Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2016 Financial Results Conference Call. [Operator Instructions]. 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.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal third quarter 2016 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 third quarter 2016 shareholder presentation in the events and presentations section of our investor relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 1 PM today through January 21. Please refer to our earnings press release for details. I would now like to turn the call over to our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri, and welcome everyone. Since becoming Manager of Saratoga Investment, we have been guided by a singular focus on increasing the quality and size of our asset base with the ultimate purpose of building Saratoga Investment Corp. into a best-in-class BDC, generating meaningful returns for our shareholders. The 2016 fiscal third quarter has continued our trend of outperformance. As highlighted on slide two during this past quarter, many of our metrics illustrate the steadfast commitment and underscore our continued momentum. To briefly recap, first, we continued on our path of strengthening our financial foundation by expanding our net asset value to $127.03 million, a 1.6% increase from $125.3 million at the end of last quarter; maintaining our strong levels of investment quality and credit with over 97% of our loan investments now having our highest rating; and generating a return on equity of 10.8% for Q3 and 12.9% year to date, greatly outperforming the industry average of approximately 4.3%. Second, while we remain ever focused on building scale, we have endeavored to maintain a robust high-quality asset base with a strong yield and return on equity. Although this quarter saw new originations of $15.3 million, our assets under management contracted slightly this quarter due to an unusual concentration of $27.9 million of redemptions particularly in our SBIC. The timing of redemptions and the new rate originations during this quarter were unusual with most redemptions occurring during the quarter while many new originations occurring following quarter end. This is demonstrated by new investments of $31.2 million subsequent to quarter end and as of January 12, 2016, versus $3 million of redemptions. While we're continuously exposed to further redemptions, we wanted to highlight the unusual timing this quarter of the redemptions and the subsequent originations. Our significant investment activity since…

Thank you, Chris, and happy New Year to everyone. Looking at our quarterly key performance metrics on slide four, we see that for the quarter ended November 30, 2015, our net investment income was $2.2 million or $0.38 on a weighted average per share basis. Adjusted for the incentive fee accrual related to net unrealized capital gains, our net investment income was $2.3 million or $0.42 per share. This represented a decrease of $0.5 million as compared to both the same period last year as well as last quarter. This decrease is primarily due to two factors. Firstly, last year's third quarter had outsized dividend income that was highlighted at the time as once off. And secondly, this quarter saw reduced interest income from significant redemptions in the quarter reducing our asset base resulting in cash awaiting asset deployment which was only deployed shortly after quarter end. This delay in deploying assets reduced interest income while still incurring interest expense on outstanding SBA debentures with much of the redemptions being in our SBIC. In situation such as those we faced this quarter, when the redemptions occur early in the quarter and the cash is only redeployed a few days after quarter end, we choose to absorb the negative interest spread during the interim so as not to limit our overall available liquidity long term. Importantly and what we're very pleased about is that these redemptions have generated positive returns that are accretive to both net asset value and return on equity as seen in the growth of both metrics. In the third quarter of fiscal 2016, we experienced a net gain on investments of $1.3 million or $0.23 on a weighted average per share basis resulting in a total increase in net assets from operations of $3.4 million or $0.61…

Thanks, Henri. I would like to take a couple of minutes to update everyone on the current market as we see it, then I will discuss our portfolio strategy and performance as we operate in this environment. Over the past couple of quarters, we have found ourselves reviewing a larger number of deals yet it is proving more difficult to find high quality transactions in the pipeline of opportunities that exist. Slide 11 shows the results of a quarterly survey of junior debt participants for calendar Q3. Not much has changed from last quarter. It demonstrates how although junior debt providers reviewed a slightly lower number of opportunities this past quarter, very large 88% of respondents still reviewed more than 25 deals and 100% of respondents submitted at least one letter of intent during the first quarter. With our increased business development activities that I will highlight later, our specific experience has actually been that we're continuing to review more and more deals. Closed transaction activity continues to be down significantly with closings down another 36% this quarter as the majority of respondents closed either zero or just one transaction during the quarter. In addition, several data sources and our own experience indicate that gross investment yields have remained tight. Despite the NII pressure facing many BDCs, we have not seen a widening of yields in the non-syndicated markets. Our experience is that high-quality deals remain in high demand. Most quality investment opportunities being pursued by multiple parties processes. Slide 12 further demonstrates how fewer deals are being done. The number of transactions for deal sizes in the U.S. below $25 million year-to-date in 2015 is down 47% from calendar year 2014. In the first 11 months of calendar year 2015, there were only 924 private equity deals -- deal…

