Good morning, ladies and gentlemen, thank you for standing by. Welcome to Saratoga Investment Corp.’s Fiscal Second Quarter 2016 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 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 second 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 second quarter 2016 Shareholder Presentation in the Events & Presentation 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 p.m. today through October 21st. Please refer to our earnings press release for further detail. 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. This past quarter we celebrated five years since we became the manager of Saratoga Investment Corp. I would like to start our earnings call by reviewing our primary focus and long-term objective during these five years, which was increasing the quality and size of our asset base with the ultimate purpose of building Saratoga Investment Corp. into the best-in-class BDC generating meaningful return for our shareholders. As highlighted on slide two, during the second fiscal quarter of 2016, we continued the momentum gained during the first fiscal quarter and last year towards realizing our long-term strategic objectives. To briefly recap, first, we endeavor to maintain a robust high quality asset base, with the strong yield and return on equity. While our asset under management contracted slightly in this quarter due to an unusual concentration of redemptions, something that we saw industry-wide, our metrics remained strong on a quarter-over-quarter basis. We will discuss this in further detail shortly. Second, the overall strengthening of our financial foundation has enabled the continuing increase in our regular quarterly cash dividends. We will pay a quarterly dividend of $0.36 per share for the second fiscal quarter of 2016, payable on November 30, 2015 for all stockholders of record on November 2, 2015. This further increase represents a doubling of our regular quarterly cash dividend in the past 12 months and shareholders continue to be able to participate in our dividend reinvestment plan if they prefer. Third, our base of liquidity remained strong and promises to improve. As mentioned before, on April 2, 2015, we received a green light and go forth letter from the SBA for a second SBI fee license, which if approved will allow us to grow our assets by an additional $112.5 million. We continue the…

Thank you, Chris. Looking at our quarterly key performance metrics on slide four, we see that for the quarter ended August 31, 2015, our net investment income was $3.7 million or $0.66 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 discussed at length last quarter, our net investment income was $2.9 million or $0.52 per share. This represented an increase of $0.6 million as compared to the same period last year and an increase of $0.2 million compared to the quarter ended May 31, 2015. In the second quarter of fiscal 2016, we experienced a net loss on investments of $2.4 million or $0.43 on a weighted average per share basis, resulting in a total increase in net assets from operations of $1.2 million or $0.22 per share. The $2.4 million net loss on investments was comprised largely of $6.1 million in net unrealized losses on investments offset by $3.7 million in net realized gains. Most of this quarter’s unrealized losses and realized gains are driven by Legacy Investments with the unrealized loss primarily from our Elyria Foundry Investment and the realized gain primarily from the network communications redemption that was discussed last quarter. Net investment income yield as a percentage of average net asset value was 11.8% for the quarter ended August 31, 2015. Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income yield was 9.3%, up from 7.2% last year and unchanged from 9.3% last quarter. Return on equity was 4% for this quarter. These will remain performance metrics that we feel are important indicators about success in pursuing our strategy of growing the asset price, building scale and generating competitive yield while continuing…

Thank you, 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 strategy and performance as we operate in this environment. Over the past couple of quarters we have found ourselves we’re doing a large number of deals. However, it seems to be harder 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 Q2. Consistent with our own experience, it demonstrates our junior debt providers were due to higher number of opportunities this past quarter, with 93% of respondents reviewing more than 25, which is up from the prior two quarters. In addition, 100% of respondents submitted at least one Letter of Intent during the first quarter. However, despite this increase and opportunities reviewed and LOI submitted, close transaction activity was down significantly 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 and our company by wider leverage levels and narrower equity cushions. 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 with most quality investment opportunities being pursued by multiple parties in competitive processes. Slide 12 further demonstrates how fewer deals are being done. The numbers of transactions for deal sizes in U.S. below $25 million year-to-date in 2015 were down 44% from year-to-date 2014. Calendar year 2015 is off to a very slow start with only 642 private equity deals closing in smaller deal market to-date, compared to 1,144…

