Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.’s Fiscal First Quarter 2018 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 the management’s prepared remark, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp.’s Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.’s fiscal first quarter 2018 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 2018 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 be available from 1 p.m. today through July 20. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri and welcome everyone. Most recent fiscal quarter reflects the continued success of our efforts and activities in pursuit of credit quality, growth and earnings. In addition, we have continued to strengthen our capital structure to further expand and enhance our capabilities. The completion of which will now benefit us for many years. Saratoga Investment is risen to and continues at the top of the industry in terms of key performance indicators and in many categories far outpaces our competitors. Importantly, we have accomplished this in a highly competitive and challenging market environment. We continue to progress towards our 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 and consistent returns for our shareholders. Slide 2 highlights our continued progress and achievements during the past quarter. To briefly recap, first, we continued the strengthening of our financial foundation this year by maintaining a high level of investment credit quality, with 96.3% of our loan investments having our highest rating, up from 94.1% last quarter generating return on equity of 7.1% on a trailing 12-month basis. Excluding our legacy investments in Targus Group International and Elyria Foundry Company LLC that predates Saratoga’s management of the BDC as well as the various impacts related to the extinguishment of our 2020 baby bonds. Our return on equity for this last 12-month period ended May 31, 2017 was 7.9%. This LTM ROE is net of a $5.3 million unrealized loss on our My Alarm Center investment, which we will discuss later in the call. Total unrealized losses on the whole portfolio for Q1 was $2.6 million reflecting the fact that the remainder of the portfolio had a $2.7 million unrealized gain in Q1 and…

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended May 31st, 2017, in our usual format. Net investment income of $3.5 million, or $0.60 on a weighted average per share basis, was up from $0.19 and $0.44 for the quarters ended February 28, 2017 and May 31, 2016, respectively. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII per share was $0.50, up $0.04 from $0.46 per share last year and up $0.01 from $0.49 per share last quarter. The increase from last quarter and last year primarily reflects a higher level of investments and results in higher interest income with assets under management up 24% from last year and up 13% from last quarter. Importantly, more than half of the $45 million originations were closed during the last month of the quarter and are not yet fully reflected in our results. These impacts resulted in NII yield of 11.0% for the quarter or 9.2% when adjusted for the incentive fee accrual. This adjusted NII yield is up 90 basis points from 8.3% last year and up 40 basis points from 8.8% last quarter. For this first quarter, we experienced a net loss on investments of $2.5 million or $0.42 per weighted average share, resulting in a total increase in net assets resulting from operations of $1.0 million or $0.17 per share. The $2.5 million net loss on investments was comprised of $0.1 million in net realized gains and $2.6 million in net unrealized depreciation. The net unrealized depreciation was primarily due to a $5.3 million unrealized loss on our My Alarm Center investment, reflecting increased leverage levels, combined with declining market conditions in this sector, which we will discuss in more detail…

Thank you, Henri. I will take a couple of minutes to describe the current market as we see it. Then I will comment on our portfolio performance and investment strategy. There has been no real change to the market’s extremely competitive condition since we last spoke in May. Slide 13 indicates a continued downward trend in the number of transactions per deal sizes in the U.S. below $25 million. The number of transactions in the last 12 months ended May 31, 2017 is already down significantly as compared to the same period last year and it is not just volume total transaction value for the 5 months ended May 31, 2017 is significantly lower than it was last year as well and significantly trailing the annualized run-rate. As a result, spreads in the broader middle-market tightened further driven by a supply demand imbalance and aggressive leverage and competition for high-quality credits. In addition, new stretch senior and junior capital entrants are further driving up competition, with the expectation of economic growth and the dearth of quality opportunities creating excess liquidity. This excess liquidity is giving new receptivity to story paper and higher leverage profiles. Nevertheless, we really like where we are in the lower middle-market and we have seen less change in spreads in this market segment where we operate. Our experience continues to support our belief that the lower middle-market is still the most attractive market segment to deploy capital and the most likely to deliver the best risk adjusted returns. In addition, we believe long-term secular trends bode well for the BDC industry as a whole. Now, on Slide 14, you can see that debt multiples in the industry have increased markedly as lenders become slightly more aggressive in their pursuit of higher quality credits. As of March…

Thank you, Mike. As many of you know, our quarterly cash dividend payment program has grown by a 561% since the program launched. As outlined on Slide 19, during fiscal year 2017, we declared and paid dividends of $1.93 per share, gradually raising the dividends through the year. In addition, we have continued to pay an increasing quarterly dividends regularly throughout fiscal year 2018, including $0.46 per share for the quarter-end February 28, 2017 and $0.47 per share for the quarter ended May 31, 2017. We are also still over-earning our dividend by 9%, deemed as one of the higher dividend coverages in the BDA industry. As you can see in Slide 20, we have had a 9.3% year-over-year dividend growth, third highest within our BDC competition, and only – and one of only four BDCs have grown dividends in the past year. We have now had 11 sequential quarters of dividend increases, while most BDCs have either had no increases or decreased the size of their dividend payments. We believe our continually increasing dividend is an important differentiation within the BDC marketplace. We are also pleased to see our relative standing in the industry consistently improve over time. As you can see on Slide 21 and reflecting our strong key performance indicators we have discussed earlier, our total returns the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 46%, significantly beating the BDC index at 23%. Turning to Slide 22, we viewed over a longer-time horizon, such as seven years, which is when we took over the management of the BDC. Our three in seven-year return places us in the top two of all BDCs. On Slide 23, you can see our outperformance placed in the context of the broader industry. We…

