Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's Fiscal Fourth Quarter and Fiscal Year 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 fourth quarter and fiscal year 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 fourth quarter and fiscal year 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 be available from 1 PM today through May 16. 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. In reflecting on the past year, we made substantial progress in growing our high quality asset base, and strengthening our organization and capital base, enabling us to maintain our industry leadership in key performance metrics and performance. We raised more than $90 million in the public capital markets this year adding to our long-term capital structure, and further developing our diversified sources of cost-effective liquidity. This new capital supported this year's record level of investments made from our growing pipeline of available investment opportunities. Importantly, we have accomplished this in a highly competitive and challenging market environment. To briefly recap the year and quarter on Slide 2, first, the high-quality nature of our portfolio and our strong performance continued, maintained a high level of investment credit quality with 98.6% of our loan investments having our highest internal rating, generating a return on equity of 10.6% on a trailing 12-month basis, outperforming the last 12 months BDC industry average of approximately 8.9% and maintaining a gross unlevered IRR of 13% on our total unrealized portfolio at year end, with a gross unlevered IRR of 13.8% on $358 million of total realizations. Second, we expanded our assets under management to $402 million, a 17% increase from last year and a 9% decrease from Q3, including an increase to realizations, which we will discuss. This year is illustrative of the success of our growing origination platform. We originate investments totaling $188 million, a record for us. These were offset by record repayments of $136 million. In Q4, $29 million of originations were offset by $77 million in repayments. Third, the continued strength of our financial foundation has enabled us to increase our quarterly dividend, the 18th consecutive quarter. We paid a quarterly dividend of $0.54 per share…

Thank you, Chris. We are pleased to provide everyone our Q4 and year-end results a week earlier than last year. In order to provide more in-depth information, we have also added our schedule of investments as of February 28, 2019 to our earnings release financial statements, which will also be included in our Form 10-K. Our 10-K is due to be filed on Tuesday, May 14. Slide 4 highlights our key performance metrics for the quarter ended February 28, 2019. Across all these metrics you can see the positive impact of a long-term trend of increased assets when paired with 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 $4.9 million this quarter was up 1.9% from $4.85 million last quarter and up 31.1% from last year's Q4. Adjusted NII per share was $0.66, up $0.01 from $0.65 last quarter, and up $0.06 from $0.60 last year. The increase from last year primarily reflects our higher level of investments and results in higher interest income, with AUM up 17% from last year. This quarter benefited from the full impact of Q3's originations and additional interest income from accelerated OID on certain repayments with a partial negative impact of these significant repayments in Q4, offsetting most of that increase. These factors all led to adjusted NII yield of 11.2% for the quarter, up 50 basis points from 10.7% last year and unchanged from 11.2% last quarter. In addition, we experienced a net gain on investments of $3.8 million for the quarter or $0.50 per share resulting in a total increase in net assets resulting from operations of $7.9 million or $1.04 per share. The $3.8 million net gain on investments was comprised of $4.7 million…

Thank you, Henri. I'll take a couple minutes to describe the current market as we see it, and then I'll focus on our current portfolio performance and investment strategy. The market is as competitive as we described in our last earnings call in January and it continues to be a borrower-friendly environment. Deal activity is growing, but the overabundance of capital persists. Leverage is still aggressive for quality credits and the supply demand imbalance continues to drive price. We continue to see no spread expansion despite the slight reduction in LIBOR this past quarter and the talk of near-term cessation of rising rates. While the volatility we saw in the debt capital markets in the prior quarter has subsided, it's important to point out that we believe our portfolio is less exposed to capital market swings. It is our observation that valuations in the large leverage 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 a larger loan market. Therefore, although market spreads and leverage points are certainly incorporated into our evaluation process and impact valuation, credit performance tends to be a greater driver. This results in our portfolio with its much more hands-on structuring and better protections as compared…