Thank you, Mike. This past year we achieved important goal for us since our inception of paying regular quarterly cash dividends. From the start, we said our expectation was that this dividend would continue to increase, which it has -- which in consistent way it’s done since we commenced this program and after today’s further increase, we have now doubled our quarterly dividend since we institute the policy 12 months ago. As outlined on slide 19, over the past five 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, $0.27 per share for the quarter ended February 28, 2015 and $0.33 per share for the quarter ended May 31, 2015. Saratoga has also paid a special dividend of $1 per share on June 5, 2015. On October 7, 2015, Saratoga Investment Corp.'s Board of Directors declared a dividend to shareholders of $0.36 per share for the quarter ended August 31, 2015, payable on November 30, 2015 to all stockholders of record at the close of business on November 2, 2015. Based on our current share price, this represents a dividend yield of almost 9%. 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 and provides for the reinvestment of dividends on behalf of its stockholders. Our goal with this policy remains 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 also interested in reinvesting their dividends to receive additional…

Thank you. [Operator Instructions] And our first question comes from Casey Alexander from Ladenburg Thalmann (sic) [Gilford Securities]. Your line is now open.

Good morning, Casey. Are you on?

Pardon me, [David] [ph], please check your mute button. Casey Alexander?

Hi. Can you hear me?

Yes, we can hear you. Hi Casey.

Okay. Great. I’m not sure what the problem was. Good morning. Can -- Henri, do you have the breakdown of the fixed rate to floating rate percentages of the qualifying portion of the portfolio?

Yeah. It’s relatively consistent with last quarter. Let me just double check it here. I think it's around 57% floating rate again. Hang on one sec, 56% floating rate, 44% fixed.

Okay. Thank you. Secondly, the reserved cash, is that cash that came into the SBA subsidiary as a result of redemption?

That's correct. Effectively what ends up in our reserved line on our balance sheet is the cash that we hold in our actual SBIC subsidiary. So any cash that might come from redemption or obviously when we draw any SBA debentures would go into that cash line on the balance sheet.

Okay. So that’s clearly money that’s going to be redeployed?

Correct. Lastly, just in relation to -- I get the Elyria Foundry, it was a big move in equity position on a commodity related company and the debt position stayed fairly stable. I would love a little bit of commentary on Smile Brands that’s marked at around 66% of par and had a pretty decent mark in the portfolio. Can you give me some color on Smile Brands please?

Yes. That’s a -- it's a product we sponsored transaction. That’s faced some challenges. They have some softness in their revenue line and have incurred a lot of additional expenses trying to grow those revenues but haven’t had as much success doing so as they would like. And as a consequence, their cash flow has come down and the valuation adjustment reflects that and they declined in EBITDA. That credit was just restructured last week in a way that increased the interest rate that the equity sponsor put infusion in cash into the balance sheet as well. The important thing to note, Casey, is that we’re at the top of the capital stack in that investment. We have our first lien security and I think we’re -- we feel like we’re well secured by the enterprise value but that’s the state of play. I think the sponsor is working hard to try to improve things of the company.

Okay. Well, that’s good news to hear that the sponsor stepped up. Thank you for taking my questions.

Thanks, Casey.

Our next question comes from David Chiaverini from Cantor Fitzgerald. Your line is now open.

Thanks. Good morning. Couple of questions for you. You mentioned about how deal activity has been low for the overall middle market, but you are seeing decent deal flow at the lower end of the middle market. Is it safe to assume that you expect net portfolio growth to resume on an upward trend in coming quarters?

That’s our expectation. Right now, we have competing influences. The market -- on the one hand, the market is tougher, the credit environment is tougher. So you see that in sort of the leverage profile that we outlined on one of the slides. We are also seeing just more competition in general, even at our end of the market. Even though we feel like our end of the market is less competitive than the larger market, we are seeing an increase in competition and sort of tougher credit profiles. Now offsetting that and what gives us confidence that we can resume growing our portfolio on a net basis, is that we are continuing to grow our presence in the marketplace and we talked about that a little bit further too. And the one thing I would remind you is that when we received our SBIC license in 2012, we really started in this business sort of standing start. So as we’ve continued to grow our portfolio and do transactions, gives us more credibility has enabled us to grow our relationships with not only private equity sponsors but business owners in general. And so you see that in our growing pipeline of activity and we think that with that growing pipeline of activity, we will still find more deals that we want to do and execute on then we will have redemptions.

