Good morning, ladies and gentlemen. And thank you for standing by. Welcome to the Saratoga Investment Corp.'s Fiscal Third Quarter 2020 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. Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal third quarter 2020 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 2020 shareholder presentation in the Events & Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night.A replay of this conference call will also be available from 1:00 PM today through January 16th. 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 fiscal quarter has continued our financial outperformance and furthered our ongoing progress in growing the capital base of Saratoga.Despite a challenging and competitive investment environment, our origination efforts, combined with our flexible capital solutions and diversified sources of cost-effective liquidity, continued to support our robust pipeline of available deal sources, driving greater scale. The quality of our underwriting – reaffirmed further this quarter – has propelled us to the top ranks of our BDC competitors over the long term.As we complete the first decade of this BDC under the management of Saratoga, our accomplishments this fiscal year, including the receipt of our second SBIC license, our return on equity of 17.6%, and the 63% increase in NAV and the 9% increase in NAV per share further our momentum and provide a strong foundation for future growth.To briefly recap the past quarter's highlights on slide two. First, we continue to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 99% of our loan investments having our highest rating; generating a return on equity of 17.6% on a trailing 12-month basis, 21.7% annualized in Q3, both significantly ahead of the BDC industry mean of 7.6%; and increasing NAV by a net $9.1 million realized and unrealized gains this quarter or $0.91 per share.This includes a realized gain of $10.7 million on our Censis investment in Q3 for a total Censis realized gain of $11.2 million. And as of the end of Q3, we have registered a gross unlevered IRR of 14.1% on our total unrealized portfolio and a gross unlevered IRR of 14.8% on total realizations to date of $435 million.Subsequent to quarter-end, our Easy Ice $28 million second lien investment and $11 million preferred equity investment was…

Thank you, Chris. Slide four highlights our key performance metrics for the quarter ended November 30, 2019. When adjusting for the incentive fee accrual related to net capital gains in the second incentive fee calculation, adjusted NII of $6.1 million was up 9% from $5.6 million last quarter and up 27% from $4.8 million as compared to last year's Q3.Adjusted NII per share was $0.61, down $0.04 from $0.65 per share last year and down $0.07 from $0.68 last quarter. The increase in adjusted NII from last year and last quarter primarily reflects the higher level of investments and resultant high interest income, with AUM steady from last quarter, but reflecting the full quarter impact of last quarter's significant originations and AUM up 10% from last year.Despite having adjusted NII increase, the decrease in adjusted NII per share from last year was primarily due to a steady increase in the number of shares outstanding.Weighted average common shares outstanding increased from 7.5 million shares for the three months ended November 30, 2018 to 8.3 million shares and 10.0 million shares for the three months ended August 31, 2019, and November 30, 2019 respectively.Adjusted NII yield was 9.7% when adjusted for the second incentive fee accrual. This yield is down from 11.0% last quarter and 11.2% last year, again reflecting the impact of our growing NAV, but also the effect of our substantial cash on hand.For this third quarter, we experienced a net gain on investments of $9.1 million or $0.91 per weighted average share, resulting in a total increase in net assets resulting from operations of $13.7 million or $1.37 per share.The $9.1 million net gain on investments was comprised of $10.7 million in net realized gain, offset by $0.5 million in net unrealized depreciation and $1.1 million of net deferred…

Thank you, Henri. I'll take a couple of minutes to describe the current market as we see it and then comment on our current portfolio performance and investment strategy.We have not seen a significant change in the market since last quarter. The landscape remains competitive, conditions continue to be borrower friendly and these all generally lead to tightened prices and expanded leverage tolerances.Fortunately for us, deal activity is still healthy and our pipeline continues to be robust. We continue to see no spread expansion. And in fact, absolute yields continue to decline due to the impact of decreasing LIBOR, with another 23 basis point reduction experienced this quarter, adding up to about 60 basis points since June.We have been reasonably successful in obtaining floors that reflect current market conditions on most of our new deals, which helps reduce the long-term impact of a decreasing rate environment.Overall, we have not sacrificed quality, but these dynamics have served to put downward pressure on yields generally.In the market we face, we believe sticking to our strategy has and will continue to serve us best. Our approach has always been to focus on the quality of our underwriting. And as you can see on slide 12, this is in part reflected by our history of producing net realized gains.A strong underwriting culture remains paramount at Saratoga Investment. We approach each investment working directly with management and ownership to thoroughly assess the long-term strength of the company and its business model. We endeavor to peer as deeply as possible into a business in order to understand accurately its underlying strengths and characteristics.With the possibility of a market downturn always in our minds, we seek durable businesses. We invest capital with the objective of producing the best risk-adjusted accretive returns for our shareholders over the long…

Thank you, Mike. As outlined on slide 17, we last night announced a dividend for the third quarter ended November 30, 2019 of $0.56 per share, which is the same level as the prior quarter.We note that this is the first time in the past 20 quarters that we have not increased our dividend, although we are the industry leaders in dividend growth on an annual basis during the past five years.Consideration for the pause on quarterly dividend increases include the recent substantial share issuances and the more than $55 million of recently received equity proceeds and fees from Censis and Easy Ice, which has substantially increased Saratoga's liquidity and NAV, establishing a solid foundation for future growth.In this highly competitive industry environment, we want to be prudent with our dividend commitment and consistent with our past performance and measured AUM growth, not creating undue pressure to put assets to work.Saratoga has now had five years of dividend growth.Slide 18 shows that the 5.7% year-over-year dividend growth easily places us near the very top of our peers and one of only eight BDCs that have grown dividends this past year.With most BDCs having either no increases or decreasing the size of their dividend payments, our continually increasing dividend, which we have over-earned in each quarter, has differentiated us within the marketplace.Moving to slide 19, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 31%, beating the BDC index of 27%.Our longer-term performance is outlined on our next slide, 20. Our three and five-year returns place us in the top two or three respectively of all BDCs for both time horizons. Over the past three years, our 78% return exceeded the 21% return of the index. And over the past…

And our first question comes from Casey Alexander with Compass Point. Your line is open.

