundamentally struggled getting comfortable investing debt capital into businesses that could be practically shut down due to one unpredictable macro-economic event, a decline in energy prices. Sticking to our principles kept us out of trouble. In the current market, finding attractive yields relative to risk is a challenge for all lenders. To a degree Saratoga has been navigating this challenge by biasing towards senior and secured structures, favoring lower risk over higher yields, but it is never that simple. Evaluating risk and return on investment is never as easy as nearly looking at the leverage point where it yields. We believe it’s dangerous to think that the risk of lending to an undifferentiated business can be simply mitigated by obtaining a higher yield or lower leverage. In our experience a low leverage senior loan may not make sense. The character of the company’s cash flow is weak or highly volatile. In the similar vein, we believe that simply charging a higher interest rate is insufficient compensation to our shareholders if we think we are undertaking the risk of a material loss of principal. Sometimes these investment opportunities can be good equity investments, but do not make sense for us as a lender with limited upside. We regularly decline to lend the companies with troublesome characteristics such as low margins, high cyclicality, customer concentration, low barriers to competition, shifting regulatory environment or declining end markets to name a few and I don’t want to dwell on too many negative credit characteristics and give the impression that we don’t like anything. As you look at our portfolio you can see that we’ve been investors up and down the balance sheet in a wide variety of companies and industries. We get excited when we find a business that offers a strong and sustainable value proposition to its customers. In these cases we get appropriately aggressive to win the deal. We try to mask the structure and the return to the risk profile. As I mentioned earlier, while our low leverage senior loan can sometimes be a poor investment opportunity, a higher leverage unsecured mezzanine loan can make perfect sense if the company has strong and highly sustainable cash flow. My point here is that every opportunity has its own story and you cannot afford to be seduced by a high yield or lower leverage as an investor. At Saratoga we always work to understand the core business of our investments and analyze opportunities against a sound template of fundamentals. The key for us is to build our portfolio around differentiated pear and now the 56% this year to produce dependable cash flow. We continue to believe our shareholders will benefit from our experienced investment perspective and our measured approach to deploying capital. Now 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 advantage we posses through our SBIC license. By focusing on the 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 15, as of February 28, 2015 over 75% of our SBIC investments are in senior debt securities, which is slightly down from last quarter due to the recent redemptions. The leverage profile of these investments is very low, especially when compared to market leverage. Because of the leverage and lower cost of capital advantages incurred in the SBIC program, we can achieve strong returns for our shareholders without moving far out on the risk spectrum. Therefore and as demonstrated this past year, 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 onto slide 16, you can see our SBIC assets increased to $135.8 million as of February 28, 2015 from $86.5 million last year. As a percentage of our total portfolio, SBIC assets have grown from 0% of our portfolio at fiscal year-end 2012 to 42% last year and now to 56% this year. 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 is important to note that as of fiscal year end February 28, 2015 we had $104.9 million total available SBIC investment capacity, of which $71 million is leverage capacity within our current SBIC license. Now, if we were to obtain a second license, our leverage capacity would increase by another $75 million, with the ability to increase assets by $112.5 million. In our view, our origination platform is among the very best at our end of the market and we are dedicating more resources towards it. 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’d like to return the call back to our CEO, Chris.

[Christian Oberbeck:]

