Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corporation’s Fiscal First Quarter 2017 Financial Results Conference Call. Please note that today’s call is being recorded. [Operator Instructions] At this time, I’d like to turn the call over to Saratoga Investment Corporation’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 first quarter 2017 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 2017 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 July 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. As we reflect on our fiscal first quarter 2017, following a successful fiscal 2016, we’d like to highlight some of the continued progress and achievements during this 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 a 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 first quarter 2017 continued our trend of outperformance. As highlighted on slide 2, during the past quarter, many of our metrics illustrate 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 $127.1 million, a 1.6% increase from $125.1 million as of last quarter, which was also our year-end; increasing our net asset value per share from $22.06 to $22.11 as compared to last quarter; maintaining our investment quality and credit with 98.4% of our loan investments now having our highest rating, our highest percentage ever since this credit rating was used; and as importantly no investments are on nonaccrual; and generating an annualized return on equity of 10.4% for the quarter outperforming the last 12 months’ BDC industry average of approximately 0.3%. Second, we slightly expanded our assets under management to $264 million, a 1% increase from $263 million as of May 31, 2015, but a sequential decrease of 7% from $284 million as of February 29, 2016. This decrease from year-end reflects redemptions of $20.6 million during the quarter. This quarter also reflects a 179% increase from $95 million at the end of fiscal year 2012. Our growth in AUM over…

Thank you, Chris. Looking at our quarterly key performance metrics on slide 4, we see that for the quarter ended May 31, 2016, our net investment income was $2.5 million, or $0.44 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 $2.6 million, or $0.46 per share. This represented a decrease of $0.2 million compared to the same period last year, but an increase of $0.1 million compared to the quarter ended February 29, 2016. Total investment income increased 1.4% to $7.9 million for this year’s first quarter as compared to $7.8 million for the fourth quarter of 2016 and increased 4.6% from $7.6 million for the same quarterly period last year. This increased investment income was generated from an investment base that has grown by 0.6% from the first quarter last year, but has decreased by 6.9% on a sequential quarterly basis. Despite this asset decrease, investment income has still increased since last quarter primarily due to higher interest income this quarter and less other income as a proportion of total investment income that benefited last quarter. The investment income increase year over year was offset by, one, increased debt and financing expenses from higher outstanding notes payable and SBA debentures outstanding this full quarter, reflective of the growing investment and asset base, with some of it not yet fully deployed; two, increased base and incentive management fees generated from the management of this larger pool of investments; and three, slightly increased total expenses, excluding interest and debt financing expenses, base management fees and incentive fees as compared to last year. These increased expenses reflect higher administrator and deal research fees. In the first quarter of fiscal 2017,…

Thank you, Henri. I would like to start by taking a couple of minutes to update everyone on the current market as we see it. The market’s extremely competitive conditions persist, and Q1 2017 was no different. Slide 11 indicates how many pure deals are being done in the market. The number of transactions for deal sizes in the US below $25 million in 2015 was down 23% from calendar year 2014 and calendar year 2016 is off to slow start as well, continuing that trend. Only 610 debt deals in that size range closed as of May 31, 2016 compared to last year’s 947 for the same time period. That’s a year over year reduction of 36%. At this pace, we anticipate the calendar year 2016 is likely to be a slower year than 2015. As a result, pricing remains under pressure as lenders compete for mandates. There is evidence suggesting that yields across the broader middle market for most credit types have increased slightly over the last quarter, but these increases are modest, generally no more than 25 basis points. We have seen no widening of spreads in the lower middle market where we operate. Our experience has been that strong credits are aggressively sought after. In the face of these difficult market trends, we continue to believe that the lower middle market is the most attractive market segment to deploy capital and the fundamentals here remain strong, leading to the best risk adjusted returns in our view. In our case, we have created a primary originated portfolio of healthy low leverage assets with a robust average yield of 11%. In addition, powerful long-term secular trends bode well for the BDC industry as a whole. Banks continue to shift toward large borrowers due in part to the regulatory…

