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

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal third 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 defer 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 2018 shareholder presentation in the Events and Presentation section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will be available from 1 PM today through January 18th. 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'll be making a few introductory remarks.

Thank you Henri and welcome everyone. As we look back at this most recent fiscal quarter we're pleased to note the continued progress of our long-term and core objectives of credit quality growth and earnings. Our flexible capital structure and diversified sources of cost effective liquidity continues to support a robust pipeline of available deal sources growing assets and greater scale. While a challenging and competitive environment persists, our originations and credit quality remain strong. Within this environment Saratoga Investment has risen to and remains at the top of the industry in terms of key performance indicators and in many categories far outpaces our competition generating meaningful and consistent returns for our shareholders. To briefly recap the past quarter on slide 2, first we continue to strengthen our financial foundation this quarter by maintaining a high level investment credit quality with 97.2% of our loan investments having our highest rating consistent with last quarter. Generating a return on equity of 10.2% on a trailing 12 month basis up from 8.3% last quarter and beating the BDC industry mean of 8.4% and maintaining a gross unlevered IRR of 12.4% on our total unrealized portfolio with gross unlevered IRR of 16.3% on total realizations of 234.6 million. Second, we expanded our assets under management to 339 million, a 16% increase from 293 million as of year-end and a 22% increase from 278 million as of the same time last year. Taking a longer term perspective, our current AUM reflects a 324% increase from $80 million at the end of fiscal year 2011. This quarter reinforced the challenging environment we are operating in and the importance of maintaining a strong origination discipline. While we saw many deals through our sourcing pipeline, limited our originations to 5 million offset by repayments and amortizations of…

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended November 30, 2017 in our usual format. Across all these metrics you can see the positive impact of increased assets to our results. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $3.3 million was down 11.3% from $3.7 million last quarter and up 7.0% from $3.1 million as compared to last year's Q3. Adjusted NII per share was $0.54, up $0.01 from $0.53 per share last year and down $0.08 from $0.62 per share last quarter. The increase from last year primarily reflects our higher level of investments and results in higher interest income with AUM up 22% from last year. The quarter-on-quarter decrease was due primarily to lower interest income earned this quarter following the anticipated and planned downsizing of both our Easy Ice and TileRedi investments that occurred in the second half of Q2, with Q2 benefiting from the higher levels for most of the quarter. In addition, the revenue was also lower due to fewer originations during this quarter. These impacts resulted in adjusted NII yield of $0.096 -- pardon 9.6% when adjusted for the incentive fee accrual. This yield is up 10 basis points from 9.5% last year but down 170 basis points from 11.3% last quarter for the reasons previously mentioned. For this third quarter we experienced a net gain on investments of $1.2 million or $0.21 per weighted average share resulting in a total increase in net assets resulting from operations of $4.3 million or $0.71 per share. The $1.2 million net gain on investments was comprised of $21,000 in net realized gains and $1.2 million in net unrealized appreciation. The net unrealized appreciation was due…

Thank you Henri. I will take a couple of minutes to describe the current market as we see it, then I'll comment on our portfolio performance and investment strategy. The market's extremely competitive conditions have continued to worsen since we last spoke in October. Slide 13 indicates a continued downward trend in the number of transactions for deal sizes in the U.S. below $25 million. The number of transactions in the last quarter ended November 30, 2017 is already down significantly as compared to the same period last year. And it's not just volume, total transaction value for the same period is significantly lower than it was last year as well and significantly trailing the annualized run rate. Published data is at last showing that spreads in the broader middle market are tightening which is consistent with what we have seen for some time now. And this narrowing of spreads is also starting to impact the lower middle market driven by supply demand imbalance as competition intensifies and available capital far outstrips quality deals. Now thankfully LIBOR has continued to increase again this quarter and has provided some counterbalance to spread compression. An extended benign credit cycle, an overall expectation for continued economic growth, and investor appetite for yield have continued to attract new stress senior and junior capital entrants into the market. This has led to changing pricing dynamics with excess liquidity giving new receptivity to storied paper, higher leverage profiles, and sectors exposed to secular changes -- challenges, excuse me. As we frequently highlight, the lower middle market appeals to us because the sheer number of companies at this end of the marketplace allows us to sift through and find transactions that we believe are most likely to deliver the best risk adjusted returns to our shareholders. On…

