Welcome to the Saratoga Investment Corp's yearend and fiscal fourth 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 open up the line for questions. At this time, I'd 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 yearend and fourth 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 yearend and fourth 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 1:00 PM today through May 25. 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. As we reflect on our fiscal 2016 yearend, following a successful fiscal 2015, we'd like to highlight some of the continued progress and achievements during this productive year and quarter for Saratoga. Some of these are outlined on Slide 2. Since becoming the manager of Saratoga Investment Corp, we have been singularly focused on the long-term objective of increasing the quality and size of our asset base, with the ultimate purpose of building Saratoga Investment Corp into a best-in-class BDC, generating meaningful returns for our shareholders. Fiscal year 2016 and the fiscal fourth quarter continued our trend of outperformance. As highlighted on Slide 2, during the past year and quarter, many of our metrics and milestones underscore our achievements and continued momentum. To briefly recap, first, we continued on our path of strengthening our financial foundation by increasing our net asset value to $125.1 million, a 2.1% increase from $122.6 million as of end of year last year. Maintaining our investment quality and credit with 98.3% of our loan investments now having our highest rating and no investments on non-accrual. And third, generating a return on equity of 9.4% over the last 12 months, greatly outperforming the industry average of approximately 1.1%. Secondly, we expanded our assets under management to $284 million, an 18% increase from $240 million at the end of both our third quarter and fiscal year 2015. For the year, this increase of $44 million is net of $68.2 million of redemptions experienced over the last 12 months and reflects strong originations of $109.2 million for the year and $51.8 million for the quarter. This growth is also a 199% increase from $95 million at the end of fiscal year 2012. Our significant investment activity in the fourth quarter is consistent…

Thank you, Chris. Looking at our quarterly key performance metrics on Slide 4, we see that for the quarter ended February 29, 2016, our net investment income was $3.1 million or $0.54 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 $2.5 million or $0.45 per share. This represented a decrease of $0.1 million compared to the same period last year and an increase of $0.2 million compared to the quarter ended November 30, 2015. This quarter benefited from higher growth investment income as compared to the quarter's ended November 30, 2015 and February 28, 2015. Investment income increased 12.4% to $7.8 million for this year's fourth quarter as compared to $6.9 million for the third quarter and increased 4.6% from $7.5 million for the same quarterly period last year. This increased investment income was generated from an investment base that has grown by 18.1% since both Q3 and last year. The investment income increase was offset by increased debt and financing expenses from higher outstanding notes payable and SBA debentures this year, reflective of the growing investment and asset base, with some of it not yet fully deployed; increased base and incentive management fee generated from management of this larger pool of investments and increased total expenses excluding interest and debt financing expenses, base management fees and incentive fees. These increased expenses reflect higher professional fees related to the issuance of notes this year as well as increased administrator and deal research fees. In addition, we also accrued an excise tax of $237,000 during this quarter. In the fourth quarter of fiscal year 2016, we experienced a net loss on investments of $3.5 million or $0.62 on a…

Thanks, Henri. I would like to start by taking a couple of minutes to update everyone on the current market as we see it. The markets extremely competitive condition persists, and so the first quarter of 2016's market volatility has not helped. As you can see on Slide 11, at first glance, it appears that Q1 2016 may have been a turning point for leverage. For a number of years, middle-market leverage has been steadily climbing, a trend that appears to have reached a turning point based on the reduction in Q1 2016 on this slide. Valuation multiples for U.S. buyouts dropped for the first time since 2012. And 2015 exceeded 2014, which already have the highest multiple since even pre-crisis level. That multiples also fell for the first time since 2009. But have valuation and debt multiples really stabilized? It seems likely to us, the declining deal volumes, persistently low interest rates, and a relatively benign credit environment will collude to bolster leverage levels in our market. It's difficult to gauge where valuations and leverage will ultimately end up, but we think we'll continue to experience a competitive market where strong business is coming to market, will garner outsized valuation multiples and aggressive leverage. Against this backdrop, pricing remains under pressure, as lenders compete for mandates. Several data sources, in 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 market. Slide 12 further demonstrates how fewer deals are being done. The number of transactions for deal sizes in the U.S. below $25 million in 2015 was down 23% from calendar year 2014. Calendar year 2016 is off to a slow start as well. Only 353 debt deals in that…

