Welcome to Saratoga Investment Corp's Fiscal First Quarter 2019 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 your questions. At this time, I would now like to turn the call over to Saratoga Investment Corp's Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal first quarter 2019 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 first quarter 2019 shareholder presentation in the Events & Presentations Section of our Investor Relations web site. 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 1:00 PM today through July 18. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who'll be making a few introductory remarks.

Thank you, Henri, and welcome everyone. As we look back at this most recent fiscal quarter, we are pleased to note the continued progress in credit quality, growth in earnings, as well as maintaining our outperformance within the BDC sector. Our flexible capital structure and diversified sources of cost effective liquidity continued to support our robust pipeline of available deal sources, growing assets, and greater scale. While a challenging and competitive environment persists, our originations and credit quality remain strong. Within this environment, Saratoga Investment has risen to and remains at the top of the industry in terms of key performance indicators, and in many categories far outpacing our competition, generating meaningful and consistent returns for our shareholders. To briefly recap the past quarter on slide 2, first, we continue to strengthen our financial foundation this quarter, by maintaining a high level of investment credit quality, with 99.3% of our loan investments having our highest rating, our strongest level yet. Generating a return on equity of 14.9% on a trailing 12 month basis, up from 7.1% last year, and beating the BDC industry mean of 8.9%, and maintaining a gross unlevered IRR of 13.8% on our total unrealized portfolio, with gross unlevered IRR of 13.4% on total realizations of $299 million. Second, we expanded our assets under management to $343.4 million, and increased from $342.7 million as of last quarter, and from $329.7 million as of the same time last year. Taking a longer term perspective, our current AUM reflects a 328% increase from $80 million at the end of fiscal year 2011. This quarter continues to demonstrate the success of our growing origination platform, with a healthy $35 million of originations. Although our repayments equaled our originations, the repayment substantially consisted of exits from non-accrual or lower yielding investments,…

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended May 31, 2018. Across all these metrics, you can see the positive impact of increased assets and improved credit quality on our results. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $4 million was up 6.1% from $3.8 million last quarter, and up 35.9% from $2.9 million as compared to last quarter's Q1. Adjusted NII per share was $0.64, up $0.14 from $0.50 per share last year, and up $0.04 from $0.60 per share last quarter. The increase from last year, primarily reflects our higher level of investments and results in higher interest income for a full quarter, with AUM up 4% from last year, and the available cash as of May 31, 2007, that was already incurring interest expense, now partially deployed. The sequential quarterly increase was primarily due to increased interest income, as our non-accrual Taco Mac investment and certain lower yielding assets were redeployed into new investments, including three new portfolio companies. Adjusted NII yield was $11.1%, when adjusted for the incentive fee accrual. This yield is up 190 basis points from 9.2% last year, and up 40 basis points from 10.7% last quarter. For this first quarter, we experienced a net loss on investments of $0.1 million or $0.01 per weighted average share, resulting in a total increase in net assets resulting from operations of $3.8 million, or $0.61 per share. The $0.1 million net loss on investments was comprised of $0.2 million in net realized gain on investments, and $0.6 million in net unrealized appreciation on investments, offset by $0.9 million of net deferred tax expense on unrealized gains in our Saratoga Investments blocker subsidiaries. The $0.6…

Thanks Henri. I will take a couple of minutes to describe the current market as we see it, then I will comment on our portfolio performance and investment strategy. The market's extremely competitive conditions have remained challenging since our last call in May. Slide 13 indicates a continued downward trend in a number of transactions per deal sizes in the U.S. below $25 million. As we have seen in past periods of sustained economic growth, spreads have narrowed and competition is significant. This reality reflects the broad capital markets trend of an overabundance of liquidity due in part to continued fund formation. Not surprisingly in this environment, terms remain borrower friendly. Thankfully, the LIBOR continued to increase again this past quarter and provided some counterbalance to spread compression. We continue to believe the lower middle market, our target market segment, as the most attractive part of the market to deploy capital. The sheer number of companies at this end of the marketplace and our experience there, allows us to sift through and find transactions that we believe, are most likely to deliver the best risk adjusted returns to our shareholders, regardless of market dynamics. Now on slide 14, you can see that industry debt multiples remain extremely high, as lenders continue to be aggressive in their pursuit of putting money to work. As of March 31, 2018, average leverage multiples were above four times. With this as a backdrop, we have been able to achieve our results for a remaining relatively modest risk profile. Total leverage for the overall portfolio is 4.57 times, up slightly from the previous quarter, reflecting primarily the repayment this quarter of numerous lower leverage deals. Nevertheless, we continue to focus our investing on credits with attractive risk return profiles and exceptionally strong business models, where…

