Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.’s Fiscal Third Quarter 2017 Financial Results Conference Call. Please note that today’s call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Saratoga Investment Corp.’s Chief Financial Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to the Saratoga Investment Corp.’s fiscal third 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 third quarter 2017 shareholder presentation in the Events & 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 p.m. today through January 19. 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. This quarter was a very gratifying quarter for us. In addition to continued strong financial results, we achieved two significant objectives by refinancing both our CLO investment in November as well as our existing baby bonds shortly after quarter end. These important steps continued to strengthen our financial foundation and assist in our singular focus and long-term objectives to increase 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. Before we go into greater detail on our fiscal third quarter 2017 results, we are pleased to say that this quarter continued our trend of outperformance and steady growth. Slide 2 highlights some of the continued progress and achievements during the past quarter. To briefly recap; first, we continued the strengthening of our financial foundation this quarter by maintaining a high level of investment credit quality with 96.7% of our loan investments having our highest rating and generating a return on equity of 7.7% on a trailing 12-month basis, greatly outperforming last 12 months’ BDC industry average of approximately 1.1%. Excluding the $5.7 million realized in unrealized losses in our legacy investments, Targus Group International and Elyria Foundry Company LLC over the past 12 months, the return on equity for the last 12 months ended November 30, 2016 was 12.1%. Both Targus and Elyria are legacy investments that predate Saratoga’s management of the BDC. Second, we expanded our assets under management to $278 million, a 15% increase from $241 million as of November 30, 2015 and a sequential increase of 2% from $273 million as of August 31, 2016. Year-to-date, assets under management are slightly down from $284 million, our highpoint at the end of fiscal 2016.…

Thank you, Chris. Looking at our quarterly key performance metrics on Slide 4, we see that for the quarter ended November 30, 2016, our net investment income was $3.4 million or $0.60 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 $3.0 million or $0.53 per share. This represents that an increase of $0.7 million compared to the same period last year and no change compared to the quarter end at August 31, 2016. For this year’s third quarter, total investment income was $8.4 million, essentially the same as compared to this year’s second quarter and an increase of 21.7% from $6.9 million for the same quarterly period last year. This increased investment income was generated from an investment base that has grown by 15% from the third quarter last year and by 2% on a sequential quarterly basis. In addition, total investment income benefited from an increase of $0.3 million in other income this quarter compared to last year as the higher levels of originations and repayments this quarter led to increased advisory fees and prepayment penalties received. As compared to last year’s third quarter, the investment income increase was offset by; one, increased debt and financing expenses from higher outstanding notes payable and SBA debentures this year, reflective of the growing average investment in asset base. And two, slightly increased base and incentive management fees generated from the management of this larger pool of investments. Finally, net investment income this quarter benefited from decreased total expenses, excluding interest and debt financing expenses, base management fees and incentive fees, reflecting primarily lower general and administrative expenses. As compared to this year’s second quarter’s debt and financing expenses, base…

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. Slide 13 indicates that the number of transactions for deal sizes in the U.S. below $25 million in 2016 was down 28% through 11 months. At this pace, we anticipate calendar year 2016 will post much lighter transaction volume than 2015. As a result, pricing remains under pressure as demands per assets has outpaced supply. Yields across the broader middle-market for most credit types have declined and spreads have tightened marginally over the last quarter. Generally, we have seen no change in spreads in the lower middle-market where we operate. Our experience this whole year has been that strong credits are aggressively sought after and this has not changed in the current environment. In the broader market, where there is an abundance of capital, competitive dynamics have led to tighter pricing, higher leverage and looser terms especially for high-quality credits. By contrast, in our view, the lower middle-market where we operate is the most attractive market segment to deploy capital and the fundamentals here remains strong leading to the best risk-adjusted returns. In our case, we have created a primary originated portfolio of healthy, low leverage assets with a robust average yield of just under 11%. In addition, powerful long-term secular trends bode well for the BDC industry as a whole. Banks continued to shift toward large borrowers due in part to the regulatory hurdles facing smaller banks serving the middle market. In addition, Saratoga Investment’s target market is rich with potential opportunities. Small businesses with revenues between $10 million and $150 million in revenues represent nearly 90% of this opportunity set. In the chart on Slide 14, you…