I think the other side of that question is redemptions. And we basically had -- unfortunately, we made some very good loans that got repaid so and then there was a concentration of them in this quarter. We don't expect that concentration to occur in subsequent quarters. We think our origination was solid this quarter. It’s just the redemptions were a little more concentrated than they might have been in other quarter. So, we view that redemption side as more of anomalist and not necessarily reflective of a trend.

Okay. Got it. And then next question is on, as you get the deal flow and you take on more borrowings, can you talk about balancing the pros and cons of going with, increasing the amount outstanding of the SBA debentures? I noticed that you have been at $79 million for the past few quarters versus you've been issuing Baby Bonds at higher interest rate than the SBA debentures. Can you talk about the merits between the two?

Well, I think as we’ve outlined in our discussion today and in general, our primary objective is to originate and to deploy the SBA capital. Again, I think the originations were concentrated in our portfolio of SBIC loans and so our objective is to do that. The SBIC, we have certain criteria in terms of what types of investments can go into that portfolio and so that is -- so it’s a combination of redemptions and criteria that sort of drive the net asset growth inside the SBIC versus at the BDC level. We feel fortunate that we can originate on both platforms and it gives us a lot of flexibility in addressing the market because we are not limited to SIBC style and criteria alone, so we can be very flexible with our presence in the marketplace. But yes, our objective is the SBIC portfolio. However, that's where some of the redemptions have been. So it's really not an either/or. It's what we are working on both and they just have different dynamics.

Okay. That’s helpful. Next question. Following up on your comments on Smile Brands and how the equity sponsor had a cash infusion, was the cash infusion enough that you may perhaps be able to write-up the first lien loan from $2.9 million up to, closer to the $4.4 million cost?

No, I don’t think we look at it that way. I think the sponsor has some work ahead. Obviously, we’ve got to be careful because it’s a private company. But I think the sponsor has work ahead of it and the bank group was well into work with the sponsor and they are cooperating as well and they are working hard to try to improve the fundamentals of the business. And I think that you won’t see that valuation move upward until we see some fundamental improvement in the business.

Okay. And the other portfolio company, it was mentioned in the prepared remarks, Elyria Foundry, I mean, how there is the rate down there? Can you talk about the performance of that company? I know it’s in the challenged metals industry, but how comfortable do you feel with the revolver as that’s been carried at cost? Is the trend such that there could be any risk with the valuation on the revolver?

We feel very comfortable about the revolver and its position on the balance sheet. In fact, we think that the risk adjusted returns on the revolver are fabulous. This is a company that could have been sold for significantly higher price just based on the value of the assets sort of the plant and equipment and the asset that Elyria owns. And so we feel like where we are on the top of the capital stack with our revolver is a very solid position. As it relates to the equity and the write-down that you see there, that’s just the company continued to struggle as it’s shifting its customer base, some of its customers which were relatively concentrated or having some challenges in the end markets they sell to. And this is a business that has a fair degree of operating leverage etcetera. So when their revenues come down, it really affects their EBITDA significantly. But we think that the company has pretty valuable asset and is looking to shift its customer base and grow the revenue profile. And if they are successful in doing that that they should have improved performance over time, and that’s what management has confidence in, as does the equity ownership.

And to further comments, Elyria is a legacy investment that existed before we became involved, before we took over the management of Saratoga Investment Corp. and the debt aspect of the business was converted. The reason it’s an equity investment is because all the debt was converted to equity. And so that revolving credit is the only debt on the company, there is no other debt and all the other equity is owned by the former debt holders which included us. And so there is actually cash flow generation at the company, even though they are in John’s times. And so it’s very well-structured to address and deal with some of its problem, some of which are cyclical, some of which are business -- they are fundamental business issues. So again, we don’t feel we are ended all about the revolver and we do continue to watch and work with the company on the equity side very closely.