Thank you, Mike. As outlined on slide 19, following our most recent increase to our first quarter dividend at $0.51, our quarterly cash dividend payment program has grown by 183% since the program launched. This represents 15 sequential quarters of dividend increases. Despite these consistent increases, as of quarter end, we were overearning our dividend by 18%, giving us one of the higher dividend coverages in the BDC industry. If all the shares from last night's common stock offering was outstanding in Q1, we would still be over-earning our dividend this quarter. As you can see on slide 20, we have had an 8.5% year-over-year dividend growth, which easily places us near the very top of our peers and one of only seven BDCs have grown dividends in the past year. This list also includes some BDCs at the top of the list, that have variable dividend policies, therefore not directly comparable. We have now had 15 sequential quarters of dividend increases; while most BDCs have either had no increases or decreased the size of their dividend payments. We believe our continually increased dividend has truly differentiated us within the marketplace. We also continue to see Saratoga outperforming the industry. Moving to slide 21, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of more than 25%, significantly beating the BDC index of 0%. And when viewed over a longer time horizon, as you can see on slide 22, which is when we took over the management of the BDC, our three and five year return places us in the top two of all BDCs for both time horizons. Over the past three years, our 92% return exceeded the 19% return of the index, and alternatively, as compared with --…

[Operator Instructions]. Our first question is from Mickey Schleien from Ladenburg. Your line is now open.

Good morning everyone. My question is about the developing trade war with more news about that this morning. It seems obviously to be gaining some traction, so those tariffs may actually end up sticking. I'd like to understand how you are positioning the portfolio in terms of your investment strategy, with those developments in mind?

Well that's obviously a very good and very complex question, because I think the implications of these tariffs are yet to be seen, and the supply chains that they are going to affect, are kind of opaque. Not everyone knows exactly the consequences of all of this. I would like to say though, I think that we as an investment organization, given where we focus on a very smaller side of the middle market, the type of companies that we are investing in are largely domestic oriented, not as much export or import oriented. We have a lot of business services, software-as-a-services companies. So what we seek in our investments -- our investments that aren't cyclical and have their own niches, and so we believe that our portfolio right now is reasonably positioned for problems from the trade issues, and even if we had economic issues more broadly, and that's kind of our approach to investments. We are not macroeconomists trained in that, and what we try and do is find companies that kind of will power through whatever environment we are in, based on the internal dynamics and their marketplaces. And so, we feel very comfortable with our portfolio, as it stands right now, in really almost any circumstance that we can foresee. But the exact implications of a potential trade war are kind of hard for us to dimension right now, and we also believe our portfolio, being domestically focused and with the strength of the U.S. economy in general and the strength of the markets they are operating in, we don't perceive that as a substantial risk.

Thanks Chris. That's very helpful. That's all for me this morning.

Thanks Mickey.

Thank you. Our next question is from Jim Hayes from B. Riley FBR. Your line is now open.

Hey guys, good morning. Thanks for taking my questions. Can you just help us size how much spreads have come in over the past couple of quarters and the impact that spread compression would have had on yield this quarter, if not for the benefit of higher LIBOR and redeploying those proceeds?

Hi Jim. That's a good question, and the reason I am hesitating is, just to give you a sense; as we negotiate our deals, each one of these deals is a primary originated transaction; less dependent on the capital market. So when we look at larger market deals, that end of the market is very fluid, and I could probably tell you week-to-week where spreads are going. But in our market, where we operate, certainly we feel the pressure of narrowing spreads, but it's not a week-to-week thing, it's just more a general competitive dynamic. And each of the deals that we do are so different, that it's really hard to say how much directly spreads are being affected. But if you push me to an answer, it's probably 25 basis points, something in that range, that spreads have been tightening, and that's really over, say, the last six months. But again, each deal that we do is so different, some of them are -- the variation in how we price our deals can be several hundred basis points, just depending on where we think the risk profile is of the business.

Got it. That's helpful. And then, repayment activity was fairly high this quarter; just wondering, how much of an impact fees and accelerated OID amortization had on earnings this quarter?

Hi Tim. Actually it had a lesser impact this quarter than it did last quarter. So if you recall we noted that last quarter, these sort of the prepayments in OID acceleration was around $0.04 impact. This quarter it had a $0.03 impact, so actually slightly less.

Got it. Okay. And clearly, you are focused on growth at this point, just wondering, you touched on some of the expense line items. If there is any near or intermediate term focus on managing the expense base, or should we just kind of continue that to grow as you continue to scale?

No. Tim, I think we view our expense base, and I am assuming you are referring to sort of operating expenses. We view that as relatively fixed. We are obviously sensitive to sort of quarterly spikes, for example, when the SOX implementation now had a little bit of a spike and if we perhaps have a broken deal fee like we did this quarter, that could spike expenses a little. But I think, from an overall run rate, we view this as a pretty good level and that generally our expenses are relatively fixed and do not move in line with increased assets.

Got it. Okay. Thanks for the color.

Thanks Tim.

Thank you. Our next question is from Christopher Testa from National Securities. Your line is now open.

Hey good morning guys. Thanks for taking my questions today. Just on Easy Ice, I know it has been a while since you guys picked a bunch of the interest to what Easy Ice improved their cash flow position and help them expand further. Just curious if you could just comment a bit on how they have been expanding and growing and whether or not, you guys are looking at any point in the near future, where you may go back to getting more cash interest from Easy Ice?