Thank you. [Operator Instructions] Our first question is from Casey Alexander with Compass Point Research. Your line is now open.

Good morning, guys.

Good morning, Casey.

Most of my questions are for Mike, but one for Henri real quick, the cash in the balance sheet how much of the cash is within the SBA subsidiary?

It’s very little this quarter. I think it was about $2 or $3 million. Most of the cash that we had on the balance sheet was in our BDC.

Okay, great. Thank you. As it relates to Easy Ice, Mike, the language hasn’t changed since last quarter that you expect to be repaid in the near-term, which I don’t know, it sounded like when you talked about it last quarter that meant that we were going to see a repayment this quarter. Has something changed in relation to the closing of this change of control?

Let me – I obviously have to be careful, because it’s a private company. I can’t get into too many of the details, but what I can’t say Casey is that we continue to be extremely excited about the position that we are in with this company and continue to feel really good about its performance and its prospects for the future as can often take place in the sort of the deal world, sometimes events transpire where there can be delays in getting something done. The delays that we faced are not anything negative toward the company they are just deal-related things that have taken a little bit to get through our objective. We certainly could have done something sooner, but our objective was to optimize the capital structure in a way that would benefit our shareholders at the greatest level that we can and that’s what we are aiming to do here. So, the language is the same and we still feel the same way about it and we do think that the transaction should take place in the very near-term.

Mike, can you then explain why in last quarter’s schedule of investment, the preferred equity was simply listed as an equity position and now it’s listed as a 10% PIK position?

Hi, Casey. This is Henri. I can’t recall what it was listed on at year end, but I mean, we can confirm as it’s listed this quarter, it’s correct it is a 10% PIK position.

Okay, because it was not listed that way in the year end schedule of investments.

Well, we can look into that, but just to make it clear there isn’t anything fundamentally in our outlook on the business or excitement about this investment opportunity. We really think it represents something that we have done extremely well. If you sort of look back at many of our most successful investments, there are ones where we made initial investment sometimes on the small side. We got to know management. We got to know the business very well. We supported their growth. In this case certainly we upsized our investment at a level that’s more than we will generally do. We recognized it is outsized, but we gave a careful consideration and the things that we weighed in making that decision were if we don’t step up here, we are likely to get refinanced. We know the management team very well and we have an opportunity to put ourselves in this position. We also know the business very well and we feel like and feel confident that there is terrific growth opportunities with this business. So, in upsizing our position, it put us in a spot where we have this ownership position, significant ownership position in the business and we together with management are partnering to grow the enterprise value. And I think in the long run, our shareholders will benefit greatly for that. Now, there has – we have got a little bit of work to do to downsize our exposure to that investment, but we are very confident that we can do that and the business is performing extremely well. And as we said we think in the very near term, you will see reduced exposure to that investment.

Well, would you guys anticipate the same level of income being generated from that investment in fiscal Q2 or would you expect the first lien to be taken out before the end of fiscal Q2?

I mean, we are going to end up with more junior securities with high rate of interest. So I haven’t run the math on the gross returns, but we can get back to you. I think what I would say is that our yields on what we have remaining in the investment that we have remaining will be where we want just the profile of what we want across our portfolio.

Okay, because I mean I wonder what kind of attachment multiple you have on this investment when if $8 million is a control position which means the total value of the company is less than $32 million and your loan – first lien loan is $27 million, you lent almost as much as the entire equity is of the firm. So, I am wondering what kind of attachment multiple you have on this investment. I mean I recognized this is outside the bounds of sort of the normal risk pattern for Saratoga, but it seems highly leveraged?

We think it’s a fabulous risk return opportunity and stay tuned. I mean, I think we feel very good about the investment. I can’t get into sort of the exact attachment points and so forth.

Okay. On Elyria Foundry, the value of that investment increased – of that equity increased 3.5x in one quarter, which seems like an extraordinary increase in the value of any equity position quarter to quarter. Is there any color on that?

Yes. I mean, that’s one way to frame it, but the reality is it’s a business that has a lot of operating leverage. It’s the right up in the investment is reflective purely of an improvement in the performance of the underlying business. And the math around that really has not changed in terms of the value drivers. So, it’s reflective of improved performance there. And the outlook for that business is positive.