Thank you, Mike. From the start of our quarterly cash dividend program just over 2 years ago, our expectation was this dividend would increase substantially and it has, growing by 150% since the program launched. As outlined on Slide 19, during 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 November 30, 2015. Last year also included a special dividend of $1 per share. In addition, during fiscal year 2017 so far, we have declared and paid dividends of $1.48 per share further raising the dividend from $0.41 per share for the fiscal quarter ended February 29, 2016 to $0.44 per share for the fiscal quarter ended August 31, 2016 and a special dividend of $0.20 per share paid on September 5, 2016. On January 10, 2016, our Board of Directors declared a dividend of $0.45 per share for the quarter ended November 30, 2016 to be paid on February 9, 2017 to all stockholders of record at the close of business on January 31, 2017. This is a further increase of $0.01 to our quarterly dividend. Therefore, in total, we have already declared dividends of $1.93 per share during this fiscal year. 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 for the reinvestment of dividends on behalf of our stockholders. For more information, see the stock information section of our Investor Relations section on our website. Slide 19 also shows how we are currently still over-earning our dividend. This…

[Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Yes, good morning everyone and Happy New Year. Can you hear me okay?

Yes, we can. Hi, Mickey.

Hi, Mickey.

I wanted to start with the new investments; Apex, Erwin, and Gray, were these deals you led or were they deals where you participated in a club where someone else led or were these syndicated?

The investments that we made this quarter were deals that we led and the vast majority of the deals that we do, we are leading as a primary origination function and that means that we are not only leading and most of the time by ourselves, we occasionally bring in some partners, etcetera. But not only performing all of the underwriting but as well all the negotiation of the documents, et cetera. And then of course the team that’s underwriting it continues to manage that investment after it’s been originated, which we think is the right way to structure an investment.

And Mike, were these sponsored transactions?

A mix, which is consistent with the mix of origination activity that we got, I think as I have referenced on the call and we have some slides in here as well. We actually are very proud of the number of non-sponsored deals that we see. Our closing rate on non-sponsored deals is naturally quite a bit lower than what they are on sponsored deals. But the ones that we get done typically have – we are able to negotiate better terms, better pricing and things of that nature. So it’s an important part of our business as well. So yes, it’s a mix of both.

And could you give us a sense of their average EBITDA at least within a range?

I would have to go look. I mean we are – if you think about our business in general, we are investing in businesses that may have as little as a couple of million dollars in EBITDA. And the ones that are on the smaller end of the range, we tend to be more focused on being in a unitranche security at the top of the capital stack. And then when the EBITDA grows, those are deals that tend to be, as you get kind of north of $8 million, sometimes $5 million, that’s sort of in the $8 million EBITDA range, those transactions tend to be more competitive and are often structured in a way where there is a bifurcated structure, so there is many times a senior lender as well as a junior capital provider. So if you looked across our portfolio, the larger deals tend to be ones where we are more in the junior capital position, the companies with larger EBITDA and the ones that are smaller, we tend to be more in a unitranche position.

So is it your sense that these are the former or the latter, what I am trying to get at Mike is that, I completely agree with the prepared remarks that the market is extremely competitive and given Saratoga’s relatively small scale, which precludes you from participating in uncertain transactions, I am trying to get a sense of how you are getting the deals done that you are doing and it feels like it’s because you are operating truly perhaps below $5 million of EBITDA, which is less competitive?

Well, it is a mix, but yes, when we see a deal, that’s less than $5 million in EBITDA, that’s right in our sweet spot, and we are very competitive on those transactions. And quite honestly, we don’t run into as many of our BDC compatriots at that end of the market. So yes, that’s – it’s part of what I said in the prepared remarks, we actually like that. We find – now we have to be extremely selective, but as you get below that where that threshold is, it’s hard to put a bright line on it, but let’s call it below $5 million in EBITDA, there is fewer people chasing those deals. We will certainly do the work to get comfortable with of the right types of businesses, and you have to be very, very careful and that’s what we have demonstrated an ability to do over the many years. When you find the right ones though, you can structure a very good deal with the terrific risk adjusted return.

Okay, I understand. Moving on to the current quarter, we are now more than halfway through it, and rally in the leverage loan market has continued, spreads continue to tighten, I am talking about loan spreads, right, both first and second lien, can you give us any color on the investment activity to-date and also the repayment activity and how you view the attractiveness, given the market is getting more and more difficult?