Thank you, Mike. As outlined on slide 19, our quarterly cash dividend payment program has grown by 172% since the program launched. During fiscal year 2017 we declared and paid dividends of $1.93 per share gradually raising the dividend through the year. In addition we've continued to pay increasing quarterly dividends regularly throughout fiscal year 2018 including $0.46 per share for Q4 last year, $0.47 per share for Q1, $0.48 per share for Q2, and most recently in December $0.49 per share for Q3. Total dividends declared and paid during fiscal year 2018 thus far is a $1.90 per share. We are also still over earning our dividend by 10.2% giving us one of the higher dividend coverages in the BDC industry. As you can see on slide 20 we have had 8.8% year-over-year dividend growth which easily places us near the top -- very top of our peers and one of only five BDC's have grown dividends in the past year. We have now had 13 sequential quarters of dividend increases while most BDC's have either had no increases or decreased the size of their dividend payments. We believe our continually increasing dividend has truly differentiated us within the marketplace. We are also pleased to see SAR continuing to outperform the industry. Moving to slide 21, our total return for the last 12 months which includes both capital appreciation and dividends has generated total returns of 31% significantly beating the BDC index of 14%. And when viewed over a longer time horizon as you can see on slide 22 which is when we took over management of the BDC, our three and seven year return places us in the top one and two of all BDC's respectively. On slide 23 you can further see our outperformance placed in the…

[Operator Instructions]. And our first question comes from the line of Casey Alexander. And sir, you may begin.

Thank you and good morning. First of all I know this is not a control investment, but you are finally regaining some value in Elyria Foundry. Can you give us some color as to your potential ability to eventually dispose of this investment, I know it's a legacy investment that comes before your time. But I mean it has been around for years and it's finally starting to pick up some value, where do you see it, what can you -- how can you control its fate and what are your chances of eventually turning it into an interest earning asset?

Casey, well thank you for that question. Everything you said is correct, it is a legacy investment. It – unlike a lot of what we have in our portfolio, it has some highly cyclical elements in it and it basically cycled very hard in the past which caused its value to get very low, its EBITDA reached some low levels. However, we do have a partner in that, and we have made some significant management changes and the company itself has done some acquisitions and the cycle is turning. They have the exposure to oil and gas, for example, they have gas compressors and things like that as the pipeline business picks up, are coming back and there's some other new developments. So, there have been some very positive aspects inside of that company that have driven the increase in value and substantial increase in earnings. We are a small minority investment investor in that entity and it's an equity investment, but there's not that much debt on the company. So, ultimately we can't drive the exit timing; however, I would say that throughout the process, we've been highly aligned with our – at the recent process, aligned with our other investor. And so we think that at the right moment, there will be an exit and we don't see our partner holding on too long, if you will, but there is a fair amount of runway ahead given some of the positive dynamics in that investment.

Okay, great, that's very helpful. Thank you Chris. Secondly, Mike I know I have asked this before, but new investors that are looking at your income statement might scratch their heads a little bit, so if you could walk us through the composition of the PIK income and why investors should feel comfortable with the level of PIK income I think that would be very helpful color?

Well, Casey why don’t I take just the first stab at sort of just the breakdown, because I think it's important to note when you sort of look at our PIK income that we have a couple of investments that are driving or they comprise PIK income, but more than half of our PIK income year-to-date consist of our Easy Ice investment and relates to obviously the transaction we did there and everything that we've spoken about in the past. If you look at the remaining PIK investments, there's probably about four to six investments that make up the year-to-date components of PIK in there but a couple of them such as Identity and Vector actually both represent realizations of those instruments that we've had during the year. So I guess the way to look at it is although PIK has increased it's primarily due to the Easy Ice component, a component that's increased. The remaining number of PIK investments have actually decreased.

