Saratoga Investment Corp. (SAR) Q3 2019 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp’s fiscal third quarter 2019 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 2019 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 2019 shareholder presentation in the Events and Presentations section of our investor relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 1:00 pm today through January 17. 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. This quarter, we benefited from actions we implemented last quarter to improve and strengthen our capitalization. Our newly raised equity and debt capital was fully deployed in originating new investments, resulting in assets and earnings growth while continuing to maintain our high credit standards. To briefly recap the past quarter on Slide 2, first we continued to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 98.6% of our loan investments having our highest rating, generating a return on equity of 10.1% on a trailing 12-month basis consistent with last year, and beating the BDC industry mean of 9.6%, and maintaining a gross unlevered IRR of 12.9% on our total unrealized portfolio with gross unlevered IRR of 13.4% on total realizations of $299 million. Second, we grew our assets under management to $444 million, an increase of 13% from $393 million as of Q2 and up 31% from $339 million as of the same time last year. From a longer term perspective, our current AUM reflects 186% increase from $155 million over the past five years. This quarter continues to demonstrate the success of our growing origination platform with a healthy $74 million of originations, including investments in one new portfolio company, bringing the total to eight new platforms since May. Third, the continued strengthening of our financial foundation has again enabled us to increase our quarterly dividend for the 17th consecutive quarter. We paid a quarterly dividend of $0.53 per share for the third fiscal quarter 2019 on January 2, 2019. This was an increase of $0.01 per share over the past quarter’s dividend of $0.52 per share. All of our dividend payments have been exceeded by our adjusted net investment income for the same periods, and when looking at our Q3 adjusted NII per share, we are still comfortably over-earning our dividend currently by 23%, which distinguishes us from most other BDCs. We are one of only eight BDCs having increased dividends over the past year. Fourth, we refinanced our existing CLO, extending the reinvestment period to January 2021 and the final maturity to January 2030. In addition, the CLO was upsized from $300 million in assets to $500 million. Henri will provide further details about the components of this investment. Finally, our base of and access to liquidity remains strong. We continue to maintain dry powder to meet future potential opportunities in a changing credit and pricing environment. Our existing available quarter end liquidity of $37 million allows us to grow our Q3 assets under management by 8% without any new external financing. Ninety-six percent of our current outstanding debt is fixed rate, structurally very important in this rising credit environment, with only 4% of our floating rate Madison credit facility. During Q3, $0.2 million of equity was issued under our ATM and 25,863 shares were issued under our DRIP plan. As a reminder, we raised almost $70 million in equity and long-term debt offerings in July and August. This quarter, we registered strong performance with our key performance indicators as compared to the quarters ended August 31, 2018 and November 30, 2017. Our adjusted NII is $4.8 million this quarter, up 49% versus $3.3 million last year and up 2% versus $4.76 million last quarter. Our adjusted NII per share is $0.65 this quarter, up 20% from $0.54 last year but down 6% from $0.69 last quarter. Our latest 12 months return on equity is 10.1%, consistent with 10.2% last year, and our NAV per share is $23.13, up 2.4% from $22.58 last year Q2 but down slightly from $23.16 last quarter. Henri will provide more detail later. As we’ve often mentioned in the past, we remain committed to further advancing the overall size of our asset base while maintaining its high quality. As you can see on Slide 3, our assets under management have steadily risen since 2011, including these first nine months of fiscal 2019, and the quality of our credits remain high. With that, I would now like to turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended November 30, 2018. Across all these metrics, you can see the positive impact of increased assets while maintaining strong credit quality. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $4.85 million was up 1.9% from $4.76 million last quarter and up 49% from $3.3 million as compared to last year’s Q3. Adjusted NII per share was $0.65, up $0.11 from $0.54 per share last year and down $0.04 from $0.69 per share last quarter. The increase from last year primarily reflects our higher level of investments and resultant higher interest income with AUM up 31% from last year. The sequential quarterly decrease was primarily due to last quarter’s deferred tax benefit not repeating, as well as the full impact of Q2’s equity raise and increased outstanding shares. Adjusted NII yield was 11.2%. This yield is up 160 basis points from 9.6% last year but down 70 basis points from 11.9% last quarter. For this third quarter, we experienced a net loss on investments of $1.5 million or $0.20 per weighted average share, resulting in a total increase in net assets resulting from operations of $3.7 million or $0.49 per share. The $1.5 million net loss on investments was comprised of $1.0 million in net unrealized depreciation and $0.4 million of net deferred tax expense on unrealized gains in Saratoga Investment’s block of subsidiaries. The $1.0 million unrealized depreciation includes two discrete unrealized depreciation items: first, a $1.6 million unrealized depreciation on the Saratoga CLO, mostly reflecting the transaction fees of the refinancing and upsizing that closed post-quarter end; and second, a $0.7 million unrealized depreciation on the company’s Health Media Network investment, reflecting a partial reduction of previously recognized unrealized gains. This adjustment was necessary to reflect the value that has actually been realized subsequent to quarter end with our full debt, equity and warrant positions being redeemed in early December for a total realized gain of $4.7 million on our overall HMN