Let me take that. The Easy Ice continues to perform very well. I think as we have referenced in the past, we look at that business, and to the extent that we can pick some of our interest on our second lien notes, and allow the business to redeploy that capital into growth, and that's accretive to our equity investment, that's something that we plan to do, and that's evidenced in the valuation this last quarter, where we continue to pick the second lien and capitalize that component of the interest there, but also the value of the business we believe continues to grow as well, and we are not changing the fundamentals of how we are valuing the business, the increase in the equity value that you saw in this most recent quarter, is reflective in just growth and cash flow of the business.

Got it. Okay. That's good color Mike, thank you. And looking at obviously, guys the stock offering last night and your total debt-to-equity is pretty much under 1.5 times, I know you guys received the Board approval in April to go to two to one. Just curious, obviously you have the ATM to issue on a flow basis and keep leverage down. But should we expect you guys scaling back on kind of ATM issuance and potentially, maybe either upsizing the revolver or doing another note issuance, perhaps in a quarter or two, in anticipation of having the higher available leverage?

A couple of comments on that. I guess, first of all, this recent equity offering, we are very pleased to have accomplished and we think that the pricing and it being accretive on a NAV basis to all shareholders, we think, is very favorable. We think the size of this offering is very much in stride with our growth and our growth trajectory, and as we have in the past, we have layered on baby bond offerings to our equity base on retained earnings, etcetera. And so, the answer is yes, we would anticipate doing some further financing, as we move throughout the year. But again, on a measured kind of way, and in strides, much like this offering is, based on what we foresee as a growth in our portfolio. The other dimension that we need to consider is favorability of market conditions, and as you very well know, raising capital, if you have favorable market conditions, it makes sense to avail yourselves of them, because things can change, as we all know. Our recent equity offering puts us capitalization wise, in a very good position, relative to an additional baby bond issuance, in terms of all the ratios etcetera. And so, that's something we are absolutely ready to consider. With regard to the ATM, I think that's an important tool of ours. We have just completed an offering, and so, this is a certain agreed period of time, that the ATM will not be in effect, certainly for that time. And then thereafter, again, it would be something that we would look at on a market condition basis and relative to what our portfolio growth profile is; and I would just point out in the last quarter, we didn't do any ATM issuances. So we are trying to be as judicious as we can, in terms of how and when we raise our capital, but also taking advantage [indiscernible] and really just trying to tune everything to supporting our growth, without having much of a lag or much of excess capital on our books. I think importantly, we said a number of times in our prepared remarks, if a 100% of these shares were outstanding, we would still be over-earning our dividend, and clearly, the protection of our dividend and our earnings relative to our dividend ranks very highly in how we look at all of our capital raising.

Okay, that's really good detail Chris. Thank you for that. And always appreciate the color you guys provide in your presentation on deal multiples and what you are seeing in the market, and it seems like obviously, there is more deals being done at plus six times EBITDA. Obviously, we have seen a major deterioration in terms and docs from the upper middle market and broadly syndicated market. How much are you starting to see that kind of creep into your part of the sandbox, and where you guys are looking? Have there been significant EBITDA add-backs and adjustments and how you pass-through debt? Is there something that you are running into, or is that still more confined to the larger borrowers?

By and large, that's confined to the larger borrowers. But certainly, some of those more aggressive terms pop-up in deals now and again. And that's why we spent a lot of time in the prepared remarks, talking about -- our response to that is just to make sure that we are scouring the marketplace, trying to find as many deal opportunities as we can, where we are not facing some of those dynamics. But by and large, lower end of the middle market, you don't see as much of those aggressive terms. I think if you look at the deals that we have closed, we have referenced in the six deals in the last couple of months, and four of those deals were post end of the quarter. The ones that we closed, even since the end of the quarter, are all first lien securities, and deals that -- couple of more sponsored deals, a couple of more proprietary in nature, relationships that we had built through our own business development efforts. And in those types of opportunities, we generally don't face those dynamics.

Okay. All right. That's fair. And sticking with reading things from more of the larger market, there has been kind of a pick-up in new money and sort of organic growth and M&A in the past couple of months. Is that something that you guys have seen and been encouraged by in the lower middle market as well?

There tends to be a lag in the deals that we see and do -- don't flow the same way that the larger market is. But having said that, it does feel like there is more activity in the marketplace, that's our general sense is we are getting potential deal opportunities across our desk. But we are really aiming at trying to find more of our own proprietary opportunities and building relationships that way.

I mean I think, to quote Alan Greenspan from years ago, I mean yeah, there is definitely little more animal spirits in the systems, there seems to be a little more confidence. The add-ons are coming a little more frequently inside of our portfolio. So we do feel encouraged by -- the confidence levels that we are seeing from our portfolio of companies.

Okay. That's all for me. Thanks for taking my questions guys.

Thanks Chris.

At this time, I am showing no further questions. I would like to turn the call back over to Christian Oberbeck for closing remarks.

Well, we'd just like to thank everyone for joining us today. We look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.