Thank you, Mike. From the start of our quarterly dividend payment program 18 months ago, our expectation has been that this dividend would continue to increase, which it has by 128%, since the program launched. As outlined on Slide 20, during our fiscal year 2016 Saratoga has declared and paid dividends of $2.36 per share composed of $0.27 for the quarter ended February 28, 2014, $0.33 per share for the quarter ended May 31, 2015, $0.36 per share for the quarter ended August 31, 2015, and $0.40 per share for the quarter ended November 30, 2015, and a special dividend of $1 per share in June 2015. On March 31, 2016, we also announced a dividend of $0.41 per share for the fiscal quarter ended February 29, 2016, paid on April 27, 2016, to all shareholders of record at the close of business on April 15, 2016. Shareholders continue to 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 the reinvestment of dividends on behalf of its stockholders. For more information, see Stock Information section of the company's Investor Relations website. Slide 20 also shows how we are currently still significantly over-earning our dividend. This past Q4 dividend of $0.41 per share compares to our average adjusted NII per share of $0.48 for the year, which means we are currently over-earning our dividend by 17% for the year. This gives us one of the highest dividend coverages in the BDC industry. We also further exercised our share repurchase plan during the quarter ended February 29, 2016. During fiscal year 2015, we announced the approval of an open market share repurchase…

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

My first question is perhaps for Chris. Saratoga has a relatively small balance sheet. So I imagine, it's a challenge to write larger checks without causing investment concentration. Can you tell us what strategies you're employing to confront that challenge, for example, other BDCs co-invest with private funds to be able to provide more capital?

First of all, I'd like to say that, our focus has primarily been on the smaller end of the smaller middle market. So we've been investing as high as $25 million, but largely in the $3 million to sort of $12 million to $15 million EBITDA range. And at that size level, many of our investments, many of the type of credit that is appropriate for BDC as opposed to a bank, or the like, is kind of maybe in the $7 million to $20 million range, which is a very comfortable range for us to be able to lead the origination of those transactions. And so you can see a number of our transactions were invested at somewhere in the, I guess, our largest is $17 million and our smallest might be in the $5 million range, but in a lot of those investments we are the sole vendor. So a big part of what we are focused on, we can finance with hold positions in the mid-teens and be the lead investor. We do come across, as you point out, opportunities where the hold size might be substantially larger, it might be $25 million, $50 million, and the like. And I think as you can see from some of our portfolio holdings, we have a long history, and the industry, the BDC industry itself, has a long history of partnering. And so we have a very close partners that we have worked on a number of transactions with, that are named investors in the BDC industry, and we have a like-minded approach to these investments. And so when we find a deal that requires a larger hold position than ours, we have had really very little difficulty in finding partners that have enabled us to maintain our leadership as the lead syndicating agent of those deals to execute. So the short answer to your question is we have not found that our size has limited us from closing on the transactions that we originate and we have used partners when appropriate, but many of our investments we're able to complete with a hold position of our own.

And Mickey, this is Mike. I'll chime in a little bit on that. The other thing I'd point out is that, our experience is that at the lower end of the middle-market, as Chris defined it, we have an opportunity to position ourselves in a better spot in the balance sheet and get better return. So we think it's a better place to play. And so we're going to continue to focus on that end of the market and feel like we can comfortably grow our balance sheet with deals in that size range. Now, having said that, as we continue to grow up as a firm, we also are expanding our relationships with other debt providers, and as Chris mentioned, we have co-invested in a number of deals with other like-minded folks like ourselves. We're also continuing to expand our relationships with potential groups, like you mentioned, that will allow us over time to look at some of those larger deals. There will be a point in the marketplace for some of those larger deals will offer better returns than they do today, but right now we feel like that's not the better place to be investing capital. We feel like our space is the better one to focus on and we're happy to be where we are.

Mike, if I could delve just a little bit further then. Can you give us a sense of what proportion of your deal flow are club deals? What is the average EBITDA of your deals? And what percentage has a PE sponsor behind you?