Thank you, Mike. As I mentioned earlier on the call, during this fiscal year we are very pleased to meet an important milestone that has been an important goal for us since our inception, namely to commence the payment of a regular quarterly cash dividend. From the start we said our expectation was that this dividend would continue to increase, which it has by 22% over the last couple of quarters. As outlined on slide 17, during our fiscal year 2015, Saratoga’s paid quarterly dividend of $0.18 per share for the quarter ended August 31, 2014, $0.22 per share for the quarter ended November 30, 2014. On April 9, 2015 we also announced a dividend of $0.27 per share for the fiscal quarter ended February 28, 2015, payable on May 29, 2015 to all stockholders of record at the close of business on May 4, 2015. Consistent with our new policy, shareholders will have the option to receive payment of the dividend in cash or receive shares of common stock pursuant to the company’s Dividend Reinvestment Plan or DRIP plan. Saratoga adopted in conjunction with the new dividend policy and provides for the reinvestment of dividends on behalf of its stockholders. Our goal of this policy is to allow stockholders who want cash to receive their dividends in cash; however, it also provides the opportunity for many stockholders we have spoken to, who are interested in reinvesting their 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 ten trading days immediately preceding and including the payment date. For more information see the stock information section of the company’s investor relations website. In addition, our Board of Directors has also recently declared a special dividend of $1 payable on June 5, 2015 to all stockholders of record at the close of business on May 26, 2015. Consistent with our quarterly dividends, this dividend will be paid pursuant to the company’s DRIP plan. The payment of the special dividend allows us to conclude an open item that we discussed on our last earnings call and that existed in the transition to our new dividend policy, as well as meet our requirements for the year. In addition, during this fiscal year we announced the approval on 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 then most recently published financial statements. Although we have not availed ourselves for this option, we continue to assess its potential on a regular basis. On April 6, 2015 we also announced the U.S. Small Business Administration issued a green light or go forth letter inviting us to continue our application process to obtain a license to form and operate a second SBIC subsidiary. A second license, if ultimately granted will allow us to grow our asset base as previously highlighted. All these initiatives are important corporate tools being employed by us in realizing the company’s vision and combined with our results for the year we feel extremely positive about the company’s development and continued expansion. Moving onto slide 18, all of our initiatives are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We hope to drive the size and quality of our investor base, while continuing to add institutions to the roster. During this past fiscal year we added analyst coverage for the first time and hope to expand that as well. We’ve spoken today about many of the components of our competitiveness that is highlighted on slide 18, strong and growing dividend, ample low cost liquidity, strong earnings per share and NII yield and expansion of assets under management. In addition, we have had only limited exposure to the oil and gas industry and had no write-downs as many other BDCs have experienced. We believe that Saratoga Investment is on the path of being a premier BDC in the marketplace. Moving onto slide 19, our final slide, we’ve accomplished a lot in this past year and are happy to be able to provide you with all these updates. We are also very proud of the financial results generated by our accomplishments. These achievements however have not altered our objectives, but are complementary to them. Our objective remains 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 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. Our primary focus remains on maximizing the potential high teen returns and the equity invested in our SBIC and utilizing the two to one leverage that that provides. This is the optimal means to increase our assets under management and net investment income yield, enabling us to increase returns to shareholders and achieve growth in our net asset 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 now like to open the call for questions.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Casey Alexander from Gilford Securities. Your line is open. Please go ahead.

[Casey Alexander:]

Hi, good morning and thank you for that comprehensive review. I have a few questions. First of all, since it’s a little bit opaque to us in terms of its construction and development, can you give us a little bit of color on the current construction and the expected development of the CLO over the course of the next year?

[Christian Oberbeck:]

Hi Casey, thank you for your question. I’m not sure I fully understand your question. It’s opaque in that…

[Casey Alexander:]

Well, the returns on it are highly variable based upon the construction and its development in terms of repayments and so it’s a little hard for us sitting outside the company to see that. So I was wondering if you had any comments related to that.

[Christian Oberbeck:]

Well, I’ll give you a total overview and then Henry can go into the specifics, but basically our CLO has a finite life to it and the earnings off the CLO are determined by the spread that we’re able to realize in the marketplace and as you correctly pointed out, we have a cost of our capital which is a floating rate cost and we also have the spread we’re earning on our assets and there are periods of time when that spread declines and it’s been declining a little bit recently, there’s been a little constriction and there’s other times where it expands. So there is variability driven off the CLO by the changes in the spread in our portfolio. In terms of the performance of it, it’s been fairly steady. I mean we have a steady flow of earnings and not all of the earnings show up in GAAP. In other words not all the receipts from the funds show up in our GAAP reporting and that’s the difference between GAAP and tax and maybe this is part of what the opaqueness is your referring to. So we get what’s effectively a principal repayment for GAAP, but it’s actually taxable income for earnings, as well as the yield of the portfolio and then we also get the management fee on that portfolio.