investment. Excluding these two investments, the remaining fair value changes across the total portfolio for Q3 is unrealized appreciation of $1.2 million. We continue to focus on return on equity as an important performance indicator for us, which also includes both the realized and unrealized gains. Our return on equity was 10.1% for the last 12 months, similar to last year’s 10.2% but well above the BDC industry average of 9.6%. Quickly touching on expenses, total expenses excluding interest and debt financing expenses, base management fees and incentive management fees, increased to $1.3 million this quarter from $1.2 million in the same period last year, reflecting primarily the increase in the administrator expenses cap earlier in the year. Expenses as a percentage of average total assets decreased from 1.4% to 1.2%. We have also again added the KPI slide starting from Slide 27 in the appendix at the end of the presentation, that shows our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained. Of particular note is Slide 30, highlighting how our net interest margin run rate has more than tripled since Saratoga took over management of the BDC. Moving on to Slide 5, NAV this quarter was $173.3 million at quarter end, a $29.6 million increase from NAV of $143.7 million at year-end and a $34.5 million increase from NAV of $138.8 million as of 12 months ago. NAV per share was $23.13 as of quarter end, up from $22.96 as of year-end and $22.58 as of the same period last year. For the nine months ended November 30, 2018, $14.2 million of NII and $0.1 million of net realized gains were earned, offset by $1.2 million of deferred tax expense on net unrealized gains in our block of subsidiaries, $2.5 million net unrealized depreciation on investments, and $10.2 million of dividends declared. In addition, $1.5 million of stock dividend distributions were made through the company’s DRIP plan. 10,373 shares were also sold through the company’s ATM equity offering during the year. Our net asset value per share has also steadily increased over the past couple of years, as seen on Slide 27, and we continue to benefit from our history of consistent realized gains. On Slide 6, you will see a simply reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. Starting at the top, NII per share decreased from $0.69 per share last quarter to $0.65 this quarter. The significant changes were a $0.07 increase in net interest margin, excluding the CLO, reflecting the increase in our asset base offset by a $0.03 decrease in Q2’s deferred tax benefit and a $0.05 dilution from increased shares due to the equity offering and DRIP issuance. All changes are shown net of incentive fees. Moving on to the lower half of the slide, this reconciles the $0.03 NAV per share decrease for the quarter. The $0.69 generated by our NII in Q3 is offset by the $0.52 dividend declared for Q2 with a Q3 record date, and a $0.20 net realized and unrealized loss on investments. Slide 7 outlines the dry powder available to us as of quarter end, which totaled $37.4 million. This is spread between our available cash and undrawn Madison facility. This quarter, we invested substantially all of the capital raised during Q2’s equity raise and new baby bond issuance. We remain pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all our debt is long term in nature, actually all five years-plus. For the most part, we have also primarily fixed our interest cost in this rising rate environment with all our borrowings, except our Madison facility, being fixed rate--apologies, floating rate. Moving across to the asset side of our balance sheet on Slide 8, 83% of our investments have floating rates, and although they have LIBOR floors, we are through all of them which means we remain a big beneficiary of the rising short-term rates. Assuming that our investments as of quarter end were to remain constant for a full fiscal quarter and no actions were taken to alter the existing rate terms, a hypothetical increase of 100 basis points in interest rates would increase our interest income by approximately $0.8 million per quarter or 7% as compared to our current interest income. This is all incremental to our existing earnings without any other changes. Now I would like to move on to Slides 9 through 11 and review the composition and yield of our investment portfolio. Slide 9 shows that our composition and weighted average current yield remained relatively consistent with the past, with $443.8 million invested in 36 portfolio companies and one CLO fund, and 53.6% of our investments in first lien. On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO and syndicated loans, as well as our total assets yield has remained relatively consistent in the 11% or just above range for the past several years, despite high levels of repayments and the continued replacement of these assets. This quarter, our overall yield as compared to Q2 remained unchanged at 10.8%. Core BDC asset yields increased slightly to 11.3%. That increase is primarily due to the increase in LIBOR rates this quarter. The weighted average yield of our CLO decreased to 13.3% as we factored in the impact of the refinancing that closed in December. Turning to Slide 11, during the third fiscal quarter we made investments of $73.7 million in one new portfolio company and nine follow-ons, and had $23.4 million in amortizations and one repayment resulting in a net increase in investments of $50.3 million. Our investments still remain highly diversified by type as well as in terms of geography and industry, spread over 10 distinct industries with a large focus on business, healthcare, and education services, and business services is also spread amongst numerous end markets. We continue to have no direct exposure to the oil and gas industry. Of our total investment portfolio, consistent with Q2 and following the large originations this quarter, 9.1% consists of equity interests, which remain an important part of our overall investment strategy. For the past six fiscal years including Q3, we had a combined $12.0 million of net realized gains from the sale of equity interests or sale or early redemption of other investments. When factoring in our available NOLs, these are similar to equity raises for us. This consistent performance continues to be a good indicator of our portfolio credit quality, has helped grow our NAV, and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our President and Chief Investment Officer, for an overview of the investment market.