I don't have those metrics in front of me. I would say that right now just generally, the majority of deals that we're doing are PE sponsor deals, but it's certainly not all of them. Our portfolio consists of a healthy mix. And I think we do have some stats on how many deals we see that are non-sponsor deals. We feel like those ones require some more work, but we have opportunities to get even better returns on non-sponsored activity. I don't have the stats either on club deals. We have more than a handful in our portfolio for sure. We've really focused our effort on trying to build relationships with the sponsor community as it relates to that side of our portfolio. The sponsor community with their size fits as well. And we tended to find that as sponsors with roughly $300 million funds and below, that doesn't mean that we don't serve some of the large ones and certainly building relationships there, but if you're looking at funds in that size range, we typically don't need to bring a partner and get a deal done. Particularly when we're looking at a junior capital position, you will note that for most of our yield unitranche deals where we're speaking for all of the capital, those tend to be in businesses that are at the smaller end of the size range just in terms of EBITDA. And that actually works out well, because it's our view that with some of these smaller companies, you'll like to be dollar one in the capital structure and be in a first lien position. As we start to see some of the larger companies with a bit more EBITDA, it's more frequently the case that those end up being bifurcated structures, where there is a first lien lender that's a third-party and we're coming in to provide some junior capital second lien capital. Sometimes we do that where the sponsors puts us together with another senior lender that they have a relationship with, and more often or more frequently, I should say, we're building relationships with senior lenders with whom we're partnering with and providing a combined term sheet to the sponsor community to support a transaction.

And Mickey, you can see on Slide 17, on the right hand size, there we just on the private equity sponsor side, we do show for our deals sourced as well as our term sheets, the break down between what is private equity, sponsored and --

Couple of questions on the CLO. I saw that you estimated yield fell pretty significantly quarter-to-quarter. Was that driven by the squeeze on cash flow from the Feds rate increase or problems with the collateral or a little bit of both?

I would say it was probably neither, Mickey. I think it reflects probably a couple of things. I think it reflects, a, some of the volatility that was experienced in the CLO market at the end of February. And then it also obviously reflects the fact that the CLO continues to sort of move down its maturity aging and another quarter of cash flow came off of it. And then you probably saw in the 10-K that our discount rate on the CLO also went up this quarter reflecting that volatility at yearend, which by the way, as you know, has changed quite a lot since then, has improved quite a lot since then. But the factor of all of these has resulted in, when you do the valuation, the effective interest moving down slightly.

Henri, what's the cash yield then on the CLO as opposed to the estimated yield?

We don't think of cash yield as a percentage. But I think as we've shared in that past, our cash distribution that we get every quarter, approximately half of it, which therefore represents the 17%, that you've seen, is interest. And then the rest of it, so really half of the $1.5 million we do a quarter is return of capital, and therefore, I guess, what you're including in your cash yield number.

And my last question. You alluded to a rebound in CLO equity valuations. Can you give us a sense of the scope of that rebound since your fiscal yearend?

It's hard to do, because we haven't done a full valuation yet, Mickey. But as I've said, we have seen definitely the prices of all of our positions improved greatly. So I'd say, February was probably, if you sort of think of the last four, five months, the valuation done at sort of the low end of the pricing. So we're expecting our valuation to reflect these increased prices when we run it, now, again, at May 31.

Couple of balance sheet questions. What's the outlook for monetizing the Take 5 common shares, I don't remember if you're in control of that situation or someone else, but obviously, I'm sure you would like to put that into a yield investment?

We have exited that equity position very successfully. I think the equity on that investment had a 10x return on the initial equity investment.

So that was exited since February?

Yes, that's correct. And that transaction was unrealized at quarter end, Mickey, or at the yearend. But we mocked it up, because it was close to being finalized at yearend to within $200,000 of the final value.

And what is your target for total leverage including SBA debentures?

Our leverage including SBA debentures, I believe, is currently about 1.15, I believe.

That's 1.3.

Yes. And then we still have -- I mean, our target is obviously to continue growing our debentures for the rest of the first license.

So you'd be willing to run the balance sheet at above 1.3?

Yes. And that's why the composition of our asset base is reflective of that as well. We're investing in lower leveraged transactions and have a good mix of first lien secured deals in our portfolio. So we think that's a healthy mix.

And you had a large quarter for originations. Were these skewed either towards the beginning or at the end of the quarter?

I'd say it's pretty even actually. There were definitely some at the beginning right after our Q3 and then there were a couple at the end and a couple in the middle. I mean I think we said there were eight and they really were split really evenly.

It's funny we tend not to think about things in terms of when they close relative to the quarter. We never ever want quarterly production to invade our credit process and our thinking.

No, I don't understand, it's just from a modeling perspective. Such a big quarter that it can really skew the metrics if you don't take that into account?