Thank you, Mike. As outlined on Slide 20, we recently increased our fourth quarter dividend to $0.54. This was our 18th sequential quarterly dividend increase and we have over-earned our dividend each quarter. As you can see on Slide 21, we've had an 8% year-over-year dividend growth, which places us at the top of our peers. And one of only seven BDCs 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 22, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated returns of 27%, significantly ahead of the BDC index of 10%. Turning to Slide 23, you'll see that our 12-month performance puts us in the top 10 of all BDCs, while our three- and five-year return places us in the top 3 and 5 of all BDCs respectively. Over the past three years, our 93% return exceeded the 29% return of the index and over the past five years, our 150% return exceeded the 24% return of the index. Slide 24 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 months return on equity, dividend coverage, year-over-year dividend growth, net asset value per share and investment capacity. Of note, is that our assets have grown with - as our assets have grown, 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 net…

Thank you. [Operator Instructions] And our first question comes from Mickey Schleien with Ladenburg. Your line is open.

Yes, good morning, everyone. I wanted to start by asking the following. I've noticed other BDCs exhibiting problems in some of their healthcare names, and you've noted issues at Roscoe. Can you be a little more specific about Roscoe? And perhaps more importantly, are you seeing some sort of problem trend developing in the healthcare sector in general, which we all know is a really large consumer of middle market loan capital?

Good morning, Mickey. It's Mike talking. It's a really good question. And I would tell you this. And of course, it's a private company, so we have to be careful what we can convey to you. But the company certainly experiences challenges. I would say that the challenges that they're facing at Roscoe have a lot less to do with the fact that they operate in and around the healthcare space and more to do with the fact that they're a highly competitive market. So the portion of their business that has faced the more extreme challenges really is the portion where they're distributing to the broader retail environment. And so, it's been less indicative of a larger trend that would be natural to ask about. But we haven't seen or experienced in our portfolio relative to healthcare in general.

Thanks for that Mike. That's helpful. My next question is the following. Over half of the portfolio is in the business services category, which is a pretty broad label. Could you give us a sense of your investment strategy in that sector and how cyclical you believe the borrowers are in that group?

Well, I think the way I'd respond to that is the business services to some degree is a catch all. Most of the...

Yeah, that's my point.

Yeah. And so, we tend not to look at it as a concentration. So, if I were to pull out the credits that fall into business services, I'm certain that they would be a very wide range of end-markets and industries that they operate in. We use that as a term, because it's more reflective of any business that's operating - a term that's used in the marketplace is B2B, but any business that's delivering a product or service to another business vis-à-vis consumer for instance. And it's been our experience that many of these business models can be extremely strong. And we probably all had this experience operating in businesses ourselves. If you provide a very quality service or product as a business to another business, and you do that very well and it's not core to what they do, it's really a side show relative to what their core business is. You can you can end up with really sticky relationships and fabulous margins and fabulous return on capital. Now, not all businesses do that, but there are plenty out there that do. And we view that category as one that we'll continue to have significant investment in. But, again, it's not reflective of an industry end-market that would all cycle at the same way. It really is more just reflective of that business model and describing it as a business that's delivering service or product to another business. If you can do that really well, as I said those going to be sticky customers and you can turn return - it can result in very favorable returns on capital.

And, Mike, would they be sticky in a downturn? In other words, are these relatively defensive business models?

Absolutely. I mean, we think that they're absolutely defensive business models. I wouldn't want to go to the point to say that there - I'd have to look at each company because we're evaluating each company on its own merits. We don't believe that they would all move in sync in a downturn in the economy. I think for each of the deals that we look at, we evaluate what a down-cycle might look like and do a rigorous analysis to get comfortable, that under all reasonable circumstances that our capital in the spot that we occupy in the balance sheet is a safe one for our investors. So I'd have to sort of look at each one of the portfolio companies, but I can tell you broadly, they're not going to - they're not all going to be correlated. And we do look at cyclicality very carefully when we make an investment in any of our portfolio companies.