Thank you, Henri. I’ll take a couple of minutes to describe current market conditions as we see them, then I’ll comment on our portfolio performance and investment strategy. The market has remained competitive since we last met, and it continues to be a borrower-friendly environment. Leverage is still aggressive for quality credits and the supply-demand imbalance continues to drive price. Although some available metrics indicate absolute yields increasing beyond just the increase in LIBOR, we have seen no evidence of spread expansion at the lower end of the middle market, but our results continue to benefit from the increase in LIBOR that was again experienced this quarter. We would also like to address recent volatility we have observed in the capital markets, particularly in the leveraged loan market. It is our observation that valuations in the large leveraged loan market can be immediately affected by the daily newswire and the massive ebbs and flows of capital that follow suit. As a result, loan spreads and leverage levels in this market are subject to sizeable changes that can occur on a weekly and even daily basis. The lower middle market, where we invest capital, does not behave in quite the same manner. Loan spreads and leverage points generally do not change overnight based on the whims of the broader capital markets; rather, credit metrics in our market tend to be driven by longer term supply and demand factors and thus our portfolio is less exposed to the volatility of the larger loan markets. To be clear, market spreads and leverage points are certainly incorporated into our valuation process and they do impact the value of our portfolio, but credit performance tends to be a greater determiner of portfolio value. For example, in this past quarter where LIBOR increased approximately 40 basis points, the estimated market impact to our valuations was less than 0.2% of our fair value, with most fair value changes coming from portfolio company performance. As we have mentioned in the past, the vast majority of our portfolio is constructed in a much more hands-on fashion than the leveraged loan market, and even the larger BDC market. In addition, we believe our investments are structured better with more protections. We underwrite each of our investments working directly with management and ownership to make a thorough assessment of the long-term strength of the company and its business model. We invest capital with the objective of finding differentiated businesses where our capital can be put to work to produce accretive returns for our shareholders over the long run. We believe this approach has contributed to our successful returns and our ability to support so many of our portfolio companies with follow-on capital as they grow. Looking at leverage on Slide 13, you can see that industry debt multiples increased significantly from last year with nearly three of four deals over the past year being executed over five times. With total leverage for our portfolio of 4.66 times, we continue to achieve our results while maintaining a relatively modest risk profile; however, rather than just considering leverage, our focus remains on investing in credits with attractive risk-return profiles and exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment. This slide also illustrates our consistent ability to not only generate new investments over the long term despite difficult market dynamics but also the strength of our growing sourcing platform. With 24 originations through the four calendar quarters, including eight new portfolio companies and 16 follow-ons, we have established an origination level that is ahead of last year’s record pace while applying consistent investment criteria. This past calendar quarter, we closed investments in one new platform with four follow-ons, thereby deploying most of our available cash at the end of Q2. We remain confident that we can continue to grow AUM steadily over the long term, and these past couple quarters’ originations, both in size and nature, illustrate the health and growth of our pipeline. Moving on to Slide 14, we have continued our significant focus on business development and this has led to new strategic relationships that have become sources for new deals, most notably in the second half of calendar 2018. Thirty-eight percent of term sheets issued during this period and three of our new platform companies are with recently formed relationships that could serve as sources of future deals, and new deals often lead to follow-ons. As