There is no doubt that the market continues to be competitive. And we know that if we stay the course that will change. But nonetheless, we are in that market. And it really is there are a lot of factors that are influencing it, but at the end of the day, there is a lot more capital out there than there are transactions, so that’s always a tough dynamic to face as a lender. I think focusing on the areas of the market that we have focused on do give us some competitive advantages that will allow us to continue to grow. We also benefit from the fact that – I say this a lot, but it’s just as true. We started at a standing start in 2011 when we took over management. And so there are a lot of people that still don’t know us. Every time we do a transaction, it creates a new relationship and a new opportunity for us to see a future transaction. That’s why I emphasize the fact that there is really three primary ways for us to do deals; one is to do another investment with a relationship that we have already formed. We have done a great job of building relationships and then getting repeat business. Another is to support existing portfolio of companies that are performing very well and advance more capital to them to continue to grow and we have done that fabulously well. And then really we spend most of our effort and we can’t get enough of these, if you ever feel satisfied is to build new relationships. But in this past year, we have built our portfolio with the combination of all three. You asked also about the repayments. Candidly, the exits that we have had, we…

Mickey and just one comment on the new originations, so Apex and Gray Heller were new originations this quarter. Erwin was actually a new origination in Q2. It just had a name change this quarter from PCF4 on the schedule of investments to Erwin.

Okay. Thanks for that clarification. A few more portfolio questions, I am curious what attracted you to the CLO’s debt rather than taking on a larger chunk of the equity, given that the equity should generate, everything remaining equal, higher return?

Mickey, this is Chris. That was a reflection of sort of the capital markets, if you will, at the time. In other words, right now there is a lot going on in the CLO market refinancing market. I believe it was December, was it 24 or December 20, there was a deadline for the imposition of new rules and regulations in terms of risk retention for CLOs. So, there was a huge volume of, they call them resets, which is what we did, which is basically refinancing existing CLOs as opposed to new CLOs. So, there is a lot of activity in the marketplace and so we were able to avail ourselves of that healthy market. This tranche that we bought was actually the tranche just above our equity. So arguably, it could be viewed potentially as equity, but it had been – when we refinanced last time, there was appetite for that. That had actually changed hands at a discount earlier in the year, you recall, a year ago at this time, it was pretty bleak outlook and certainly in the CLO market, there was a lot of very difficult performance for all the various tranches. And an investor actually had brought this on a discount on the secondary basis and that investor was more of a hedge fund short-term investor. And so when it came to refinance, they were not interested in rolling over for a long-term. They were interested in basically realizing a very good purchase. They bought it at a substantial discount and then we took them out at par. So, they did very well on that tranche and it really wasn’t a market at the time we did that for that tranche. So, we bought it ourselves. It’s marked as somewhat of a market, the interest rates – and that’s something we are keeping our eyes open. If we could place that ultimately or sell that ultimately we would consider doing that. So, it’s setup to be sold again from us if we can find an adequate purchaser for that.

Okay, that makes sense. And Chris, what drove the declines in the valuation of, I don’t know, is it pronounced Courion and Targus as well?

I will take that, I think. And did you mean Targus or Taco Mac perhaps?

Well, I was going to end with Taco Mac, but all three.

Yes, Targus has already been substantially written down and see if there shouldn’t really be much of a change.

I think most of the Targus write-downs had already been taken place in previous quarters.

Well, the TLB fell some more, right? I am just curious whether this thing is ever going to turnaround or is it sort of in a death spiral?

Well, it’s hard to say. I think the management team and those involved feel like it has stabilized generally, but it certainly plays in a difficult market for sure. As I said, that’s a legacy investment and that’s one that we are doing our best to try to realize the most return we can out of it. But let me...

Courion and Taco Mac?

Yes, happy to address that. So, Courion has been written down really to reflect a yield adjustment and that’s mostly reflective of the fact that the company is repositioning itself and is investing very significantly in growth, which is creating some noise in the numbers. As a consequence, when we look at it and we look at the pricing on the deals with the noise in the numbers, we feel like it probably needs a write-down. It deserves a write-down to reflect that. But fundamentally, we feel like we are well covered in the enterprise value that’s a sponsored transaction with a significant amount of capital underneath it in a business that fundamentally we feel very good about and is sound. As it relates to Taco Mac, that’s a first-lien security, that is a business that is underperforming. It’s having some challenges with its fundamentals. It operates in the competitive restaurant market. We are working closely with the sponsor and the other lenders to evaluate our options right now. And in the recent to and fro of negotiation, the sponsor has elected to suspend interest payments currently, but we are working with them and that’s not an uncommon thing to happen when you are in negotiations around that, but we are, as I said, in a first-lien position and actively working with the company to evaluate our options in that credit.