And the thing I'll add to that Casey is the amount of it that's coming from Easy Ice. If you look at those instruments, what gives us ultimate comfort with recognizing that PIK income is that we think that those instruments are well within the enterprise value of the investment.

Right, okay, I just think for people who haven't looked at it before it's important to reiterate some of those facts. Mike again you've detailed very often in the past the lumpy nature originations and this was kind of a quiet quarter, can you give us a feel for how you see the cadence going forward from the end of this quarter?

Obviously you have to be careful in that respect. I think as I said in the prepared remarks with the success that we've had building up our business development function, we feel confident that we can continue to grow the balance sheet and that our origination pace should exceed our repayments. It's just -- its very hard to do that quarter-to-quarter. We have confidence that we can grow and that's probably the best answer I can give you as it relates to forward-looking.

But Mike looking at a couple of your slides, your funnel versus what you showed as the deal activity year-to-date on deals below 25 million, if I read that right, it looks like you guys are in on approximately 40 some percent of the deals that exist out there, is that accurate?

It may be. I mean it's obviously a highly fragmented market and so you've got to take some sources that we get when we're looking at transaction activity that you see on that one slide with a bit of a grain of salt. But we do know that our pipeline is accurate and the one comment that we often make is that as tough as the market is, one of the things that's wonderful about being in the lower end of middle market is that there are thousands and thousands of companies out there and if you have a good origination function, you can find those diamonds in the rough. And that's really what we've set ourselves up to do.

Okay, alright great. Thanks for taking my questions, I appreciate it.

Thanks Casey.

And our next question comes from the line of Mickey Schleien. You may begin.

Yes, good morning everyone. I want to follow up on Casey's last question because my sense is that the level of competition in the market is not abating, that may or may not change down the road, it's hard to say. But it's certainly been increasing lately and meanwhile the portfolio is healthy but it's highly concentrated. So what I'd like to understand is you just expressed some confidence in your ability to grow the balance sheet and what underlies that, is that an expansion of your origination capacity or something else?

Well we have we have -- it's a few things but it's mostly the origination side of things. If you go back to when Saratoga took over management, this is really a much different business model than the predecessor had. So getting out into the marketplace and letting people know who Saratoga was, it took some time and there are still plenty of folks out there that are doing deals actively in our space that really don't know us. And so a lot of it is reflective of just the efforts that we've put forward in getting our name and reputation out there so that we're seeing the best quality opportunities. We've also allocated more resources to that so we've got -- once upon a time we had one person in addition to all the execution people but one person who was 100% focused on business development, scouring the marketplace for deals. Now we have three people who are pretty much 100% focused on that effort and that's one of the reasons you see the pipeline grow. Another thing that's happened and it has been delightful experience is that we now get referrals just because we are good partners to people, folks that we've done business with are referring us opportunities that I wouldn't call them proprietary all the time but they definitely give us a much better -- a higher probability of getting some of those deals done if we decide that we like those deals. And I think the thing that I can't overemphasize is how important it is that we remain disciplined and we're going to remain disciplined. We're certainly not going to stretch for yield in this marketplace and the management team here as you know is very seasoned. So we've seen a lot of these cycles. The last thing you can do when market gets very competitive here, last thing you should do is chase yield. You've really got to go for credit quality and that's what we've always done and that's what we're going to continue to do and remind ourselves of that. Having said all that I have and it's difficult as the market is we still feel confident that we can grow the balance sheet. It is going to be hard to peg exactly quarter-to-quarter how that -- well the shape that takes but we do feel a little over the long run that we can grow at a healthy pace.

Mike correct me if I'm wrong but if I remember correctly the private Saratoga pre-limited other BDC's have expanded that portion of their platform in order to leverage expenses and also to improve diversification across their funds, is that something Saratoga is considering doing?