I appreciate that. Just one more question, if I may. I noticed that one of your objectives towards the end of the deck is to increase your sourcing capacity. And I noticed that a good portion of the portfolio is in the South and the Midwest, so I'd like to understand how you're thinking about structuring your sourcing to perhaps help you diversify the portfolios geography

Where we're focused on - I think it's a very good question because it's from a strategic standpoint, a very big focus for us this year and in the coming years. You can see from that slide that we've done I think a really good job. Our business development team has done a really good job of increasing the number of deals that we're bringing in-house, that we can evaluate. If you do that right, it enables you to continue to be highly, highly selective when you're evaluating where you want to invest. Our primary focus right now is looking at trying to make sure that we're developing relationships with more relationships, with firms where the yield, that the number of deals that will actually get done and be competitive on is greater. We don't want to just increase the top of that funnel on that slide forever. The idea is with the number of deals we're seeing now that's a lot, let's try to grow our relationships where we feel like there's a really good fit from a size perspective, from a type of deal perspective, et cetera. I think as it relates to the geographic side of things, we don't feel like we have any exposure to or concentration in geography. And the reason for that is that if you look at the businesses, by and large, it's not 100% true, but by and large, if you look at a business, I think you mentioned the Southeast for instance, most of those businesses happen to be - happen to reside in the Southeast, because it's a cheap place to do business. It's generally a business-friendly geography within our country. But the market that they're selling to is national. So usually, when we look at geographic concentration, we tend…

That's really helpful, Mike. I appreciate all your time this morning. Thank you.

Thanks, Mickey.

Thank you. Our following question comes from the line of Tim Hayes with B. Riley. Your line is open.

Hey, good morning, guys. Thanks for taking my questions. My first one, just loan origination activity, a little light, repayments are rather large. I know they can both be lumpy on a quarter-by-quarter basis, but just wondering if the volatility played a part in that or if it was just a timing thing and if it was volatility related, has your pipeline picked back up?

I would say it wasn't volatility related. I think, as I mentioned in our prepared remarks, we largely live and operate outside of that marketplace. So the lower middle market businesses that are seeking capital and trying to grow, generally aren't affected by where the capital markets are and what they - what the capital markets are experiencing at the higher end of the market, what you see in the broader large syndicated world that really just doesn't affect us as much. It's a very good question. But I think what's also - something that we're very much focused on is our production this quarter. We didn't have as much production as we would have liked, but we tend not to look at that quarter-to-quarter. I think, I've said in the past that if you see a BDC that has just steady [Technical Difficulty] in some cases, it's not likely that there'll be follow-ons. In these two investments, they're both ones where this may or may not happen, but they look to be investments where there's a good chance that those portfolio companies could be seeking more capital as they grow and we're delighted by that, and of course that's been a big part of the recipe for our growth historically if you sort of look at our portfolio over the years. Many of our best investments have been ones that started off small and then the companies have done well, and they've come to us as a financial partner and we've been able to fuel their growth and that's worked out really well not only for the debt capital that we deploy, but in many instances we've been co-investors in the equity and that's also worked out well.

Yeah. No. I appreciate those comments as well. Would you be willing to give an update on repayments so far this quarter?

I think, we're trying to - I think, the comments relative to production were really meant to address what we felt like. Naturally someone would say, boy you didn't do any deals. I think we were trying to address and hopefully give folks comfort that we're still active in the marketplace and getting deals done. But just trying to avoid the precedent of right up to the earnings call, giving an update on exactly what's coming and going.

Yeah. I think, Tim, I would just add things obviously change quickly in our business. Mike's prepared remarks also noted a deal is imminently - a deal is closing imminently. So there's so many moving parts and we try to give you guys some extra color, but at the same time not sort of try to be like day by day basis sort of projecting what's closing and what's repaying. But it's very relevant to what Mike noted about new portfolio companies from new relationships and continuing to grow that, which is the key to the long-term growth of ours.

Yeah. That's completely fair and those comment extra comments are appreciated, so I'll try not to be too greedy here. And then of the loans you've closed so far this quarter and those in the pipeline, can you just give us an idea of the ratio of sponsor deals versus non-sponsored, how much is senior? The range of leverage multiples - are they just largely consistent with historical levels?

Largely consistent with historical levels.

Okay.