you can see on the slide, our number of deals sourced and evaluated has increased materially over the past couple of years despite competitive market conditions. Fifty percent of these deals come from companies without institutional ownership, although 80% of term sheets are issued to companies with private equity ownership. Nevertheless, proprietary relationships remain a vital component to our deal sourcing. Our overall portfolio credit quality remains strong. As you can see on Slide 15, the gross unlevered IRR on realized investments made by Saratoga Investment’s management team is 13.4% on $299 million of realizations. On the chart to the right, you can also see total gross unlevered IRR on our $442.6 million of combined weighted SBIC and BDC unrealized investments is 12.9% since Saratoga took over management. A couple of comments on two of our existing investments: My Alarm Center and Easy Ice. My Alarm first - a $0.7 million investment was made in the new Class Z preferred equity of My Alarm Center this quarter. This new class of preferred equity is senior-most with a significant accreting preference, so the investment caused a write-down of our existing positions in the Class A and Class B preferred equity. It is worth noting that our assessment of the overall enterprise value of the company did not change significantly. The write-down in Class A and B is primarily the result of reallocating equity value among the three classes with the introduction of Z. In the near term, we expect the Class B preferred equity to be written down to zero and the Class A to further decline as the Class Z appreciates. Longer term, Class A preferred equity may appreciate if the company executes its plan. In evaluating our investment, we consider the various preferred classes together as a whole and we would encourage investors to look at them in the same way. You will also note a follow-on investment of approximately $5.4 million in our Easy Ice second lien debt, which increases our largest position. This investment was made to acquire a meaningful regional competitor. Despite this increase in exposure, the overall strength of the business and the pro forma credit statistics have improved with the incremental investment. With this acquisition, Easy Ice has significantly increased its customer base and machine count and has created a much more substantial service footprint, which should lead to efficiency gains. The company’s growth in EBITDA has been accretive to our equity investments. We remain positive on Easy Ice’s market opportunity, and now with double-digit EBITDA it’s leadership in it’s market is significant. We expect to continue to see attractive acquisition opportunities in the pipeline and will continue to evaluate the capital structure vis-à-vis the company’s sizeable equity growth opportunity. Slide 1 highlights that the mix of securities in our SBIC portfolio is conservative with 50% of our investments comprised of senior debt first lien investments. The leverage profile of these 23 investments remains relatively low at 4.73 times, especially when compared to overall market leverage. Our favorable cost of capital from this program allows us to deliver highly accretive returns to our shareholders without stretching out on the risk spectrum. Moving on to Slide 17, you can see our SBIC assets increased to $241.1 million as of quarter end, representing 54% of our overall portfolio. This means our SBIC assets are fully funded. As at quarter end, we had $3 million of total available SBIC investment capacity, all cash, with our current SBIC license, and as we’ve previously noted, we continue working with the SBA on the application process for our second license following their issuance of a green light letter to us earlier this year. If approved, this will allow us to issue, subject to SBA approval, up to $175 million of additional SBI guaranteed debentures. Overall, this quarter’s operating results again demonstrated the growing strength of our sourcing and origination capabilities, leading to a growing base of high quality assets over the long term. The power of increased scale on our operating results is already visible, but producing this result has required us to remain extremely diligent in our overall underwriting and due diligence procedures, culminating in high quality asset selection within a tough market. Credit quality remains our top focus and we remain committed to this approach. This concludes my review of the market, and I’d like to turn the call to our CEO. Chris?