[Henri Steenkamp:]

And Casey, if you look at the financials it is actually very discreet, sort of the two strings that come into the BDC through the financials, which on the income statement would be the interest from our controlled investment, the CLO being the only controlled investment and that’s been relatively consistent between $600,000 and $700,000 over the last year per quarter and then there is also of course the management fee income, which is also a separate line on the P&L, which has been around about $350,000, $370,000 per quarter over the last year.

[Casey Alexander:]

Okay, great, thank you. That’s very helpful. Secondly, Michael your slide on the deal counts in calendar Q1 is very telling and the deal counts are down. How are those deal counts and deals below $25 million developing during Q2?

[Mike Grisius:]

Well, there is an uptick, is the short answer. I would also add that the first quarter tends to be a light quarter in our business. There is often a run to calendar year end to get transactions done and the first quarter tends to be a bit slower. But that slide also demonstrates that the first quarter relative to prior quarters, first quarters is down. We have seen deal flow pick up pretty substantially though since then.

[Casey Alexander:]

Okay, that’s good to know. Lastly, as it relates to the share repurchase plan, I’m a little curious and that the dividend reinvestment program which I think is very beneficial for shareholders and is very well constructed also does present a little bit of dilution to NAV and so I’m curious when you say you are assessing the potential of the share repurchase plan, why you haven’t used any of it up to this point in time when the shares have at least at some point in time during the last few quarters been trading at a 30% discount to NAV. Why you haven’t used some of the share repurchase plan to offset some of that dilution and if you think maybe you plan to in the future.

[Mike Grisius:]

Well, that’s a very good question Casey and an important point. We do have the share repurchase plan in place, to be able to take advantage of situations where we feel our stock is substantially undervalued and we do feel like it is undervalued at this time. We also need to balance our liquidity relative to stock repurchases at this point in time. I think we made a very strong point in our presentation that within the four corners of Saratoga Investment Corp., we have the ability to increase our assets under management by more than 50% and we don’t require any outside capital to do that. I think that’s in contrast to many of the companies in our industry right now where they are pushing up against our leverage requirements and they are trading below NAVs. So their access to capital is somewhat constrained. So we need to be mindful of retaining our ability to finance the growth of our SBIC opportunity where we can invest as we mentioned in high teens type of returns and build the scale that’s going to drive profitability, in addition to looking at the opportunities in our own stock. I would remark that we think with some of the progress we are making, the stock price seems to be increasing in value based on our actions and your recommendations, thank you, and also more exposure to the type of investment management performance we are delivering and the metrics of our increase. In terms of your very specific question, yes there is some dilution that does occur as a result of shareholders exercising the DRIP and we feel that – we hope the shareholders view that as an opportunity and we would like as broad a participation in that, in this transitional period we’re in right now as we move towards paying a higher dividend on a regular quarterly basis.

[Casey Alexander:]

All right. Well I just, you did point out that you have over $100 million of available capacity for investing and the shareholder, the share repurchase plan at 200,000 shares is only $3.5 million. So I don’t think that exercising the share repurchase plan would necessarily be squeezing your ability to deploy capital, but it would go to some extent to offset the dilution of the share repurchase plan. But we’ll keep recommending investors reinvest, because we think it’s a well constructed plan. So thank you for taking my questions.

[Henri Steenkamp:]

Thank you, Casey.

[Mike Grisius:]

Thank you.

[Operator:]

Thank you. Our next question comes from, Andrew Kerai from the BDC Income Fund. Your line is open, please go ahead.

[Andrew Kerai:]

Yes. Hi, good morning and thank you for taking my questions. Just on the CLO equity investments that you guys hold, I noticed the discount rate moved up again. I think from 10% to 12% this quarter and that obviously had an associate unrealized mark. Just wondering and perhaps a little bit more color. I mean with the strength and the liquid low markets here so far in 2015, I mean is there something from just a default outlook that you are seeing in the underlying loan collaterals. Just wondering why you decided to take up that discount rate and as a result, have the mark down on the CLO equity again this quarter.