Thank you, Mike. Since assuming the management of Saratoga Investment Corp., paying regular quarterly cash dividends was an important goal for us. Since reaching that goal, our quarterly dividend has increased consistently. After today's further increase, we have now increased our dividend 122% since the commencement of the new quarterly dividend program. As outlined on slide 17, over the past six quarters, Saratoga has paid quarterly dividends of $0.18 per share for the quarter ended August 31, 2014; $0.22 per share for the quarter ended November 30, 2014 [Technical Difficulty], payable on February 29, 2016, to all stockholders of record at the close of business on February 1, 2016. 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 which Saratoga adopted in conjunction with the new dividend policy. The DRIP plan provides for the automatic reinvestment of dividends on behalf of stockholders. Our goal with this policy remains to allow stockholders who want cash to receive their dividend 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 100 days immediately preceding and including the payment date. For more information, stock information section…

[Operator Instructions]. Our first question comes from the line of David Chiaverini with Cantor Fitzgerald. Your line is open. Your question please.

First question is on the CLO yield, looking on slide eight, I see in the most recent quarter it was 18.9% which is at the lower end of what it has been over the past few years. Could you just comment on what drove it to come down and if we should expect that to come down further going forward?

Sure, David, it is Henri here. Yes, the yield is sort of a function of our overall cost and I would say what you saw this quarter is probably more reflective of the yield in the high teens that we will see going forward based on our current costs and it is really sort of driven as the future cash flows are reducing as we near the end of our reinvestment period.

Okay, that makes sense, and looking at the overall portfolio yield, how it has kind of ticked down a little bit over the past few quarters, should we likewise expect that to come down somewhat over the next few quarters?

I think on the overall yield if you take out the CLO which we attempt to do on one of our slides, you will see that it is actually sort of what we call the BDC and SBIC has remained relatively consistent and it has sort of been between I think 10.8% and 11.2% probably for the last six quarters and I think based on what we have seen in the last two or three months in the new originations we have done, that is still a range which has been consistent with [the past] [ph].

Yes, this is Mike Grisius. We're keeping our fingers crossed that we start seeing an upward trend toward rates being higher especially given the fact that many of the BDCs and the participants in the financial community are facing some pressure and return on their portfolio. We haven't seen it yet as we mentioned in the prepared remarks. But are hopeful that we will see some upward trends in that direction, but in terms of thinking about the future and certainly what we're experiencing now, we haven't seen downward pressure either. So the deals that we're doing now are consistent with the types of returns that we have achieved in the past.

And a follow-up to that. As you noted, you are not seeing spread widening in the non-syndicated market but given the current environment and just over the past week to week and a half, it seems as if spreads just continue to widen out. How long do you think that would take to impact and show up in the markets you serve?

Yes, I wish I had a crystal ball and could tell you. I think logic would dictate that at some point it will. The point of reference I would give you is that when spreads were -- if you went back a few years ago, a couple of years ago in a different credit market when spreads were tightening significantly, the spreads at the lower end of the middle-market were wider. And I tell you that because I think our perspective is that the lower end of the middle-market tends to lag the broader more liquid market so while you see the larger deals in the more liquid market having expanded yield profiles, it hasn't shown up yet, but logic would dictate that at some point it should. We're not underwriting or thinking about investing our capital that way. We really look at each deal individually and make sure that the return that we're generating relative to our cost of capital is strong as compared to the risk profile of the business that we're investing in.