This is Chris Mickey, that's definitely something we've -- it is out there, there's a lot of private credit funds that are not public like BDC's and we've looked into that and it's an interesting space. As of this moment we are very focused on our own portfolio where we see the growth prospects are very good and we feel like getting SAR to the right size and scale. And performance characteristics is really our number one objective and that's where we're really concentrating our management efforts here. And we think we're on a good path where be it year-over-year, year over two years, I mean a substantial progress has been made and as Mike says I mean we have a very healthy pipeline and in a given quarter -- the quarter before this was probably good. This one was a little light but that's sort of been our history. But if you look at it on any kind of longer range basis we've had a really steady climb and we don't see that changing.

Okay, I would add to that Mickey, it's not to say that we wouldn't as I think Chris touched on it a bit, but it's not to say that we wouldn't give consideration to private funds or you know other investment vehicles but for the time being we're laser focused on building SAR and creating as much value to shareholders as we can. The things that we could consider certainly would be ones that we felt complimented our existing line of business, didn't conflict with it in anyway. And so those aren't off the table by any means but that's not really where we're focused at this present moment.

Okay, another question in terms of the dividend policy, it's running now around -- the dividends now around 90% of NII, I do realize that NII is moving up and down but roughly speaking so do you envision further upside in the dividend or do you think it might be time to maybe keep it at this level and then consider special dividends down the road if they're needed?

Well Mickey I mean that's a very good question, that's something that we consider every time we declare a new dividend and we've got a lot of factors to evaluate. I think it really is -- it really depends on the growth of our asset base. We have significant dry powder that we can access right now that the incremental earnings from that incremental asset growth would be sizable and would be at a higher marginal profitability than what we have now. So just deploying that alone should increase our earnings. So the question is what rate at which we deploy that and revaluate each quarter on a basis based on the facts at the time. And I think we've had a consistent rising dividend and we've also had consistent rising assets. So I think they're kind of linked and I think your point is your point is a good one. I mean we don't want to get in a situation where we've got to cut back on dividend rates so we want to grow it, we want to grow it with an up curve so that we can absorb any kind of excess redemptions that might occur relative to originations. So, to specifically answer your questions the facts you recite are right. We are at a 90% payout ratio and if we were to remain flat that would be one consideration. But if we were to grow that would be another and we're going to evaluate that on a quarter by quarter basis.

Okay, I understand. And my last question, can you give us an update if possible on Taco Mac in terms of restructuring that and where that process stands?

Well obviously as a private company so we have to be real careful of what we can convey. I can say this that the -- where we have it valued now is reflective of a couple things, the performance of the company which is -- has been challenged obviously. It's a non-accrual as well as the ongoing discussions that we and our senior lender group are having in the marketplace.

Alright fair enough. Thanks for your time this morning.

Thanks Mickey.

Thank you. And our next question comes from the line of Christopher Testa from National Securities. Sir, you may begin.

Hey, good morning guys, thanks for taking my questions. The structured credit yields were up roughly 60 bps per quarter, there is some pretty significant spread compression in the CLO market, just wondering if you could provide some color on how the yields went up pretty significantly this quarter?

Do you mean our own interest -- our own effective interest rate or you mean…

Well, yes.

Yeah, well I mean the effective interest rate is a function of what we are obviously earning and the projected future cash flows that are being derived by the CLO. Chris was -- and if you look at our valuation as well it was just slightly down because we obviously had our own Q3 distribution but that was more than offset by an increase in collections. Because what you effectively saw was that the projected LIBOR over the projection period increased by 21 basis points. So that obviously had an impact on the quarterly cash flows in the valuation which then drove the effective interest rate up slightly. I mean it wasn't a big increase, I think it was probably about a 50 or 100 bps increase in the quarter which was partially reflected in the in the actual interest income for the period.

Got it, so prefer to say that, that increases your expectations for the LIBOR increases in your projections, is that holding kind of the current reinvestment environment static though?

Well, I mean I think we have had a pretty -- we've seen pretty healthy reinvestment opportunities out there and that's why we have managed to -- why it's been possible to keep the cash flows positive through the reinvestment of any repayments we've had.