[Henri Steenkamp:]

Hi Andrew, how are you. Well as you remarked that was the one variable that we changed and I think just looking at the market we felt that that was the most appropriate discount rate to use, slightly upping it from 10% to 12%. I would note that, if you think of sort of the adjustment to our CLO valuation for the quarter actually that change in the discount rate had a relatively small impact to the CLO from a valuation perspective. But we did feel just looking at the market and the recommendations we were getting that that was probably the appropriate thing to do. The remaining bulk of the actual change in the CLO valuation related to some cash flow changes as we sort of modeled out the remaining cash flows through the life of the CLO and that actually resulted in most of the change in CLO valuation.

[Andrew Kerai:]

Got it. Okay then, thank you, that’s certainly helpful color. And then I noticed obviously with your portfolio relatively static quarter-over-quarter, the interest income ticked up about $1 million this quarter. Was there some prepayment fee income or something that pulled through in Q4 for you guys?

[Henri Steenkamp:]

No, any prepayment or origination fees etcetera come through the other income line, you see how that moved. I would just say that we you had – feel healthy originations this quarter and we managed to maintain the rate at which we’ve sort of been investing as you saw on the various slides we did. We also had a couple of redemptions, some of which happened more towards sort of the middle of quarter, middle and back end, but no, those would go through other income if those types of changes happened.

[Andrew Kerai:]

Great, and certainly that makes sense. And then just Elyria Foundry, obviously you guys have the common equity piece now as well as the revolver. Can you give us just any update on how the business is performing? They’ve sort of seen an uptick in just from an earning perspective and just your outlook having both the equity and the revolver piece now.

[Mike Grisius:]

Hi Andrew, this is Mike. I would comment on both. So the incremental capital that we’ve put into the company this past quarter is the debt capital which resides at the top of the capital stack. It’s the very – most senior security in the company’s balance sheet. So feel like the risk adjusted return there is just terrific. So that’s a fairly simple one to analyze given the company’s enterprise value. The company is continuing to experience some softness and so their outlook for this year remains pretty soft. That will be and we expect that that will be somewhat offset by the fact that the debt securities in that portion of the capital structure have been converted to equity. So the company’s going to be producing a lot more free cash flow and therefore increasing its enterprise value form that fact alone. The folks that control the company have a bullish outlook on the business in the long run. Certainly could have exited the deal prior to the transaction and choose to pursue this course with the confidence that they could grow enterprise value significantly and generate higher returns. So the long run outlook is good from the owners, but the current situation is pretty soft.

[Andrew Kerai:]

Sure. No, certainly I appreciate the color. And then just lastly just a comment to go back to the stack repurchase as well too. I certainly appreciate a lot of the things that you guys are doing and wipe the DRIP given the 5% discount and all that, but just looking obviously, if you just assumed roughly $0.50 run rate for earning, that’s about a 9% ROE for you guys. So you can basically get to a low double digit, at least sort of return from buying back your stock as opposed to obviously issuing for the new shares. Just wanted to maybe reiterate my advice to perhaps at least to offset some that dilution, because I think you are doing a lot of the right things. I appreciate the value and would just like to – I personally feel that your investment is a great value and I think it would make the story even more compelling if that was enacted at least partially to offset some of the dilution from an app perspective for those that choose to take the stock and the DRIP.

[Christian Oberbeck:]

Well, we appreciate the input. We will and we continue to and we have been actively considering that and just one final comment on that subject is that we are also looking to balance the sort of maybe the shorter run opportunistic, opportunities of purchasing the stock at a discount with the longer run fundamental growth of the company and so that’s one thing in terms of our capital allocation. We do appreciate your input and we’ve heard it from a number of other parties as well. So we understand that there is a lot of input coming about offsetting some of the dilution and that is something that we actively consider.

[Andrew Kerai:]

Great. Thanks guys and congrats again on another strong quarter.

[Christian Oberbeck:]

Thank you.

[Henri Steenkamp:]

Thanks Andrew.

[Operator:]

Thank you. [Operator Instructions]. The next question comes from [Indiscernible]. Your line is open. Please go ahead.