Well, Mickey, as you can appreciate for modeling standpoint, I think there was three deals that close within three days of quarter end. So it-was sort of an anomalous quarter, because the redemptions came early and then the originations that have been in the pipeline didn't actually close officially. So you really probably should look at those two quarters, on an average of the two quarters, rather than separate quarters, just to make more sense of all that.

Absolutely, Mickey. And we highlighted the past couple of quarters on our calls as well just that clearly redemptions are lumpy, and even originations, it's tough to look at it in a quarter. I mean, we're obviously very happy with this past quarter, but quarters are not really reflective of sort of production and redemptions, we look at it more from sort of an annual perspective, an annual growth.

So I think our balance sheet in terms of, from the top-down, building the right relationships, so that we're seeing the deals that our investors want us to invest in, and at any given time, we're looking at, gosh, it could be 50, 60 potential transactions in a given week and we're going through our pipeline constantly. As a result, the production ends up being very lumpy. I would even say, that if you saw -- I'd go further and say, if you see a BDC who is producing assets on a very consistent steady Eddie basis, that would concern me, because that's just not the business.

My last question, I appreciate all the time you're giving me. Your year happened to end sort of at a low point in the recent cycle in the market. And so there is some names that are marked at levels that look concerning, but that maybe technical. And I was just wondering if you could comment on whether any of these are really experiencing operational issues as opposed to just technical marks, so these would be BMC -- the names I was looking at were BMC, Dispensing Dynamics, Prime Security, Roscoe, Smile Brands and TM Restaurant.

So if, and of course, these are private companies, so we can't get into -- each deal has its own story, but a general response I'd give you that some of those deals are ones where there is a mark, and so they are valued based on the mark, because it's -- their securities that are traded, and certainly in looking at those by in large there has been an uptick, if you were to get a sort of indication from folks in the marketplace, the preliminary indication from folks in the marketplace, there you'd see a rebound generally in those credits. And then the other ones are also reflective of mark-to-mark, but it's a combination of things. I think you mentioned TM is one that that have had some softness. So I think in that business, I think reflecting the fact that the leverage is a little higher than what it would be on a new origination activity, but we still, in all of those credits, other than the two that we've talked about, the two legacy credits, Elyria and Targus, we feel very good about our principle investment in all of those credits.

Our next question comes from Doug Crimmins with RVP.

The question really that we continue to have, and just the area of concern is just this dilution, and I can understand the qualitative reasons, but quantitatively if I look, the NAV would probably be over a dollar higher today versus where it is today, if it wasn't this continuous dilution via the additional shares. And can you kind of walk me through the quantitative thought process on why you guys feel that this dilution is okay?

Well, I think a couple of thoughts here. Number one, we have been over time producing very strong returns on equity in Saratoga Investment Corp. And part of what we're able to do is to access SBIC leverage and baby bond leverage and the others. And so it's important for us to build our equity base in the company. And we recognize the company is trading at a discount to NAV, yet the incremental return on the equity that's retained is extraordinarily high. It's higher than our average return on equity, especially if it's viewed as invested in the SBIC. We think the return on equity in the SBIC is really like off the charts in terms of way north of 20%, if you look at the last year. So we view that the dividend retention is an extraordinarily high return investment for the company by retaining that capital and by the investors that participate. What I'd like to point out that that dividend, reinvestment plan is available to every single shareholder. So if every single shareholder were to participate, they would not have any dilution. The dilution occurs because some people are taking cash and some people are reinvesting. The rate of actual dilution is, there is a 5% discount for those that do that to the 10 days prior market price. So it's not that different than investors buying. It's close to what investors would get from just buying into the company at the market. However, it's primary capital that we can use to grow and support the high return on equity activities that we are doing. And so in an environment where much of the industry is trading below NAV, yet our performance is way in excess of the industry, we think it's important to keep growing and investing in the company, so that dollar a share that you're talking about that would be less equity capital, less of an equity base to support our operations. And because it is available to every single shareholder, that dilution is a voluntary event, right. I mean, it's voluntary to just take the stock or to take the cash. So if you are diluted, it's because you chose to take the cash and you chose to be diluted. But if you choose to reinvest, you're in the same position as you would have been.

But the fact is that it's trading at a 25% discount, and the market is saying, it really doesn't like you guys, you've guys have done a very nice job, the assets are performing and the company has done well, but you want to be in the entities that traded 95% of book value or close to par, those are the guys that are able to issue more equity through secondaries. And I mean it's kind of admired in this 65% to 75% of book value range for a while, so I mean the market continues to be skeptical. And I understand your thought process with respect, if you take the dividends, you eliminate the dilution, but the market kind of continues to assign a pretty big discount.