Okay, and then just touching on something Casey was asking about what the jump in tender and kind interest, the PIK rates on both the preferred and second lien portion of Easy Ice were constant quarter-over-quarter but, PIK income in total jumped pretty substantially during the quarter, what were the other investments that made up the increase in PIK during the quarter?

I think it was primarily Easy Ice because you had both the preferred as well as a portion of the second lien being accrued for the full period which obviously was full period in the last quarter. So, I think it was primarily Easy Ice. You're going to see a slight reduction now going forward because of Identity and Vector being repaid and not picking any more.

Not Vector but Targus.

I am sorry, Targus not to Vector. Mike is correcting me, thanks Mike.

So Identity and Targus are the ones that came off, so that should lower PIK income?

Yeah, yeah we had realizations on those two and they were partially PIK so that would slightly lead them going forward. Then you have Easy Ice continuing for the full period.

Got it, okay, that's helpful.

And Chris just one further nuance on the Easy Ice and it's PIK and I think we talked about this in prior calls, there's an interplay between the rate we pay on the senior credit at Easy Ice and our PIK. I mean we could have had less PIK but then we probably would have a higher rate on our senior. So we are kind of supporting a low cost senior situation but it's kind of softening how we get paid. But from our standpoint as Mike said earlier we've been -- those -- the earnings on that are rock solid but it's helping our overall cost of capital be lower by having sort of a variable pick on that in our instrument.

Right, that makes sense definitely. And for the stability in your first and second lien yields this quarter is just indicative of the further increases on LIBOR?

Yes, yes and I think we are continuing to see spread compression and all the competition that we've been talking about, thankfully the increase in LIBOR has offset that.

And with your SBIC, I know you guys break it out roughly 41% you have in second lien and sub debt, just curious how -- what's your -- is this kind of your comfort level for having that composition within a two to one vehicle. What I'm getting at is it seems like it would make more sense to put more of the first lien, more senior secured assets into the SBIC given the increased leverage capacity in that vehicle. Could you just provide some detail on that?

It's a good question. I think the way we think about it though is that we really look at each business very carefully and we evaluate where we want to be in the capital structure whether it be first lien or second lien based on what we think the opportunity presents and if it's offering a good risk adjusted return to our shareholders. The SBIC even though it's two to one leverage which we don't think is super aggressive, most of the SBICs that are out there doing almost entirely -- is a healthier mix of senior capital than most of the SBICs that are out there. But the SBICs economics are so accretive to our shareholders and so attractive that candidly if we think that an asset qualifies for the SBIC we're going to put it in there. We instead just look at credit separate from that and say let's make sure that we think this is a money good investment and is this the right place to reside on the balance sheet.

Got it, okay that's helpful. And last one from me would just be on the leverage. Obviously your leverage and regulatory leverage of course have come down as the portfolio has been roughly flat, just curious how we should think about your target leverage and given the commentary on the pipeline being strong should we expect maybe just very, very, very, very little ATM issuance and you guys kind of ramping the debt to equity in order to bolster the ROE or should we expect a pretty measured kind of ATM usage onward?

Well I think that's a good question. I think you know, listening to all the things you just said are what we consider. I mean we consider how -- what is our outlook for portfolio growth, what is our capital structure, and with regards to the ATM what is the receptivity of the marketplace because as one can see from our past issuance we were able to issue a fair amount of equity but in a very market friendly manner which is our intention to maintain good trading characteristics. So we factor all that together in looking at how we look at our capital structure and it's a dynamic situation that we evaluate at each point in time and probably the biggest factor really is our view on portfolio growth.

Okay, that’s fair. That's all from me. Thanks for taking my questions guys.

Thank you and our next question comes from the line of William James from Merrill, you may begin.

Hi Chris, the new tax bill outlines the deduction elimination for interest expense starting with 30% of EBITDA and -- exalts that and then it moves up and you are 5% to 30% of EBIT. So my question is how does that affect your existing portfolio for total debt and then does that create any opportunities for you guys in these companies that are going to suffer free cash flow shortfalls?