[Unidentified Analyst:]

Hi Chris and everybody else there. I too applaud you for what you guys have done in the last couple of years, upgrading the portfolio and actually more recently doing that as probably things get more aggressive in the high yield and this private lending market and you guys have done a great job. I guess Mike, I have two questions, one of which relates to both those last comments about NAV and buybacks. I mean with this 30% NAV discount, I too would like to see you guys consider that more aggressively. Obviously that’s offset by the liquidity in the stock, which if we could figure out a way to get more shares outstanding without diluting the whole package, I think that would help to narrow that NAV just by itself, getting some more institutional investors or something like that. So that, it’s a statement, but it’s sort of a reiteration of what’s everybody else and it was one of my questions and maybe a solution. My other question just relates to legacy positions, and any that are on your radar screen or any of the new investments over the last couple of years that you might be weary of or anything that could be on your watch list, that could maybe result in as you see these companies that you made loans to result in a potential write-down in some of the NVA.

[Mike Grisius:]

As it relates to the portfolio, the values that we are holding them at now reflect our assessment of the value of those investments. So we take a very comprehensive approach to that valuation and we look at the opportunities for the business; their historical financial performance etcetera and so that’s all reflected in what you see in the valuations and the marks there. I think the prior caller asked, certainly Elyria is a business that’s continuing to evidence softness in its business. I think the owners have a long term positive outlook on being able to build that business and grow its enterprise value, but in the present moment they are experiencing softness, so we are watching that one very carefully.

[Christian Oberbeck:]

But importantly on Elyria is the capital structure right is because of the conversion, restructuring that took place. While we do have a debt instrument, that’s at the very senior end of the scale. So there is really no risk in that investment of ours and because of the capital structure being all equity after that, the impact of the softness isn’t – we are not being driven by like bank restructuring type of actions that might further diminish equity value. We are structured to handle the softness and get to as Mike described, the sort of this long term business. The company does have a tremendous franchise. It’s just that at this point in time it’s got some cyclical characteristics to it and there’s some sector issues and it has some exposure to different sectors that are weaker now than they have been, but can recover. So sorry that’s just a comment on the structure of Elyria. But generally across our portfolio, our credits are in good shape and part of that, our structure, we’ve been very careful to try and be first dollar lenders or if not absolute first dollar lenders, there might be a small revolver ahead of us and we think that’s a very good position to be in this type of environment, where we are trying to avoid having a lot of debt ahead of us in case the type of softness that you described occurs. Going to your question number one; again, this is a subject we are hearing a lot of feedback on we are taking it very seriously. But in what you said is kind of a bit of a dilemma that we’ve been wrestling with and by the way you have phrased your question, you are too. It’s that one thing we are hearing from institutions is that there is a lot of stock, there is not a lot of float and so it would be good to get more shares out and available. But what the problem is is that the company goes out and buys stock, it’s going to actually decrease the supply of shares that might be available for institutions to come in and buy and so what we are trying to balance this position of having, of trying to create more float, more trading, but we don’t want to diminish the supply too much. We do want to offset our dilution and then what we are seeing is that basically there is not a lot of people who want to sell their stock at this level and so we got to somehow bring the institutions in, bring the stock value up and get to a point where we could add more share. So the question you asked is something we are very focused on and all those elements we are actively considering and working to basically create that circumstance that’s going to get our stock up though NAV and allow us to be a properly trading BDC in terms of value.

[Henri Steenkamp:]

And I’ll just add, while we’ve been sort of balancing it and as we are balancing it, we’ve been reinvesting this cash in our SBIC and as our assets in the SBIC as we previously mentioned have gone from 42% to 56% of our total assets or a 14% increase, our NII yield overall has gone from 7% to 8.8% in a year, so almost 200 basis points. So it does show sort of while we are balancing this, it does show how the power of deploying that cash in the SBIC really impacts the NII yield this far.

[Christian Oberbeck:]

And let me add to that. What we are really excited about is that we look at that 8.8% that Henri referenced and if you benchmark that against most of BDC peers, it compares very favorably and especially favorably given how much dry powder we have; how much room we have to continue to grow our SBIC portfolios. So we have lot of optimism that as we continue to deploy capital through the SBIC that you should see that NII yield grow considerably.