Mike, but fundamentally, are they facing pricing pressures or what are the operational issues that they have to deal with?

Well, we always have to be a bit careful, because these are private companies, so we have to sort of give you what you need, but not get too much into the weeds. It is a restaurant business. The casual restaurant space in general is down quite a bit. It has pretty competitive dynamics there. So much of it is really just the competition that they are facing in the market, but they are doing some things – they have undertaken some initiatives to try to stabilize that as well.

Okay. One last question, I appreciate your time this morning. Just when I do the math and maybe this is for Henri and you take into the consideration of the write-off of the deferred financing costs on the 2020 notes, it could cause your pre-incentive fee NII to drop below the hurdle, obviously that there is a lot of assumptions in there. But if that were to be the case, I just want to confirm that in that event, you would not accrue an incentive fee?

We feel sort of working through all the accounting and review of the contract. We have just been focusing on the presentation for now, Mickey. So we haven’t done the accounting for that yet. I guess I will update you guys when we complete that.

Well, I guess I could ask the question a little differently. With the write-off of the deferred financing costs under the management agreement be excluded from the calculation of the pre-incentive fee NII?

Well, as I said, I am still working through sort of all the accounting. But I think just looking at our contract – our contract excludes operating expenses only. And so this is obviously, we view it as a one-time sort of non-recurring expense which is not operating in nature. So without having completed the assessment, I think it’s most likely that it will be excluded from the formula that we use for the calculation of our incentive fee.

Okay, that’s fair. I appreciate all your time this morning. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Casey Alexander with Compass Point Research. Your line is open.

Hi, good morning. You guys covered a lot of ground with Mickey there. So, I just have a few questions left. Although, Michael, I am not sure that you have actually addressed one question regarding what you have kind of seen to-date in fiscal 4Q regarding the sort of balance of new investments versus payments?

We – that’s a good catch on your part and it was unintentional, but we make a practice of not getting too much into the weeds as we are into Q4 sort of saying where exactly where our origination activity is, how we really know when the dust settles. I would say that we feel very confident as I said before that our origination activity and our pace will be consistent with the past. I also think that the environment that we are facing is still going to – hasn’t changed enough that we would say that the payoffs are going to stop and suddenly, our origination activity is going to outpace the payoffs by a big degree. So, the fourth quarter is just – we are in the midst of the fourth quarter, so we don’t know exactly how it’s all going to work out, but we do feel pretty confident that we have got a number of interesting deals that we are looking at.

Okay. When I look at a couple of factors coming together, the fact that you kind of – you had issued the baby bonds to redeem the previous baby bond, but you did issue $13 million more. And when I throw that together with the fact that TM is now on non-accrual, you have some additional interest expense and some decreased interest expense. Do you feel as though your origination pace is going to be enough to absorb some of that additional interest expense and decreased additional interest expense and decreased investment income?

Well, we don’t look at it on a quarter by quarter basis. I think you could get me talking a little bit about the BDC market. That’s what I think too many people on our industry are guilty of. We think about things in a longer term perspective at least year-over-year. And over a longer term horizon, we absolutely feel like we can deploy that capital and that as we continue to do so, our NII is going to increase, reflective of that.

Casey, particularly on that question, I think certainly you have had vast experience in the capital markets. And one of the principles is that when you are raising capital, especially long-term capital, you generally will raise as much as you can. And our first objective was to refinance the existing notes, which were effectively – we are extending our maturities by almost 4 years and we are reducing our interest rate by 75 basis points. In and of itself refinancing of those notes was a good opportunity. I think obviously, the broader marketplace is full of a chatter of rising long-term rates. So we felt like we were catching the window. Whether it turns out to be a window or not, time will tell. But certainly, the whole feeling out there is that rates are going to be rising. So this was a chance for us to lock in sort of the current rates before the whole yield curve moves up. If it moves up, I mean it may not, but certainly you talk to most people, they would expect a significantly increased yield curve out there. So that was our number one objective. We went to market, we had a very favorable response and in terms of appetite and we are able to get the whole deal done in just really a couple of days, not even a road show, I mean just a few phone calls. So our reputation is very good in that marketplace and so we basically upsized the deal to the maximum parameters around the way the deal went. So we maxed out what we were sort of allowed to do inside of the green shoe and the upsizing for us. And so with all that, we raised that excess capital. So that was sort…

Okay, great. Thank you for that. The movement for TM to non-accrual, I mean it sounds like that came sort of after the pricing for this quarter, is it reasonable for us to expect that there would be a further mark on that when 4Q is recorded?