Doug, I think I'd note also, this quarter, as you probably heard, we note the discount ourselves as well and so we do have a share repurchase program that we are executing on quite a lot over the last couple of months. And we're up to over 60,000 shares already, but at the same time trying to balance this need to grow our equity and also grow our float as well, which is for us, I think, is important in thinking about share price depreciation as well.

I mean, I guess, we're not going to agree on it, but thank you.

Thanks, Doug.

Our final question comes from Ben Rubenstein with Robotti.

Quick question on the energy exposure. I understand that you have almost -- basically you have no direct exposure today, but I guess is that something you'd look to increase moving forward?

To give you a perspective on why we don't have energy exposure; the challenge with most energy deals, so it's not a 100% the case, there's certainly are business models that can be pretty steady and have characteristics that we like. But by in large, most energy deals just companies have a lot of volatility. And it's natural that they would, because their fortunes are tied to a commodity whose price changes quite a bit, depending on where you are in the cycle and depending on what's going on in the world and so forth. And so the reason we don't have a lot of energy exposure isn't so much that we forecasted it would be a decline in energy prices and so we sort of timed it, and we're smarter in that respect. Instead we just said let's stay away from businesses that are in end markets that are very volatile, and so when we looked at a lot of that -- and we could have done countless energy deals two, three years ago, but we've sit around our own credit community, and we say, okay, what does this business look like if oil is at $50 million. And almost every time it was like this business may not even be around or it's going to be really struggling, but certainly our debts going to be in trouble. And if we come to that answer, when we ask that question, then it's not a deal for us. So it's not likely that we're going to increase our energy exposure. It's not to say that we wouldn't find a deal or two, where we feel like its not tied to rig counts or things of that nature, and maybe serving the energy market in some way where we feel like its got more steady characteristics that we seek in the companies that we like to putting in our portfolio.

And if I could maybe make a comment further that the energy -- everybody is learning a lot about energy, it's written in the headlines of papers everyday. I think one of the biggest problems that we have with energy -- and we're very much niche-oriented. We like to focus on businesses that have like a leading market position, have something proprietary about their business, so that they kind of control largely what happens to them and management can make adjustments to things that happen. So you have a good quality management team, a good quality nich0e, you can manage that. And most of our portfolio, I mean almost all our portfolio isn't that type of business. The problem with energy characteristically is every single energy firm has underperformed dramatically. I mean even the best managed energy firms have been hammered by this downturn. So the forces that drive energy are beyond the control of a good management and good niche. Company's like Schlumberger, for example, which maybe has one of the best business niches in the world in terms of their incredibly dominant share of the energy industry, I mean, they are having a terrible time stock market wise and their market position is probably getting better, because their competitors are going out of position, the business, et cetera. So we would be more interested if we were equity investors in energy now than we would be necessarily as debt investors. But as debt investors we're looking for security of our principle and we just find in a market as volatile as energy, it's pretty -- history has shown it to be a very dangerous place to be a debt investor. And the people that made the most money have really been the equity investors, not the debt investors. And so that's kind of why we stay away from that particular sector.

And then, I guess, just quickly, I know you've talked a little bit about this, but in terms of the repurchase plan, I guess, can you be a little more specific in terms of how high of a price-to-book or price-to-NAV that you'd be willing to pay versus, I mean, like at 90% of book are you buying back stock? Are you trying to find more loans at the SBIC?

Well, I mean, as you can appreciate, any time a company is buying back its own stock, there is a lot of regulation around that. As you see reporting, we have blackout periods and the like. And so what we do is we have a plant with some parameters, but they are not publicly disclosed parameters and they are not supposed to be publicly disclosed, that we use on a quarterly basis to decide how we will be purchasing stock going forward. So each quarter we make a decision as to what the formula is for that. But then once that's determined, we don't weigh in. In other words, that is delegated to a third-party brokerage firm to execute. So again, that's a subject that's -- it's highly regulated subject and not something that's fully publicly disclosable.

And that concludes the Q&A session. I will now turn the call back over to Christian Oberbeck for closing remarks. End of Q&A

Well, again, we want to thank everyone for joining us today. And we look forward to speaking with you next quarter.