Okay. And let me finally turn to Mercury Network, because this one is I am sure there is an explanation for this, but I certainly can’t see it from the outside. Coming into the quarter, you had 413,000 shares that was valued at 1,065,000 or $2.57 per share. Do you added 167,000 shares and added 444,000 to your cost basis, which means you added stock to your position at $2.65 a share, a little higher than what it was marked out at the end of the quarter. But then you marked it at the end of this quarter at $2.63 million or $4.53 per share, 70% higher than what you paid for stock during the quarter that seems like a remarkable markup.

Okay. So, again it being a private company we have to be very careful what we say about it, but I think there are transactions involved.

The rules according to Hoyle are in private equity are sort of you can’t mark something more than what you paid for it in the quarter and the market up 7% above what you paid for it and the quarter just seems like a remarkable markup. And all I can do is say I am an outsider looking at this, I can do the math and that seems like an extraordinary markup?

Casey, that markup is based on the transaction.

Thank you.

Our next question is from Mickey Schleien with Ladenburg. Your line is now open.

Yes, good morning everyone. I want to follow-up on Casey’s first question, Henri, you said most of the cash is….

Can you hear me?

Now, we can hear you, Mickey.

Perfect. I wanted to follow-up on Casey’s first question, Henri, you said most of the cash is outside the SBIC. Is that correct?

That’s correct, yes.

If that’s the case, Henri, why were you carrying a relatively high cash balance as well as a corresponding balance on the revolver, wouldn’t it – it’s not as efficient as we would expect?

Well, obviously, Casey, as you could probably see what we did as we drew down on our revolving credit facility and that was obviously done right before quarter end in anticipation of a transaction that we were closing just post quarter end. And that’s why you see a big cash balance which is primarily in the BDC and then also see the drawdown on the revolving credit facility.

Okay. And that makes sense.

Yes. And as Mike is saying, Mickey, we can add that, that transaction for which we had earmarked that cash had closed since quarter end.

Okay. I haven’t looked at the Q completely, was that transaction mentioned in the subsequent events section or is there anything you can tell us about it?

No. We generally don’t comment in our subsequent events and nor is it required about deals – either deals or repayment subsequent to quarter end before the issuance of the financials.

It’s a new portfolio company systematic investment.

Okay. And in terms of CLO investment incentive fee income, could you – if I recall correctly, that’s the first time you have reported it or maybe broken it out, because now it’s material. Could you tell us what drove that and is that something that could be recurring in nature?

Sure. That relates to the incentive fee that the CLO earns if it – I guess, or the BDC earns if the CLO’s overall return exceeds 12%. And so to your question, it wasn’t something that we have broken out for the first time, it’s actually the first quarter in which the overall return of the CLO exceeded the 12% hurdle rate. And so the way to sort of think of it is now part of the waterfall cash flow we receive every quarter. We will continue to have, while the return – if the return stays about 12% we will continue to have a proportion, which relates to this incentive fee component. And so that was the case for the first time now in Q1.

Henri, my question is so what happened during the quarter that allowed the 12% to be achieved. Was it LIBOR going through floors or something else going on in the portfolio that caused that?

No, it’s a cumulative total return calculation. So, it’s just that the first – this is the first time that the cumulative returns like today has exceeded this 12% hurdle rate.

Okay. My last question relates to the second SBIC license, I know the green light letter expired and you sort of had to start over again. Can you provide us any update on where that process stands and if at all possible any expectations on when you will hear back from the SBA?

Sure, Mickey. As you can appreciate, our policy around the SBA is really to only make discussions when we have specific events like a green light letter or a receipt of a license. But what we can’t tell you is we are in active dialogue with the SBA, but it’s really not something that our policies talk much further than that without specific events.

Chris, can you confirm that you have actually applied or reapplied for a second license?

Again, I think our policy is to – again, the SBA has its own inner workings and the way they – and so we just really want to be very careful about not getting in front of anything that the SBA would be doing or considering. And so we prefer to be specific once a green light letter, for example, would be the time that we’d want to talk about that.

Alright. And actually I have one more follow-up question perhaps from Mike. I noticed some deterioration in valuations at Ohio Medical, was that due to reduced reimbursements or is there something else going on there that you can talk about?

Yes. That’s not a reimbursement based business model, but it’s just reflective of softness in the underlying business. We think that this is a sponsor transaction. The sponsor has continued to support the investment. They have a significant equity investment in this business. And so it just reflected the softness in the business.

And what’s causing the softness, Mike?

It’s just the end market is soft. It remains a leader in its position and the management team and the sponsor is working hard to try to improve some declining sales that they have experienced.

Okay, that’s fair enough. Those are all my questions. Thanks for your time this morning.

Thank you.

Thank you. And I am showing no further questions. I would now like to turn the call back over to Christian Oberbeck for any further remarks.

Again, we appreciate the support of all of our shareholders and we appreciate the interest of all of you on this call today and we want to thank you all for joining us. We look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone have a good day.