[Unidentified Analyst:]

Thanks very much. I don’t think this is necessarily a value question or anything else, it’s figuring out how to unlock it and maybe I’ll give you guys a call offline and I have an idea. Thank you.

[Christian Oberbeck:]

One thing I should add, because I just realized your asking about portfolio. The other deal which should be mentioned is Targus. So if you are looking at the quarter-over-quarter numbers that was one that was written down a bit and that’s a legacy portfolio investment that makes essentially cases for...

[Unidentified Analyst:]

For the computers.

[Christian Oberbeck:]

Notebook computers and tablets and so forth and its very dependent on new product launches and that end market is softer than it was and so that write-down is reflecting the softness in that end market.

[Unidentified Analyst:]

How much is that investment, because I don’t have it in front of me.

[Mike Grisius:]

And just while we are talking about that, both Targus and Elyria which are our softer ones, those are legacy investments.

[Unidentified Analyst:]

Right. Thanks guys. I appreciate it.

[Christian Oberbeck:]

Thank you.

[Operator:]

Thank you. And our next question comes from Joshua Horowitz from Palm Ventures. Your line is open. Please go ahead.

[Joshua Horowitz:]

Thank you. Hi Michael, hi Chris, hi Henri. Congrats on a great quarter, terrific execution. I just want to say, you guys have done a tremendous job, really hitting all the goals and targets that you’ve spoken about over the last years and you are to be commended for that, so thank you. I guess we are talking about oil and gas and saying we have very little exposure to it. Michael maybe you can answer this question, what is the next oil and gas that we are going to be talking about a couple of quarters from now and we are going to say, Wow! Thank God we avoided that sector. Are you seeing as we in our equity portfolio, sort of mini-bubbles taking place in the market place that you are avoiding because of multiples.

[Mike Grisius:]

That’s a great question. I mean we are always thinking about that as it relates to very business in the end markets and oil and gas in particular is just so obvious that these businesses had become so profitable, so fast, that you could just see that it wasn’t sustainable and it made us very nervous and so we didn’t invest in that space. The experience that we’ve had and we are starting to see a bit and we are being cautious in this respect is more in the building product space. So you can see the housing market starting to come back and a lot of the companies that are selling to that end market are experiencing pretty significant upticks in their revenues and cash flow. I think we’ve even got a legacy portfolio, legacy cabinets that’s experiencing a really nice rebound as well. But as we look as new investment opportunities, we are very cautious in that end market, because we just, we’ve seen those cycles. We feel like if there is company in that space that has a differentiated product in some way that’s not just riding the wave of the ups and downs in the housing markets, but instead really has something that’s unique and has a defensible product position, we’ll obviously look at that very carefully and likely pursue those deals, but we are pursuing that end market with caution.

[Christian Oberbeck:]

And not to be too much unjust, but fortunately we don’t invest in biotech, so that’s one bubble I think we’ll be side stepping.

[Joshua Horowitz:]

Great. We are seeing a lot of frothiness in the restaurant sector. The multiples seem crazy to us. I don’t know if you are being shown any deals in that space as well. Maybe you could comment.

[Mike Grisius:]

The restaurant sector in general and we’ve got a couple of investments in that sector is a sector that we are very careful with. So we do invest in that sector, but we proceed with an awful lot of caution. The fact that people are paying a lot for those businesses is one thing and its fine if an equity sponsor wants to pay a big price for the company. We just look at it from a debt perspective and really try to make sure that we are positioning ourselves in a spot in the balance sheet where we feel like our money is safe.

[Joshua Horowitz:]

Thank you very much and congrats again on the great results.

[Christian Oberbeck:]

Thanks Josh.

[Mike Grisius:]

Thank you.

[Operator:]

Thank you. I’m showing now further questions at this time. I would like to hand the conference back over to Mr. Christian Oberbeck.

[Christian Oberbeck:]

Okay, well thank you everyone for joining us today. We look forward to speaking with you next quarter.

[Operator:]

Ladies and gentlemen, thank you for your participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.