Thank you, Mike. From the start of our quarterly cash dividend payment program 21 months ago, our expectation was this dividend would increase substantially and it has, by 139% since the dividend program launched. As outlined on slide 17, during the fiscal year 2016, we declared and paid dividends of $2.36 per share, gradually raising the dividend through the year from $0.27 for the quarter ended February 28, 2015 to $0.40 per share for the quarter ended of November 30, 2015. Last year, we also included a special dividend of $1 per share. In addition, during Q1, we announced and paid a dividend of $0.41 per share for the fiscal quarter ended February 29, 2016 and on July 7, 2016, our Board of Directors declared a dividend of $0.43 for the quarter ended May 31, 2016 to be paid on August 9, 2016 to all stockholders of record at the close of business on July 29, 2016. This is a further increase of $0.02 to our quarterly dividend. Shareholders continue to have the option to receive payment of the dividend in cash or receive shares of common stock, pursuant to our dividend reinvestment plan, or DRIP plan, which we adopted in conjunction with the new dividend policy and provides the reinvestment of dividends on behalf of our stockholders. For more information, see the Stock Information section of our Investor Relations section of our website. Slide 17 also shows how we are currently still over-earning our dividend. This quarter’s dividend of $0.43 per share compares to our adjusted NII per share of $0.46 for the quarter, which means we are currently over-earning our dividend by 7%. This gives us one of the highest dividend coverage ratios in the BDC industry. We also further exercised our share repurchase plan during the quarter…

[Operator Instructions] And our first question comes from Casey Alexander from Compass Point Research.

I had a couple of questions. Last year you noted that you did the catch-up dividend in order to meet the RIC requirement. There hasn’t been any discussion about it this year. Is your plan this year to just let the excess net investment income spill over?

We will probably have a catch-up dividend this year, but it would be substantially smaller than it was last year. That is something we’re still working to calculate and we will address that shortly.

Henri, can you tell me how much of the cash is within the SBA subsidiary?

Most of it, Casey, I think it’s around 25 or 25.5 of the amount that’s on the balance sheet is in the SBIC subsidiary, reflecting – some of the redemptions we had during the quarter in that – in our SBIC.

So you’re kind of in a situation where you’re almost reverse levered and that you’re paying interest on some debt that you just have cash against instead of investments. As you get that money to work and continue to grow the portfolio, does it make sense to take a more balanced view of your liability structure and try to get into that line of credit a little bit more so that even if you have some redemptions you can pay that down as opposed to paying interest on leverage that you’re not currently using?

Casey, I think that’s definitely an optimal situation and that’s something that we would like to be. And I think one of the things that’s just – the way our investments pattern has occurred is while we’ve made some significant investments in SBIC, we just also had a lot of realizations in the SBIC. And once you draw the debentures there, they’re just – they’re drawn. And those aren’t a revolver as you point out. And really what we need to do is get our – all that cash reinvested and we’re in process, we have deals already close this quarter and we would expect to take care of that cash imbalance shortly. But again, once we’ve drawn the debentures, they’re not redeemable, if you will. I mean, they are, but you shouldn’t because they’re such attractive financing. So ideally I think we would be into the revolver, but again it has to do with the concentration of our investments and the very positive returns on those investments in the SBIC.

Mechanically, Casey, I mean it’s a very good point, but the way the SBIC program works is that when an asset qualifies for the program, you draw on the debentures to fund that investment. And if you get the money back, good news is you can redeploy that capital and get the advantage of that really long-term interest-only cheap financing from the government, but it doesn’t have the revolver capacity. It can’t swing up and down unfortunately. But if you were to instead fund more of that on the revolver, then it’s out of the SBIC subsidiary for good. The SBA doesn’t want you to fund it up at the BDC and then depending on timing sort of push it down to the SBIC. It’s just sort of the mechanics of the program. We don’t manage that SBIC license with the expectation that we’re going to be sitting on excess cash. One of the downsides of the performance that we’ve had with our investments is that we’ve done very well and sometimes results in some significant realizations, redemptions and we just happen to be at a moment in time where we’re sitting on some cash. We don’t expect that’s going to last long looking at our pipeline. So we shouldn’t be in a position where it’s a real drag on shareholder earnings.

I appreciate that answer, Mike. Let me ask you, of this pipeline, is the pipeline meeting the leverage profile that you’ve been used to or are you also starting to get squeezed up into the top end of the toothpaste tube in terms of leverage? And how many deals are you turning down or specifically on terms, there are companies that you would like to invest in, but the competitive terms have just pushed them to the point where you don’t see it worth it to you?