Thank you, Mike. As outlined on Slide 18, we recently increased our third quarter dividend to $0.53. After 17 sequential quarters of dividend increases, we are currently over-earning our dividend by 23% based on our adjusted Q3 NII per share, giving us the third highest dividend coverage in the BDC industry. As you can see on Slide 19, we have had 8.2% year-over-year dividend growth which easily places us at the top of our peers and one of only seven BDCs who have grown dividends in the past year. With most BDCs having either no increases or decreasing the size of their dividend payments, our continually increasing dividend has differentiated us within the marketplace. Moving to Slide 20, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 5%, significantly beating the BDC index of negative 5%. When viewing performance as of the first week in January and over a longer time horizon, as you can see on Slide 21, which is when we took over management of the BDC, our three and five-year return places us at the top two of all BDCs for both periods. Over the past three years, our 85% return exceeded the 18% return of the index and alternatively, as compared to when our management team became the invested manager of the BDC eight years ago, our 345% return is more than triple the index’s 104% return. Slide 22 highlights our outperformance in the context of the broader industry and specific to certain key performance metrics. We continue to achieve high marks and outperform the industry across diverse categories, including interest yield on the core BDC portfolio, latest 12-month NII yield, latest 12-month ROE, dividend coverage and year-over-year dividend growth, NAV per share, and investment capacity. Of note is that as our assets have grown and we are achieving scale economics, our expense ratio is moving closer towards the industry averages. We continue to emphasize our latest 12 months return on equity and NAV per share outperformance, which reflects the growing value our shareholders are receiving. Moving on to Slide 23, all of our initiatives we have discussed in this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We maintain that our differentiated characteristics outlined on this slide will help drive the size and quality of our investor base, including the addition of more institutions. These characteristics include maintaining one of the highest levels of management ownership in the industry at 21%, a strong and growing dividend over-earning adjusted Q3 NII per share by 23%, strong long-term return on equity, available low cost and long term liquidity with which to grow our current asset base, including the recent equity and baby bond offerings, obtaining a triple-B investment grade rating, solid earnings per share and NII yield with substantial growth potential, steady high quality expansion of AUM and an attractive risk profile with protection against potential interest rate risk. Our high credit quality portfolio contains minimal exposure to cyclical industries, including the oil and gas industry. With this overall performance, Saratoga Investment has achieved recognition among the premier BDCs in the marketplace. Finally, looking at Slide 24, we remain on course with our long term goal to grow our asset base without sacrificing credit quality, while benefiting from scale. We also continue to increase our capacity to source, analyze, close and manage our investments by adding to our management team and capabilities. Executing on our simple and consistent objectives should result in our continued industry leadership and shareholder total return performance. In closing, I would like to thank all of our shareholders for their ongoing support. We are excited for the growth and profitability that lies ahead for Saratoga Investment Corp and would like to now open the call for questions.