Okay. That’s very helpful. And then my last question is, when I run the calculation, so book value is down 1.4% and it looks like half of the book value decline came from dilution from the dividend reinvestment program, can you talk about why this program makes sense when reinvestments occur at such significant discounts to book value and lead to dilution because it seems like you increased the authorization from 200,000 to 400,000, which I think is great and it seems that at this valuation roughly 75% of book value needs to be buying shares back as opposed to issuing shares? Can you make some comments on that?

Sure. There are several things in your question. First, let’s just talk about the shareholder repurchase plan. We had a plan of 200,000, we increased to 400,000, but basically a big chunk of that increase was sort of reflective of the increased volume in our shares. And so since we succeeded the plan we’ve had doubling of the volume which we’re very happy about, I mean that we’re very interested in promoting as much creating volume as we can. And so that was really just a tuning of that purchase program relative to the trading volume in the stock. With regards to the dilution from that plan, I think ever since we became involved five years ago before we start paying regularly cash dividends, we basically had an equity reinvestment plan compared to 80% in stock and 20% in cash. And we have a relatively small company, we’ve been working to achieve scale and we’re getting much closer to achieving scale. As Henri mentioned, our expense metrics and the like are very much bright on track with the industry now. They were able to higher relative to industry before. So we are making progress on scale. And then what we’ve effectively done is we’ve grown by retaining our earnings and that retention of earnings, the reinvestment rate on those earnings is very high. In the SBIC it’s high-teens, even 20s depending on the investment. So every dollar that’s retained by the company, it gets reinvested at a very high rate of return because of our dynamics, specifically in the SBIC but also across the company. What we’ve endeavored to do when we went to the regular cash dividend was to continue the opportunity for shareholders to reinvest. I think that on the one hand it’s dilution but on the other…

Okay. Thanks very much.

[Operator Instructions] And I’m showing a question from Mickey Schleien from Ladenburg Thalmann. Your line is now open.

Yes. Good morning, everyone. I wanted to ask a broad question, actually two questions. As we’re heading into next year, I was curious what your thoughts or sort of base case scenario is for the U.S. economy in terms of GDP growth? What the fed may or may not be doing? What your expectations are for defaults? And also if you could give us some sense of how your borrowers are doing in terms of their revenue growth and margins?

Let me try to address that, Mickey. The way -- well, let me just say directly. We don’t spend a lot of time trying to predict the macroeconomic state of the economy. We really -- we’re mindful of it. We pay attention to it. And the approach that we take is that when we underwrite a business and look to invest or lend to a business, we want to look for businesses that are going to hold up well in almost all economic environments. Everybody of course, faces some pressure if the economy goes down. But we’ve spent a lot of time underwriting each business and going through scenarios. We are doing what/if scenarios, going back to the last recession and seeing, well, how much the sales decline during that period and we’d hold up with this capital structure, et cetera. So the core of our focuses is really finding good businesses and making sure that they are once that we feel will perform even if the economy goes through a tougher time. So it’s hard for us to really have a crystal ball and predict what the outlook is going to be. And I’m sorry, your second question was….

Well, before I go to the second question, Mike, can I interpret that answer as another way of saying that perhaps you’re being defensive in terms of how you are allocating your capital today?

Yes. Well and generally we are. It’s a reactive piece of capital. And I guess a perfect example is one of the reasons you don’t see us with very much energy exposure at all. We don’t have any direct energy exposure for sure. I think if we had more of the momentum investing philosophy, we would have been there two years ago, we're seeing these deals constantly and what I’ve seen an upward to the right trajectory in EBITDA for a lot of these businesses. And said well, let’s go for it. Let's make a loan and hope that the energy prices don't change. We just don't do that in general. So that’s just not the approach that we take. We tend to be a little more defensive. We are certainly aggressive in trying to lend to and partner with businesses that we think are very solid and sound and we are aggressive in that respect. But it’s only when we feel like there are good business that will hold up pretty well in most economic times.