Well that's a very interesting question and it's going to play it play out on a kind of case by case basis. That deductibility on the other side if the entity is a C Corp it's got a substantially lower tax rate. So how all those economics fully shake out sort of is a case by case analysis. It's clear from the writers of the tax bill that there is a view that absolute leverage -- high absolute leverage should be discouraged and so they're trying to discourage that there are those actual few extra turns. I think as a practical matter in our business we have the flexibility of designing our credit instruments in many different ways and we can -- we might wind up with a little more preferred stock in addition to debt instrument to manage the company's absolute leverage and tax deductibility. I mean it's something we think will favor us because we can work constructively with our portfolio companies to really come up with an optimization of their capital structures. I think there's some potentially pernicious dynamics in this where I think that was part of your question. I think as a company that might be highly levered runs into problems and troubles and there are EBITDA declines of sudden deductibility of their interest actually is going to decline just at the same moment that they're having other cash flow problems. So there may well be an accelerant to a company's distress as a result of this bill. Now we're in a pretty rising generalized -- generally the economy is looking pretty good and with some certain sectors retail for example that might be having more challenges than others. But in a downturn these dynamics might, this -- the cash flow, tax, and deductibility dynamics could have some adverse cash flow consequences at precisely the wrong time for some companies. And that would give rise obviously if you are in your portfolio that's one set of issues. But if they're not and they're out in the world at large that also creates an opportunity to come up with some accretive capital solutions. So as you... Go ahead.

I am sorry, go ahead.

I just said that it's going to be highly dynamic and it's going to be case by case out there. And -- but it's definitely a change and change has risen, change is opportunity and so we will be evaluating all of that.

So as you look through the total debt exposure of your portfolio but what percentage of the portfolio do you see where there's going to be free cash flow issues and maybe you guys moving to preferred stock issuance and adjusting these capital structures in your portfolio?

I think at this moment in time we don't see -- we don't see any major issues inside of our portfolio at this time. Now we are in budget season, right. I mean it is January and lot of companies are calendar year companies. The tax bill just passed so as a lender they're required to give budgets and projections for the year. So we haven't seen all that out of our portfolio growth because it's coming. And everything is brand new so this is something that's going to be watched by us and by our portfolio companies and really by everybody in the marketplace. This quarter I think -- I think we have a lot more visibility on precisely what's going to -- what the dynamics are in a company by company basis probably towards the end of this quarter because we'll have the benefit of budgets and people have to buy the benefit of putting the tax bill into their cash flow equations. But again from what we know about the tax bill and our portfolio companies we don't anticipate credit events being driven by our companies.

Okay, as you look at potential deal flow and the deal flow that looks over the last year and your existing portfolio, as you look at the EBITDA across all these spectrums of industries what sense of the economy are these EBITDAs growing or is this just our arbitrage leverage buying out family and people buying companies back and forth or do you sense that there is true good return on investment in CAPEX and therefore EBITDAs are growing? And I know it depends upon industry but just to be…

Yeah, it does and the one thing that our perspective is colored by is that we're so highly selective on the assets that we -- the companies that we invest in that it's not uncommon for us to see business that is growing at an exceptional rate because the fundamentals of that business model are so strong that it's not necessarily a good indicator of sort of broader economic trends. But having said that overall we're seeing our portfolio of companies have success. They're not all necessarily growing at the same pace that they're budgeting but the year over performance by and large is positive.

I think it also -- where I think their outlook is positive. We are seeing a lot of our portfolio companies coming to us with acquisitions. There's a sense of lets invest for the future. A number of portfolio companies are coming to us to recalibrate because they want to invest more in their businesses. So we think the mindset is very much want to have growth that we see coming out of our portfolio.

Great, I appreciate the color.

Thank you and it looks like we have no further questions at this time. I would now like to pass it over to Mr. Henri Steenkamp.

Well, this is Chris here. I just want to thank everyone for joining us today. We appreciate your time and interest and support for Saratoga and aim 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.