[Operator instructions] Our first question comes from Mickey Schleien with Ladenburg. Your line is now open.

Yes, good morning everyone. In the prepared remarks, you alluded to the volatility we’ve seen in the markets the last couple of months. I’m curious whether you had an opportunity to take advantage of some of that volatility and buy some distressed syndicated deals at prices you thought were interesting, and perhaps to capture the pull to par effect.

Mickey, how are you? Happy new year. Yes, clearly there’s a lot of volatility. Just getting behind the volatility for a moment, in the broadly syndicated space, as Mike discussed in his remarks, there is some exposure to capital flows that are less institutional and more retail. There’s a lot of income-oriented funds that have been buying leveraged loans, and that have had some volatility as there’s been redemptions, so you get redemptions in the mutual fund flows and then that spills back over into the credit markets and creates the volatility. Again as Mike articulated, this is a credit-based portfolio, and so these swings in market value don’t necessarily reflect the underlying dynamics and characteristics of the companies, but they do affect valuation.

But in our portfolio, less so - much less so.

Yes, I’m speaking primarily in the CLO, and I think in our base BDC portfolio it hasn’t. So specific to your question, we did price our CLO and upsized it, and we had a warehouse and we also had some incremental capacity to fill, so yes, we were able to purchase assets in the marketplace and take some advantage of the down swing when we upsized our CLO. Now, it’s a long game and whether that volatility--you know, whether our prices ultimately will be the lowest that’s available or not, it’s unclear; but we feel comfortable with the quality of our portfolio and the risk characteristics as measured by the fundamentals of the underlying companies.

But also to add to that, Mickey, we did not invest in anything outside the CLO in an opportunistic way. We’ve done that in the past and always have our eyes open to those opportunities. We didn’t see anything that we felt presented a good, long term opportunity for our shareholders that was outside the CLO. One of the challenges we face there is that you know how we do due diligence, and so even when we do participate in something that’s more broadly syndicated, we want to have the time to do our homework and we look to do a lot of independent diligence. Oftentimes those market corrections like that are short-lived and don’t offer us quite the time to do the kind of homework that we’d like, so we didn’t see anything that fit the bill outside of the CLO.

Okay, thank you for that. I do understand that the markets moved quickly and perhaps you didn’t have time to do all the homework you would usually like to do. Another question I have is I did notice the follow-on investment you made in Easy Ice, the second lien which includes a PIC component, but I can’t reconcile why PIC income on the controlled investments almost doubled in the quarter. Was there something non-recurring in the quarter, and what is the outlook for the company to get PIC income down to a more manageable level?

Mickey, it’s Henri - hi there. Yes, you are right. In Q3 as part of this transaction and in assessing our overall Easy Ice investment, we made a decision to re-invest some of what the original allocation was between cash and PIC on Easy Ice into more PIC, so they could obviously re-invest it within the business. There is about $496,000 of reclassification in Q3 that occurred between cash and PIC, and so therefore if you sort of look at the overall PIC percentage as an overall percentage of total interest income for the quarter, about almost half of it relates to this one-time reclassification in Q3 as part of that transaction.

But to add to Henri’s remarks, Mickey, it’s a good question that you asked. To add to it, just to give you a little bit of perspective on Easy Ice, to remind folks, this is a deal that we’ve been invested since 2013 when it was a very small business. It’s an exceptional business model. The business has performed exceedingly well. We have a very strong relationship with the management team and have a lot of confidence in them as well, and we’re working with them very actively as they grow their enterprise value. Just to put some frame of reference around it, you might recall a couple of years ago-ish, we did a transformative transaction with Easy Ice where we were able to, based on the strength of our relationship and our position in the balance sheet, we were able to upsize our investment in the business very significantly and were happy to take a very meaningful equity ownership in the business as well. At that point, we upsized our investment in a very significant fashion, in a fashion that we recognized represented a fairly big concentration. About six months later, we were able to look at the balance sheet and better optimize the capital structure and reduce our exposure in that respect. The most recent transaction that we did, we felt also offered the company and therefore us and our shareholders an opportunity to, in partnership with the business, execute on an acquisition that is very meaningful and very significant to the business because of the scale that it allows the company to get to, and the geographic location of that business we think should drive significant efficiencies for the business. Now, looking at our overall exposure to that credit, we recognize that it’s very meaningful exposure. We’re very comfortable with the business and the business model, as we’ve said, but we’re always evaluating how much exposure we want to the credit and as we look at opportunities out there, what’s the best way to optimize the balance sheet. Certainly our goal is to bring in more third party capital as we continue to grow the business, and our goal in conjunction with that, especially as the business continues to have success, is to drive more of that PIC income into ordinary cash income. But that’s work in progress, and it is something that we’re very focused on.

Mike, as you bring in other providers of capital into Easy Ice, would you consider perhaps selling some of your position to them simultaneously in order to manage your risk profile a little bit?

Well, I don’t know that we’ve given a lot--we’re going to be open-minded to optimizing the balance sheet in a way that’s best for our shareholders. I think we’ve created--we and management have created a lot of value here. So far, what we’ve done is we’re brought in senior lenders, and I think that’s the best way to leverage our position in the credit and improve returns for the investors, but we’re looking at all the options as we continue to grow the company.