And I think, we have said historically, and we're careful to emphasize it when we were in the prepared portion of our presentation, we have never taken the viewpoint that a first lien loan with low leverage is necessarily a good deal, and a second lien or junior capital with a high leverage is necessarily a bad deal. I think, the approach that we've always taken, we resorted to never put ourselves into that boxes. For ourselves when we evaluate the investments on behalf of our shareholders, we've always said let's evaluate the strength of the business. And based on our determination of that relative strength, then we can decide where's the best place to occupy in the company's balance sheet. So there are businesses that we like a lot, where we'll provide capital to them, but we'll only do that in a first lien unit tranche position, because we think perhaps there's some volatility potentially that you could face or there's some elements of the deal, where you wouldn't want to be too deep in the capital structure and you wouldn't want to be junior. There are other deals, where we think the fundamentals of the business are so strong they may have a lot less cyclical - exposure to cyclicality. The cash flow characteristics are super strong, the steadiness of the business would allow us to feel comfortable moving into more of a junior capital position. And that's how we evaluate it. What is the best risk-adjusted return opportunity for our shareholders and what makes sense, where we feel like our principal is very highly likely protected and that just depends on the opportunities that we see. It's less driven by our predetermination that we want to do all first lien or all junior capital.

Yeah. No. That makes sense. That definitely makes sense. Okay. And one more follow-up for me. Just looking for an update on the second SBIC license. Following the shutdown have you seen approvals pick back up. We've seen at least one BDC get approval for other license in the past, but I'm just - I know the SBA works at their own pace, but just wondering if you have an updated timing in mind?

This is Chris, Tim. I think we've tried to be very consistent in how we discuss are our licensing process. I mean, I think you kind of answered your own question a bit. They have a process and obviously they shut down. They were part of the shutdown. So they didn't answer the phone. They weren't even in the office during that shutdown. So the answer is yes, that did have an impact on their process. Where we sit in the whole firmament down there, we're not - we don't we don't know exactly. We continue to respond and submit, and then do all the things that we need to do. I mean, I think we have confidence that our performances that - where our strong performance and we're certainly one of the better performing BDC - SBICs and so we think ultimately that, that should have a lot of weight. But precise timing and all that, we're really subject to how they are doing things. And I think as you point out, there have been some new license issued. There's been relative to history the recent period of time has had fewer licenses than the past, and we're certainly hopeful, I think the industry is certainly hopeful that they'll start issuing more licenses.

Got it. Okay. Well, thanks for taking my questions this morning.

Thank you.

Thank you. And our last question comes from Christopher Testa with National Securities. Your line is open.

Hi, good morning, guys. Thank you for taking my questions. I just wanted to touch on a couple things. The incentive fees on the CLOs continued to be earned. I remember something being said about no more incentive fees being earned, but they were earned during the quarter. Just wondering on a go forward basis, if that will be the case.

Yes. So the only - well, let me - the first answer Chris is that when we refinanced our CLO, the incentive fee concept was removed from the agreements. So there'll be no incentive fees going forward. The only reason why there still was in Q1 - Q4 was, if you recall that with the change in the revenue recognition standard, it changed recognition to when you actually receive the incentive fee rather than on an accrual basis - from accrual basis effectively to cash. And when we refinance the CLO, we received our final incentive fee payment related to the CLO up to that point in time. And so that's why it's reflected in the P&L for Q4.

Got it. Okay. That's helpful, Henri. Thank you. And sticking with the theme on CLOs, obviously you guys have the reduced asset coverage that is now effective as of last month. I'm just wondering, given you have a good track record, you have a lot of senior secured debt and now sort of a brand name so to speak. Have you given thoughts to securitization financing as opposed to notes and revolvers, because what spreads as well as they are, it seems that you could get a very favorable pricing for middle market CLO, and as we know that provides much more flexibility especially in a downturn, where banks could cut advance rates and what not, but that's not the case, if you're financing with the CLO?