That’s a really good question. And I’ll tell you to the last part of that, I’ll address first. For us, mostly we have just not seen the quality that we like. I think we’ve done a very good job creating relationships and making sure that we’re seeing as many of the right types of deals as we should. And you can see that reflected in the number of deals that are coming in house in that one slide, but you see fewer term sheets being issued. And that’s really reflective of quality; it’s not reflective of us wanting to win the deal and then the competitive terms are so aggressive that we decide to back away. So we’re in the fortunate position where we’re not just getting squeezed away because the leverage profile of the investments is too great. I will remind you that when we think of our portfolio, certainly leverage is a metric and it’s a metric for risk. But I’ll tell you some of the best deals that the investment professionals around here have done are ones that on the face of it have a little bit higher leverage profile, many of those have a higher equity contribution than the businesses that deserve more leverage as well. So while that is a metric that we pay attention to and I think overall it’s reflective of the quality of our portfolio, the fact that we’ve got a lower leverage profile, some of our best quality assets are ones that on the face of it have a little bit higher leverage.

So your point is then the cheap is sometimes cheaper.

Absolutely. I can tell you we’re sort of talking about it, I’ve been doing this for so long. I think over my career, the one deal that I did that didn’t work out so well was I think a deal that was 2.5 terms leverage on the face of it. And at the end of the day the business had some dynamics that were tough. It was many moons ago, but it’s sort of a reminder that leverage is one metric, but we spend all of our time thinking about the sustainability of the business model and why it’s going to have a sustained enterprise value and there’s a lot of variables, a lot of work that goes into that. Sometimes you’ll position yourself that you could be 5 times in the balance sheet, but it’s a business that has an enterprise value that’s north of ten and we can get comfortable that it’ll stay there. That may be a better investment than one that’s at 3 times leverage that somebody is buying for five, but it’s got other dynamics that may make it a tougher credit.

And lastly, Henri, this is just a maintenance question. The higher administrative expenses, is that permanent for modeling purposes? Is that a step up that it’s going to stay or does that have something to do with additional year end expenses?

No. That is permanent. Last year, during their renewal of the administrator agreement around mid-year, our cap was increased from $1 million to $1.3 million. So that wasn’t in Q1 last year; it was still at the $1 million. But now the last three quarters it’s been at a run rate of $1.3 million annualized. So that is permanent.

Our next question comes from Mickey Schleien from Ladenburg.

My first question maybe for Mike, I noticed that Targus was converted from cash to pick pay, which could imply that the company is struggling. Could you give us an update on how they’re doing?

Well, there’s been a recapitalization of the balance sheet. So our debt capital is reflecting the under-performance of the business. And I’ll remind you this is a legacy asset as well, it was converted to equity capital. So that transaction has taken place and we’re hopeful that the business is now at a level that is not only stabilized but has a chance of recovering to some degree.

And Mickey just also to remind, it was mostly written off, actually totally written off last year end as part of the restructuring. And prior to that, although it was cash, it was on nonaccrual status. So there wasn’t any cash interest actually flowing through the P&L.

Just a technical question, in your unitranche deals, when you sell the first piece and I don’t really know how often this occurs, how many turns of leverage does that usually represent?

That’s a really good question because you see a lot of those structures in the marketplace and we’ve been involved in crafting them for many years, so understand it very well. I can tell you there’s not a set answer as to how much senior capital comes in front of you. We typically don’t structure deals like that where we’re selling the first lien or the first out piece off. When we structure something that way we usually do it in concert with a senior lender partner and we together come up with a capital structure that – with a facility that we think is competitive in the marketplace and so they’re done at the front end, not a sale process. And usually the senior debt is a component of it, the first out piece is a component of it. It might be half of the capital structure, but there’s no one rule of thumb.

And Mike, in the deals where there is a – I shouldn’t use the word sale, I understand, because if you sell it then that creates a lot of accounting issues. But in situations where you have a bank ahead of you on a unitranche deal, do you list those as first lien investments or second lien on your SOI?

If it’s a – so you’re referring to actually schedule of investments, right, Mickey?

Yes. So if you do a unitranche investment and with a commercial bank partner which has some piece of the deal ahead of you, do you list that as first lien or second lien? I didn’t see a footnote that would describe that.

I think we generally would – if it’s like a first lien last out, we would highlight that in our schedule investments. An example was Community that we had up to some point towards the end of last year, there actually were listed as the first lien but it would be first lien last out. What you see you is sort of first lien highlighted on the SOI is just a first lien loan.