Mickey, to add to that, I think Mike had mentioned it earlier, Easy Ice now is a double-digit EBITDA company and before it was substantially smaller, and we’ve grown through acquisition and those acquisitions have taken place in the most recent past, and so our financial structure was originated when the company was smaller and as it gets larger and as it proves out the sustainability of the current earnings, our credit quality and ability to leverage at more attractive rates is going to improve. The company’s in a very different place than it was when we first started and put this capital structure together, so we do think, as Mike said, we’re going to have chances to optimize this capital structure. Our focus has been to assemble the assets and accomplish some of the acquisitions that are near and long-term highly accretive, so that’s where our high focus is and we will work to optimize capital structure as well.

So Chris, as Easy Ice gets into double-digit EBITDA, presumably your refinancing risk might also be increasing; in other words, as you just said, they may have access to more capital. Do your loans to the company have any meaningful call protection in them?

Yes, we have call protection in all of our loans. We’re highly involved in the business, so clearly optimizing the capital structure of the company is very much rooted in the business plan. Our capital is relatively junior. I think the PIC characteristic of our capital is very supportive of the company’s growth plan, so we think those characteristics have helped us maintain our position and should going forward.

And just to add to that, just to be clear, Mickey, because it’s a very good question, we don’t see any near term risk of being refinanced into credit unless we chose to. We feel very confident that we don’t have a lot of risk in that respect.

I understand. My last question, switching gears, with the upsizing and reset of the CLO, I’m assuming you probably refinanced the debt at more attractive spreads. What could we expect in terms of the impact on the estimated yield going forward? I noticed it came down to 16% in the most recent quarter, which is sort of in line with the market. Could it move meaningfully from that number based on the reset?

Mickey, this is Henri. I think as we’ve discussed in the past, there’s sort of like three [indiscernible] to how the CLO interacts with our P&L, and that’s the incentive fee, which we disclosed there will be no more incentive fee going forward; there’s the management fees which proportionately will increase as we have upsized from $300 million to $500 million - same terms as in the past; and then to your question, the interest income, and with the reinvestment date that now has been pushed out, the weighted average interest rate that we would be using to recognize interest income will return more to similar to what it was a year or so ago on our existing CLO, to sort of that normalized mid-teen level. I think that’s sort of a good proxy for you to use as you think of interest income. Of course, that interest income will now be based on an increased investment cost basis as we’ve put an extra $15.8 million into the CLO equity cost investment.

Understood, thank you for that comment. That’s it for me this morning. I appreciate all your time and happy new year to everyone.

Thanks Mickey.

Thank you. As a reminder ladies and gentlemen, that’s star then one to ask a question. Our next question comes from Casey Alexander with Compass Point. Your line is now open.

Hi, good morning. Mickey asked a lot of my questions, but I do have a couple. Michael, I understand that the attachment point of the entire portfolio is 4.66 times, and maybe this is an idiosyncratic data point, but what was the attachment point of the new portfolio company loan that came into the portfolio this quarter?

Higher than that, but the thing--I hesitate to answer. As we’ve often said, we look at credit very much based on what is the strength of the business model, so we think it’s--we’re careful not to just use a metric like leverage. It certainly is an important metric, but as we’ve said in the past, there are a lot of businesses that we could underwrite and provide capital to, and some other folks do and they’ll do them at three turns of leverage, and we look at the business and we would never give them a dollar just because of the profile of the business. There are other businesses that we look at that we think have a much stronger profile and therefore we’ll be comfortable being deeper into the balance sheet. The one new portfolio company that we did this year has a higher leverage profile than that average, but I think--I will add this, though. That’s not to say that--because I think directionally you’re trying to get a sense for the average as reflective of deals that we’ve done over a period of time, so what are we seeing lately. We are still seeing opportunities to invest capital at what we think are very reasonable points in the balance sheet. In some cases with exceptionally strong business models, it will be north of that; for instance, many of the deals that we have that have a SaaS business model attached to them, the leverage profile may be north of that if the company has credit metrics that support that. There are other companies that we see and invest in where it will be south of that, and we’re still seeing plenty of opportunities to invest below that average leverage point.

Okay, thank you. Secondly, looking at your capital availability, are you guys really at the point right now that until the next SBA license comes through, you’re sort of on a replacement cycle of replacing repayments, because nobody ever spends their last dollar and puts them in a position to where they can’t close something because they have no further available capital. I’m just wondering how we should think of balance sheet development from this point forward until such point in time as the government reopens and maybe the second license can be addressed.