We are still in the back and forth of negotiation. We think that, that mark is the appropriate mark based on what we knew then. And we are still learning more about the business and we will be working hard to make sure that we get the maximum return for our shareholders.

Okay. So can I at least say that this mark at $0.90 on the dollar or so is sort of before you knew that it was going on non-accrual?

Okay. See, I mean I think we factored in, obviously we were talking to the company long before it went into non-accrual on a regular basis. But we factored into sort of what’s going on from a sort of a day-to-day operational perspective and the steps they are taking into that. The non-accrual is not just an extra element but it doesn’t change sort of some of the actions that they are taking.

Well, let me tell you, it was not on non-accrual at that past period and we put it on non-accrual now. There are, we are – we have got to obviously be very careful on what we disclose at this point. But I would say that there is nothing that we have learned since that time that would cause us to currently – if we were to look at this and value it this today, it wouldn’t cause us to change the valuation.

Okay, understood. Regarding Elyria, that revolver comes due here in a couple of months, do you have any clear idea, because that’s obviously you guys have a long history with this particular credit, do you expect that to be redeemed or do you think that you are going to end up extending the maturity date on that revolver?

That’s open to discussion right now and we are considering a few different options. We feel good about that piece of capital in the balance sheet, but that’s to be determined.

Okay. And lastly on Polar Holding, that shows a maturity date of September 30, 2016, on the November 30 schedule of investments, it’s marked right at par, I am just wondering why it’s still there?

It’s paid off.

Okay, alright, great. Thank you very much. Thank you for taking my questions.

Thanks Casey.

Thank you. And our next question comes from the line of Jim Young with West Family Investment. Your line is open.

Yes. Hi. Could you give us a sense for the overall portfolio, what percent is in sponsored transactions versus un-sponsored transactions? And secondly, with some of the recent deals that you closed, could give us a sense as to what’s the pricing premium and the change in the terms relative for sponsored to un-sponsored deals? Thank you.

Well, that’s – as it relates to the composition, yes I believe it, I think it’s 40% un-sponsored, 60% sponsored for what we have executed in our portfolio, roughly.

And that is we think a significant differentiator for us. I think the team to be built here is, as I have said, I think there is not a better team in the BDC industry, including all the big guys and that allows us to execute successfully on these non-sponsored transactions, that take more work, involve a lot more underwriting and there is just a lot more involvement with the management team. But there certainly is a premium to get from those transactions. Hard to put an exact number on it though, because the credit profile is different, typically. Sometimes you have a sponsored transaction and they are going to write a real big equity checks as some of that’s reflective of their ideas for growth and therefore, the balance sheet is going to have a big implied equity piece in there and as a result of the pricing on those transactions, tends to be less. But it’s hard to put a real peg on the difference. It’s certainly at least 100 basis points, but it may be more than that.

Okay, thank you.

Thank you. And our next question comes from the line of David Miyazaki with Confluence Investment Management. Your line is open.

Hi, good morning. Thank you for your time. Just to follow-up a little bit on the sponsored and un-sponsored nature, wanted to hear your thoughts on the risk side of it, do you find that the default risk tends to be higher with un-sponsored deals and if there is a default, how does the recovery look?

It is a good question. We are cognizant of who our partners are in every deal that we do. So when we are looking at non-sponsored transaction, we recognize that oftentimes, there is not a big institutional partner in there that could potentially write a check if there is difficulty. So the way we think about that is the bar is higher and we are making sure that we position ourselves in the balance sheet, where we feel very, very comfortable that the enterprise value is well in excess of our last dollar in the balance sheet. As a result, I think we – as we said, we see a lot more non-sponsored transactions than we do, so the ratio of our portfolio as Henri said, it’s about 40% of our portfolio is non-sponsored. We are seeing more non-sponsored deals than that just in our origination pipeline. Fortunately, our portfolio has performed very well. So we don’t have an experience that to point to say what the outcomes are. I would say this, there are a number of people in the marketplace and we and our team kind of scratch our head who falls themselves into thinking, because there is a sponsor there and they are writing write a big check that it’s kind of easy and you just lower your pricing and just chase those deals all day long. I think that’s a very undifferentiated model. And I think if there is real trouble in the portfolio, the sponsors aren’t going to write a check to save the day. That would be irrational. So, we tend to keep that in mind when they are underwriting at the front end and are cognizant of it, but instead we really get to the core of the fundamentals of the business and what’s driving that enterprise value and likely to drive the sustainability of that enterprise value. Hopefully, that’s helpful.