Well, I think that - I think that a middle market CLO would be largely comprised of pretty senior debt like maybe more senior debt, more senior than the type of investments that we make. I mean, we make first lien loans, but they're generally in smaller type of companies. So that would be a slightly different market than we are addressing. And we work with companies that do all that. Clearly, it is an attractive marketplace, but I think, we're - I think, if you look at the absolute returns there, the gross returns on those investments, those will be substantially lower than what our gross returns are which is kind of reflective of a sort of a different segment of the market. I think, as Mike had mentioned in his section and the Q&A, we don't have any kind of challenge in terms of deal flow. I mean our pipeline is very, very robust, obviously, closing the deals that we want to close. This is challenging, but there's a lot out there. And so we don't feel like we need to go to a different segment to get - to move our whole enterprise forward. We feel like our - the world that we are addressing has plenty in it for us. And so at this time, that approach is not - it's not as much a priority as really just continuing to press on with our existing focus.

Okay. No. That's fair. And sticking on the topic of leverage, just please remind me, did you guys give a leverage target, any sort of guidance given you have to reduce the asset coverage?

No. Chris, we haven't given guidance. We've obviously said that we feel comfortable with the level that we're at the moment. And then we - as Mike said in his remarks, we assess sort of any change in that as we close deals and assess the risk-adjusted returns of the investments and where we on the leverage, would play a part in that assessment as well. But we haven't given specific guidance.

Without fishing too much on that, Henri, is it reasonable to assume that you could go above one to one on a regulatory basis, obviously excluding the SBIC?

Yes, that could be a possibility, yes.

Okay. All right, great. And given you guys have had so much success with the company and kudos on that, just wondering, it seems like a lot of your peers who basically couldn't fall out of a boat and hit water, have raised a significant amount of private debt funds. Just wondering if there is any thoughts on you guys raising some more private debt funds to provide bigger ticket sizes and provide more certainty of close to the sponsor community as you move forward and continue to grow out?

Well, I think, clearly, it's attractive from a franchise standpoint to have a broader array of funds. I think, where we are in our lifecycle is, we still believe we've got ways - still good ways to go to achieve scale in our BDC. And so - and we have had success in what we've been doing here. And we don't really see a limit. We don't see a reason to need to go elsewhere at this time. We see plenty of opportunity in front of us and we just need to do more of it. You mentioned something about having different funds, to have larger deal sizes. Once you get to a larger deal size, and I think that - what we're focused sort of a funding side somewhere on the low-end $5 million, the high-end $30 million, that area is a very fertile ground for us. And so, I think once you start moving into a higher level than that, it's a very different competitive set that's out there. It's different leverage metrics, it's different credit characteristics like you start losing covenant protection. It's much more competitive in terms of the documentation, the process for winning, et cetera. So we are very attracted to the market approach that we have right here. We feel there's plenty of room to grow our assets, consistent with how we've grown them in the past. And that's really where we're focused right now. I think let me…

Got it. And - I was just going to say I certainly appreciate that Chris. And maybe I should have phrased it differently, not necessarily making loans to a larger borrower, but for example, let's say you had a [sister and private debt firm] [ph] with the same AUM, when you write that $15 million ticket, if it gets splits pro rata, then you'll only have a $7.5 million exposure at SAR and $7.5 million exposure there. So you're just enhancing your diversification. So if something goes sour, then it's less of an impact on the SARs and NIIs as well as the NAV per share. So I think that would be more of the benefit.

Right, but along those lines, I think in our view, we would rather have twice the level of assets at the BDC to achieve that same goal. And that was if we were to grow our assets substantially, we would still be doing very much a similar type size investment. So as our assets grow, we start to achieve what you just described.

Got it. Okay, that's fair. And what was the prepayment related income during the quarter?

I'm sorry. Just repeat the question, Chris, the what income?

What was the prepayment related income in the quarter, both fees and OID acceleration?

Yeah, we had a couple - while had a couple - we had a pretty big repayment quarter. So a couple of our loans that's included in the $70-odd-million that we had of repayments were obviously early repayments. And so, there are prepayment penalties associated with those. And so, that would flow through the other income line.

Got it. Okay, that's fair. Those are all my questions. I appreciate your time today, guys.

Thank you.

Thanks, Chris.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Chris Oberbeck for closing remarks.

Okay. We'd like to thank everyone for joining us today. And we look forward to speaking with you next quarter.