My last question is on credit quality. It seems investors are very focused on credit quality these days particularly given the oil and gas backdrop and it is great to see the exposure that Saratoga has is minimal, it is really only showing up in the CLO. But for the portfolio overall, how is the credit trends and the performance of the underlying companies? I noticed in the most recent quarter you added the senior loans of targets to nonaccrual but outside of that, what are you seeing in the rest of the portfolio?

Well, I would make a few remarks. Generally the performance of middle-market companies just as we participate in the marketplace is good but not great. So you don't see the kind of growth in middle-market businesses that you see in other times of the cycle if you will and our portfolio is holding up very well. I think we've talked about this in the past. If you look at the portfolio relative to what a lot of the companies want to achieve with their budget, many of them are below where they want to perform but the vast majority are outperforming their performance in the past. So generally our portfolio is holding up very well and I think as we have indicated most of our assets are in senior loans so we feel very good about the credit quality that we have. Another point that I would make is that the couple of deals that we tend to focus on and are having some difficult performance are legacy assets. I would say that the credit profile of the deals that we're originating and focused on are different than the credit profile of those that we inherited and so we're working those and those deals are still facing some challenges. But overall, I think the message you should have is that we feel very good about the quality of our credit portfolio. So some of the legacy deals that are facing challenges are really Elyria and Targus.

And I would just add on Targus that you mentioned, David, when we think about credit quality and our highest credit quality rating, we talk about the 97% although you mentioned that it was already in that 3% last quarter and not within the highest credit quality bucket of ours last quarter already.

I will add this, one of the challenges you see and we talked about this a little bit in the prepared remarks, one of the biggest things that drives redemptions is strong portfolio performance. So if you capitalize a deal in a certain fashion and then the company performs real well, you are exposed to that one being refinanced or perhaps sold and that is unfortunate because it makes it difficult to grow your net assets. We have expressed that we have got lots of confidence that we can continue to do that and will do that but certainly if you are making good investment selections you are exposed to higher redemptions and we have experienced that.

That is a great point and one follow-up if I may. You said that some of the companies aren't necessarily meeting their budget or where they would hope to have been. Are you able to comment on which industries you are seeing a little bit of that underperformance so to speak?

Yes, it is really hard to attribute it to any industry. I think I should probably clarify my comment. What I was trying to convey was that certainly our experience has been in certain markets you have certain robust economic markets where you see lots of companies that are just performing super well and really for the last few years that is not what we have seen across the industry and in our specific portfolio, it has performed well. But you don't see companies that are consistently outperforming their budget. They are doing well and we're selecting the right types of companies but they are not knocking the cover off of the ball if you will. It is hard for us to attribute to any industry per se. I think we have got a very diverse set of portfolio companies and each one is unique and we're proud of all the investments that we make and they typically have unique characteristics that make us feel very comfortable that they are going to sustain their enterprise value over time. [End]

I think it is also and not too much focus on the legacy investments but I think for example in Olearia, that is exposed -- again it is a legacy inherited investment we have but that has got exposure to some of the mining and some of the energy related industry so that is a source of weakness there. And then Targus has had some issues. It is not really related to general -- it has to do with its own marketplace. But in terms of our originated portfolio, I think as Mike said, we're investing lots of different niche companies and service businesses in the United States and it is highly diversified, it is not really correlated to the economy per se. It is each business has got its own kind of focus and that is why as Mike said earlier, we feel that the lower middle market is a very attractive place to be invested today since you are not necessarily subject to the big swings in the economy as much as the niche markets and their relative market position.

Our next question comes from the line of Casey Alexander with Ladenburg Thalmann. Your line is open. Your question please?

Mike, just as a general industry question, do you think that the heavy repayments that Saratoga saw is kind of consistent across the BDC industry? Did you sense out in the marketplace that there was a trend of that type?