Yes. If I could add a little to that as well, I mean, I think that what you get with a sponsored transaction, a quality sponsored transactions is, in effect, you get a high quality leadership with relatively deep pockets. But as Mike said, they are economic animals, the sponsors and they are not going to just throw money in there. They might have minor money to buy a little bit of time, but they are not going to save a bad credit. They are going to restructure. They will invest on a fully restructuring to market. So they are very market savvy. And so when you do a sponsored deal, basically everything is market, generally the sponsors paying a market price, generally the financing is a market price and that’s what you get and it’s highly negotiated in that markets very, very tough. So, you get the benefit of the leadership and you get the benefit of really professional due diligence, etcetera. In the non-sponsored world, in effect, there is this non-market elements. There is auto relationship involved. There is particular situations involved that make that entire transaction not necessarily a market transaction. And then inside of that, because of that and because of the non-sponsored nature, generally, the financing doesn’t get bid out like it would in a sponsored situation. So, it’s much more negotiated capital structure and negotiated deal and it’s all kind of one piece. And then another thing we like to add is that our organization has a history of being an equity sponsor. And everyone on our team has been an equity sponsor at some point in time in terms of owning the equity and doing complete buyouts outstanding themselves. So, we are not uncomfortable with, if we had to take over the companies…

That’s very helpful. It’s obviously important to be able to help management team work through problems and provide that guidance if you don’t have a sponsor. So, that’s very good to hear. But if you don’t have a pattern within your own underwriting since you have taken over Saratoga with regard to whether or not they default more frequently or they have more problems, I presume like most BDCs, you are only doing a small proportion of your overall deals that you see. So, when you look at the deals that you didn’t do, is there a clear pattern between the defaults and non-defaults between the sponsored and non-sponsored opportunities?

I think that’s a very difficult question to answer. I mean, we are coming out of a period of probably the lowest default rates in the history of LBOs since the downturn into the fall, very, very small. In our portfolio, we haven’t had any defaults to-date on ones we have originated. So, we don’t have hard data on that. In terms of deals we didn’t do, it’s very hard to track exactly what happens. And I think if you look across maybe the BDC industry and you look at where some of the credit problems have arisen, certainly in retrospect, a number of those deals were sort of questionable structure, there are some sort of obvious credit problems with them. And so the main inside the bell curve of the type of credits have been underwritten, there is really not a lot of default history. And so it’s very difficult. And in the environment we have had over the last – since 2008, ‘09, has been sort of really slow, steady growth, which has not been a robust recovery, but it also has not been in much risk of recession. You look at recent reports, Goldman Sachs just came out with a big report they think there is basically zero risk of a recession in 2017, so not that that’s possible, but it would be hard to really answer that question without having gone through a full cycle and we have really had not a full cycle with what’s happened in the economy.

Okay, great. Thanks. Even if you don’t have a specific answer, it’s helpful to hear your thoughts on that. Just one last question, you mentioned that some of your origination is working with companies that are smaller, say with EBITDA of less than $5 million. One of the things that credit agencies stress is that larger companies tend to be safer for creditors, all things being the same, because they are just more bigger with more resources. So, if you are looking at companies that are of that size, do you think that, that risk is – which is greater in your eyes, the size of the company that you are underwriting and lending to or the nature of whether or not there is a sponsor involved?

Well, I mean, that’s a very profound question and it goes to the heart of credit, right. And yes, it’s sort of like physics. I mean the body in motion – the big company has more momentum, right? And so the more momentum they have and the less knock they can be. There are some large companies that has some very dramatic negative offense.

Absolutely. Sure.