So in other words, there’s probably no unitranche currently in the portfolio. Henri, we’ve talked about this before, but we are getting closer and closer to the end of the reinvestment period for the CLO. Can you give us any thoughts on refinancing that vehicle, updated thoughts?

I think not too much of an update than what we provided last time. As we said then, we still had – I think last time we spoke still three quarterly payments remaining. We still have two now currently before the reinvestment period ends and I think we definitely talk about it and still considering the various options. But there is still a couple of quarters to go as one would generally do this refinancing once you go past the reinvestment period. But Mickey, consistent with what we said in the past, CLO is an important part for us, of our BDC and it’s something that we do place a lot of value on.

And one further comment, Mickey, is that as one who watches the CLO market carefully, there’s been a tremendous amount of volatility this year. Late last year, early this year period of time, CLO valuations were down, spreads were difficult, there were not a lot of CLOs being done. And all that has reversed itself at this point in time. So the refinancing environment is much more favorable today than it was on our last call and it was on two calls ago. Whether that remains to be the case or not is unclear. So there’s a market dynamic as to when it makes sense to pull the trigger on a refinancing as well, having to do with spreads and asset spreads, liability spreads. So all that’s in a dynamic that we’re watching very carefully. And as Henri has said, we’re very interested in finding a path, but we also need to find a path that’s fundamentally in the right profit profile for the firm.

Chris, I was hoping, given that you are a relatively small company, your forecasts for your company are very sensitive to the pace of investments that we assume. And I know you in your prepared remarks talked about a stronger second quarter. But can you give us – we are halfway through this second fiscal quarter, can you give us at least a scope or a range of what you think you might see in terms of the gross originations this quarter?

I think we’re reluctant to do that right now just because we have a number of deals we’ve closed and we have a number of deals that we feel are going to close soon, but we also have a number of potential redemptions. And there is just a dynamic there that we would prefer not to predict on this call at this moment.

Mickey, it is a good point. As a smaller business, our balance sheet can be a little bit whippy quarter to quarter just reflecting that. We tend to look at the business and I’ve been doing this for a long time, I think it’s a real important thing from a credit perspective as well as I know our shareholders want to make sure that our assets are really high quality, we look at the business really over sort of a longer period, 12 months or so. What progress are we making? And first and foremost, we evaluate ourselves by saying are we seeing the right transactions? Are we getting add backs to try to win the right deals from the right people? And there’s still work in progress there and that’s one of things that we’re most excited about is that we’re still getting our name out there. There are a number of people in the marketplace, in the smaller end of the middle market is massive. It’s just an ocean of different deal providers and investors. So we’re still getting our name out there and we want to increase the number of opportunities we get with quality co-investors and people that we can work with. That’s how we evaluate ourselves. Now having said that, if you ask the question not quarter to quarter, but over just maybe use a 12-month metric, do we feel like with the deals that we’re looking at that the chances that we’re getting to invest capital that our originations can outpace our redemptions, the answer is yes and we think that we can grow at a pace that’s consistent with what we’ve done in the past. But that won’t – you’re going to see some lumpiness quarter to quarter and I think that’s an important thing. I would even say and I think I maybe said this before, but I would say that if you see a BDC that is investing at a consistent pace quarter to quarter that is a sign of trouble. It’s not how the business works, it just doesn’t work that way.

I hear you, Mike. But with much larger BDCs, it tends to be a little smoother and I understand everything you are saying, but obviously our customers are looking for a quarterly forecast and in the end we have to assume something. But it’s actually a segue into my last question. If I recall correctly, the amount of private funds other than the CLO that’s managed by the external manager is quite limited and the BDC does not co-invest. Is that correct?

Yes.

So given that structure, Chris, have you given thought to converting to an internally-managed BDC, which potentially could improve your efficiency ratio and realize a higher valuation for the stock?

I think we’re generally aware of a lot of the conversations in the industry. I think the point that you make is one that has been in discussion across the industry for a period of time. It is something that we consider when we look at it. We also look at the marketplace in particular and in the marketplace in particular the vast majority of funds are externally managed. And there don’t seem to be many conversions taking place like you just described. So it’s something we are aware of and have thought about and considered. But we don’t see that as an industry trend, if you will, and it’s something that we’re not planning on doing. It’s something that we’re generally aware of at this time.

[Operator Instructions] I’m not showing any further questions in queue at this time. This concludes today’s Q&A session. I would now like to turn the call back over to Christian Oberbeck for closing remarks.

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

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.