I’m sorry, further to the macro perspective, I mean, I think all of us and all that public dialogue you see about it. I mean, this recovery has not been highly robust recovery. I mean, it’s sort of recovered, but it's been sort of weak recovery along the way and there's been -- there is always a potential or reversal and some of the news in general has not been that great. So it's not that that would radically change what Mike said. I mean, we are really looking for niche companies and that's the beauty of the aspect of our market, right, is that all the companies we invested in, the GDP is not that relevant too, I mean they have their own niches, they have their own growth opportunities, they are sort of independent of broad economy. And so it doesn't necessarily affect us that much. But again in terms of the overall backdrop, we've been in a pretty big -- it is felt like a pretty precarious environment for whole a lot number of years. And so we have, as Mike said, we’ve had a defensive posture every time we made a loan and I think it's reflected in a steady asset growth where some of our peers in the industry have had very rapid asset growth. But we had a very steady measured level of asset growth. As we find these companies that we think are sort of all weather, all season companies that we can feel comfortable investing in almost regardless of the economic climate.

And then to your second question, Mickey, if you are ready for us, then to ask.

Well, I was just going to ask Chris, is the -- whatever you are assuming in terms of where we are in the credit cycle, are there particular industries that you are attracted to now?

I don’t know if I would characterize it is particular industries so much as niche companies. And again because of the size we’re at, we are looking at lots of service companies, companies that have software components, but they are not software companies, they are focused on specific applications of software in sort of highly niche areas. So it's not so much industries. I think what might be better to characterize it is what we’re not, what we’re avoiding, and what we’re avoiding is cyclical companies, commodity oriented businesses which would -- which energy would be part of. And as we said, we’ve been basically zero direct energy exposure. But there is a lot of other commodity related businesses that are out there and we kind of avoid those. We look for companies to where they have sort of leading market positions, pricing power, strong gross margin, stable market places, and room to grow within their market niches.

High recurring cash flow, high free cash flow and really good management teams.

Right. Okay. And the other part of my question was, we’re getting just such a mixed signals about our economy and obviously outside the U.S. even more mixed signals. So I would like to ask how your customers are doing, your borrowers are doing in terms of revenue and margins? I mean you get to see their numbers at least quarterly and probably monthly in many cases, so what is the thermometer saying right now?

Well, I think as a general statement I would say a lot of our companies are U.S. based companies.

Right.

And the United States’ economy is and U.S. focused. And so the U.S. economy is, I’m not saying it’s the strongest in the world, but it’s pretty -- it’s held us a lot better than a lot of the other places in the world. So our economic environment in United States is good and attractive. And so -- and our companies are niches inside of that. And so we have not with the exception of Smile brands and then Elyria legacy investments had some certain exposures. But in general, our companies are U.S. focused businesses and the U.S. economy in general is doing well, and our companies are doing quite well. And also our credit positions inside these companies with our sort of dollar -- first dollar credit first lien predilections that we’ve been executing on. We feel our credit position on top of that is very strong and Mike do you want to…

By and large, though to answer your question directly -- by and large our portfolio in total, the portfolio companies are performing better than they had in the previous years and just a broad statement throughout the portfolio. But by and large they are also underperforming where they expect. Now that that can be sort of, that’s something you have to take with a grain of salt though because no two company ownerships are alike in terms of how they put their projections together.

Yes.

Some ownership groups will put real aggressive projections to try to drive management goals that they probably can’t really reach and other extent to sandbags, so it’s hard to say, but across the portfolio I would say that by and large they are not performing as well as they would have liked, but better than last year.

And Mike is that to some extent driven by -- in the sponsored companies or the private equity sponsors putting or asking for overly aggressive budgets?

In some cases and some cases not, it’s just really depends. I think though that, if you look at across the portfolio that probably, it probably tells you something about where the economy is.

Yes.

I think it is pretty representative group of businesses in the U.S. and they are doing pretty well and performing better than they did last year by and large, but not as well they like.

Okay. I appreciate all of your time this morning. Thank you.

Thank you.

Thanks, Mickey.

I am not showing any further questions, I would like turn the call back to Christian Oberbeck for any further remarks.

Well, I’d like to thank everyone for joining us today and we look forward to speaking with you next quarter.