A couple things on that front. We do have repayments that occur, and so the absolute level of assets at a quarter end is not necessarily reflective of the total liquidity. We have a couple things coming down the pike in that we have our full Madison facility essentially available. In terms of--

Yes, but Chris, you’re not going to go to the last dollar of the facility - you’re just not.

No, but we have access to--we do have access to the baby bond marketplace and we have--so you know, we do have access to the capital markets. Obviously the equity is bouncing around a fair amount, but on the debt side we do have the ability to increase our facilities.

Yes, and Casey, I noted in my remarks that HMN is very successfully now repaid right after quarter end, so that’s $18 million of, I guess, additional liquidity that’s been added just subsequent to quarter end. Then as Chris said, we have open baby bond programs if we wanted to increase our liquidity.

Great, okay. All right, great. Thanks very much.

Thank you.

Thank you. Our next question comes from Tim Hayes with B. Riley. Your line is now open.

Hey, good morning guys. Thank you for taking my questions. Just piggybacking off Casey’s last question there, Chris, I think you quickly mentioned you have the ability to upsize that facility, the Madison facility. Just wondering if there’s been--you know, I know that you haven’t really drawn on it much now, but if there’s any appetite on your part or talks with Madison to upsize that facility, and if you’ve been in any other conversations with any other counterparties about entering into new credit facilities.

Let me just say it this way - we obviously have a longstanding relationship with Madison and that’s been a very important and flexible facility for us. We have also had dialogs with parties possibly joining that facility, and we also have had dialogs with other parties to provide other financing facilities to us, and we have the access to the baby bond marketplace. With that array, with our current cash position, our current liquidity and our current pipeline, we feel comfortable that we have the capital available to go forward in our business as we have. Obviously we’re coming off of a very substantial growth period over the past year, and that’s a very positive development for all of us and we’re very comfortable with all the credits. If that were to continue, clearly we would look to raise some incremental capital, but that would be a very positive--you know, we’d be in a very positive form and role to do that. I think just looking at some other metrics in terms of the fact that we’re over-earning our dividend by a substantial amount, our financial metrics are very healthy from a financing standpoint.

Got it, okay. I know you don’t have a crystal ball and the SBA moves at its own pace, but what have discussions been like recently? Do you have any more clarity into potential timing around approval, and how much does the government shutdown back things up, do you believe?

Well again, this is an area where we really don’t want to speculate very much. The SBA works at its own pace. There is a change of administration and some different focus at the SBA, and we believe we’re making forward progress. Obviously with the government shutdown, there’s a number of things down in Washington that aren’t moving. We hope that that will be resolved soon, but in terms of the overall progress at the SBA, from our perspective we feel like we’re making forward progress down there and they are--and we’re working with them. As to the exact time and pace of the outcome of that, that’s not something that we either can predict or would like to project necessarily. What I would like to say is we’ve been making a tremendous amount of investments outside of our SBA SBIC recently, and a lot of our growth has been outside the SBIC, so we don’t view that as a gating item to growth. We clearly view it as a very attractive program, but it’s not something that impedes our ability to grow and to close deals as we’ve demonstrated certainly in this last quarter and this last period of time.

Okay, got it. Appreciate the comments there. Henri, I think you said you had an investment repay after quarter end, but I think you also said you had one repayment, early repayment in the quarter as well. Would you be able to just quantify how big that repayment was in the quarter and then the amount of accelerated OID or early prepayment fees you realized from that?

Yes, it was technically from an accounting perspective a repayment because we had a restructuring on our Noland [ph] investment, but actually it was actually just effectively a part of the new origination of Noland. There was also a repayment of a portion of the investment, so it was not a full repayment or exit of any investment in Q3, it was just the restructuring of our investment in Noland that took place, just technically from an accounting perspective. Because the instrument changed, it was regarded as a repayment for accounting purposes.

Okay, understood. I will hop back in the queue. Thanks for taking my questions.

Thank you.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Chris Oberbeck for any closing remarks.

Well again, we’d like to thank everyone for joining us today and we look forward to speaking with you all 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 wonderful day.