That is a very good question. I need to caveat that I haven't studied it to that level, I haven't gone through the other BDC's balance sheet and look at their redemptions and so forth. But certainly the fact that our assets lean toward more first lien securities and our leverage profile is lower than the industry average and of course the performance of our portfolio has been exceptional I think. Those factors expose us to redemptions that may be a bit higher than what other BDCs may experience given where they are investing in the capital structure of deals and the types of deals that they are doing.

Did you get the sense, Mike, that your portfolio companies were repaying and/or refinancing because they sensed that the Fed interest-rate increases were on the way and that this might be their last window to do so and therefore perhaps it is likely to trail off or did you get any kind of feedback like that?

No. That is a good question but that is not what we have experienced. Really in our experience where we get exposed especially on a refinance is that we may underwrite a business at a certain size and a certain credit profile where we can come in with not a whole lot of risk and get an outsized return just because the market is not terribly competitive. And then the company performs very well. We come in as an institutional investor and give it a little bit of a stamp of approval and then over time, that accesses that business to cheaper capital. It may be a traditional finance institution like a bank or another institution that offers more favorable pricing and just is in a different market than we're in.

I think just to follow along with that, I think it is fair to say that each of the company's refinancings are really their own story and their own progress and their own development. There is really not a macro theme running across it.

I should add this too, Casey, just so I make sure that you don't misinterpret my comments. I think if you went back say two, three years ago, the credit environment especially at the lower end of the middle-market was different. I think there was even less competition in that market so for a while we were exposed to new entrants into that market offering cheaper terms and more aggressive terms, etc. While the market remains very, very competitive, we have sort of already experienced that in our portfolio and facing that pressure we feel like that is mostly behind us.

Would you share with us of the $31 million that you have originated subsequent to the end of the quarter? Can you share with us how much of that has been directed to the SBA subsidiary?

Yes, it is probably between 80% and 90% of it, Casey. It is almost all of it.

So you have successfully pretty much soaked up most of the cash that was left over in the SBA subsidiary?

We would prefer to say invested, Casey.

My fault, I'm sorry. What is Henri, I think you might have this, the total fixed rate to floating rate exposure in the portfolio?

I believe it is around 53%, 55% floating rate at the moment.

53%, 55% floating. Okay.

It is in that range.

And a couple of years ago when the company was sort of in a similar position with a previous CLO, rather than run it out to the finish line they chose to restructure or rebuild it into a new fully formed CLO and I think investors benefited from that pretty solidly. Is there some thought or a trigger point in time where you might consider doing that again?

Casey, as you correctly point out, each CLO has an investment period. Our current CLO's investment period runs through October 2016. So generally when your reinvestment period ends, that is generally about the time to look towards a refinancing. So certainly that is something we're beginning to think about but there is a question of market dynamics and the optimal time to take advantage of that.

Thank you. Our final question comes from the line of Tony Polak with Aegis. Your line is open. Your question please.

Can you explain the rationale of not buying back stock at 65% of book value?

Sure. This is an ongoing discussion we have had on a number of our calls and looking at the marketplace and looking at deployment of capital. I think on the one hand buying back stock is -- at $0.65 is something that we're actively considering doing but I think we'd still look at that in the context of our short and long term investment goals and I think if we look at buying back for example stock at the current market price versus investing further in our SBIC, that in a short period of time like a 12 to 15 month period of time, the buying back the stock looks like -- is probably a better use of capital but over a longer period of time, investing the SBIC is going to return substantially more. So because of the high rate of return, because of the leverage, the ongoing nature of it and in addition, it gives us more scale and scale is very important to us given our size and it also gives us more market presence and in a larger and more diversified portfolio. So we're kind of weighing those two analyses sort of at all times and so we haven't fully concluded not to buy back stock but we're actively considering the buyback of stock in the context of the growth of the portfolio and the returns available through our investments.

I would like to now turn the call over to Christian Oberbeck for any additional remarks.

I would like to thank everyone for joining us today and we look forward to speaking with you next quarter. Thank you.