But I think if you are a credit investor that’s looking to be sort of a highly diversified, broad participant in the credit marketplace, you definitely want to be with higher – you re taking 1% or 2% positions and 150 credits or something, like in our CLO, for example, you definitely want to be in substantially larger credits because they are safer on average, right? If you are doing statistically, yes, they are better. And so in our CLO, we adhere to that. The average EBITDA in our CLO, I think is in the hundreds of millions of dollars of EBITDA. So, we agree with that premise. But when we go below $5 million, these are situations where we are generally the dollar one lender, we have a lot of power, we also have equity investments and so we have – we are much closer to a sponsor-like relationship. So we are not just a passive creditor that just hopes everything is going to work out. If things aren’t working out, we have the ability, we have covenants, we have metrics, we have board observation rights, we have defined powers, so that we can actually act as we see things either deteriorating or whatever. So, in these smaller deals, we have a much greater degree of involvement. And so with that, that takes – it doesn’t take all the risk out of it, but it takes a chunk of risk out of it, because we can help manage that. The other is investment selection. There are some companies below $5 million EBITDA that have really strong, persistent customers, number of the software-as-a-service companies that we have been investing in that are small and growing, I mean, they have highly diversified customers, very embedded software solutions for those customers that…

Let me add a little bit to that too. Just to further emphasize what Chris said, the rating agencies are right, because they are looking at a broad, broad portfolio of companies. And what they are really saying is that by and large, large companies have more durable cash flow. And that really is the trick of credit is you are spending all of this time and energy analyzing the business to reach a conclusion that you think it has a durable cash flow, that’s going to pay interest on your debt and ultimately be a source of repayment of your debt when you get paid off. And we are sure, larger companies and what rating agencies are saying is, the larger companies tend to have really good management teams, they have got a diverse customer base, they have got a very strong market position and they are typically offering a very strong and compelling value proposition to their customers. Now it’s easy to say that a broad level, so if you look at a basket of big companies and a basket of small companies, they are right in saying that large companies are less risky than small ones. Our job and what we spend all our time doing and that’s why originations are so lumpy. This is exactly why originations are so lumpy, is trying to find those small companies that have those characteristics, strong management teams, diverse customer bases, a great market position in the little niche they operate in, may be a regional niche, it could be – or a smaller market that they dominate and did they offer a value proposition to their customers that’s sustainable. And when you find those, even if they are small, their credit profile and the risk adjusted returns there could…

I think the one place where there has been some pretty broad gauge evidence of credit decisions and credit results has been the energy sector. And there was quite a heavy cycle to the energy sector and that caught a lot of people out. And I think we as a firm, specifically avoided that sector. There were lots of sub-$5 million companies that were growing very rapidly. We have made some type 1 errors, as Mike said. There was a number of those companies we didn’t do that did pretty well. And part of the reason they did well is because they cycled really fast and that was maybe investment – the debt investment was made and they were out.

It was a timing play...

But if in for 3 years, they would have may be lost all of their money. And so that’s one test is it’s going to say who invested in energy and who didn’t and we did because again, that’s not our credit philosophy to be exposed in the debt markets. On the equity side, we consider investing in energy because we think it’s an asymmetric game, right. I mean we think in debt, you can lose 100% and really just get your interest, where in equity, in energy especially, you could make 10x on your equity and just lose 1x. So we don’t like that asymmetry. We want the other way. So our focus has been in sort of non-cyclical niche type of companies. And one of the things to repeat something Mike had said earlier is that in the less than $5 million investments, we are pretty much – we are exclusively dollar one in unitranches. So that if we are lending 4x or 5x, we are also lending 1x, 2x, and 3x. So if there is exposure, it comes down the chain, but there is no creditor ahead of us.

There may be one or two exceptions for that.

What they are, it’s kind of a revolver or something like that. And so that really mitigates a lot of risk. Where in the larger companies where – in the companies with higher EBITDA, again as Mike had said, there would be maybe down the capital structure. We might be more towards a mezzanine or second lien type of investment. And that’s because we have better faith in the durability of that company and less need for that role. And so it’s a combination of management selection and structure that helps us navigate our way through these credit questions that you just asked.

Very helpful and really helps me better understand your underwriting and management philosophy. Thank you very much.

Thank you. And I am showing no further questions at this time. I would like to turn the call back to Mr. Oberbeck for closing remarks.

Okay. Well, thank you, everyone. We very much appreciate your support. We appreciate the discussion we always on these calls with you and we look forward to speaking with you next quarter. Thank you.

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