Hi. Good morning. Congratulations on the realization of the two investments. Certainly, I had been as direct about the accumulation of concentrated risk as anybody, and I think that's just a fantastic outcome for shareholders.Would you anticipate that you would – given the fact that you have so much liquidity from the sale of the investments that you funded SBIC II, would you anticipate tapping the brakes on the ATM at this point in time and allowing earnings to start to catch back up?

Well, thank you, Casey, for your congratulations. We appreciate that and we appreciate your focus on our portfolio concentration issues. And, thankfully, a very good resolution, as you mentioned.In terms of our ATM issuance, I think that, as you mentioned in your question, one of the key objectives of our equity issuance was to fully fund our SBIC license equity requirement, which is approximately at $87.5 million. So, in essence, we've done that. And so, we have issued a very substantial amount of equity accretively, as we've mentioned, and we feel we are very well capitalized. We have tremendous liquidity on hand, as you note. And so, there's no straightforward obvious need for incremental capital at this time.So, without committing ourselves to anything in the future, at this point in time today, we feel we're very well-capitalized.

Okay, great. Secondly for Mike, obviously, the balance of first lien and second lien is going to shift more towards first lien once the Easy Ice investments pay off in the next quarter. Given that the scale of the BDC is changing, do you kind of see your deal size evolving? And given where we are in the credit cycle, would you tend to press a little closer towards first lien than second lien at this point time in the credit cycle?

It's a good question, Casey. And good observation just in terms of the mix of securities in our portfolio. Let me address the two parts of your question. In terms of deal size, we like being at the lower end of the middle market. We've highlighted that. There are thousands and thousands of really good businesses out there. We think it's a much better place to play in the marketplace than sort of the upper end of the middle market where many of the BDCs spend most of their time deploying capital.I think the two businesses that we exited very successfully most recently give evidence to the opportunity set that exists at that end of the market. So, the playbook for us is to stay at that end of the market. And that's going to result in us making some smaller investments. And you'll see, as some of the recent investments we've made have been on the small side, and you'll see as we do future investments, we're going to continue to find opportunities that are maybe $5 million, $10 million initial check sizes.But what the expanded balance sheet allows us to do, and you've seen this in many cases in the past, not just in the two most recent exits, but many other examples, where, as those companies have grown, we've been able to support their growth with additional capital and our balance sheet is sizable enough to do that. What most often happens in the marketplace is that companies of that profile go to a smaller firm, they get a capital partner, they get to a certain size and then they need to go find another partner to continue to grow as the business develops.And from our perspective, we want to stay at the lower end of the…

Thank you, Mike. I appreciate that. And thank you for answering my questions. I'll step back and let some others in to ask some questions now.

Thanks, Casey.

Thank you. And our next question comes from Tim Hayes with B. Riley FBR. Your line is open.

Hey. Good morning, guys. Congrats on the strong results and for taking my questions. My first one, I just want to circle back on the dividend. And, Chris, I appreciate your comments there. But adjusted EPS – excuse me, NII, $0.61 this quarter. Based on that level of earnings power, there's clearly some room to bring up the dividend from where it's at. You highlighted pressure on asset yields. But I would expect that putting the Easy Ice and Censis proceeds to work and drawing down on the SBIC facilities should be very accretive to earnings over the intermediate term. So, are you just waiting to see how earnings power shakes out over the next couple of quarters before continuing to potentially raise the dividend or is it your view that the asset yield pressures and maybe some other factors should offset those benefits I just mentioned? Any color around that would be helpful.

Sure. I think as we mentioned in our prepared remarks, we have had a significant share issuance and we do have substantial liquidity on hand, and so that's what informed us to pause on our dividend increase. We have had five years of increases. So, we are believers and drivers in trying to continue on that trend. But I think, as Mike mentioned in his part here, it's about the pace of net asset growth that we have to watch. And so, we make our dividend decisions on a quarterly basis, and so we've made one for this quarter and we have not yet made them for the future quarters. And our decisions will be informed – the biggest driver of our decision-making is going to be asset deployment. And so, if we get more redemptions than assets deployed, that's one set of facts. If we put a lot of money to work, that's another set of facts. And so, it's very difficult for us to lay out a projection of any increase from here. But the dynamic of our company, the dynamic of our high level equitization relative to where we've been in the past would indicate that, if we get more asset growth, that would be something that we should follow, but it's really going to be driven by how much capital we can put to work relative to redemptions.

Got it. Okay. Yeah, that makes sense. And appreciate the additional commentary there. And then, were there any one-time exit fees received from the Easy Ice change in control?

Yes. I think as we say, again, in our prepared remarks, and we also need to be thoughtful here because this is a post quarter-end and we have an audited 10-Q – not audit – a E&Y reviewed 10-Q that we've released, we have a subsequent event paragraph. And the specific information that we can release at this time is included in that characterization. So, we really don't have a lot more specifics from there.

Okay. Yeah. I'll look for, I guess, maybe a breakdown with the next release. And then, just on the $1.51 per share expected increase in NAV from the Easy Ice exit, how much of that do you expect to be sheltered by the capital loss carryforward?

Well, a few things. I think our tax analysis is not complete. It's exactly how this will all work through. And so, obviously, we have a certain amount of our NOLs, capital loss carryforwards, remaining and those will be consumed and we will go through that amount. The exact treatment beyond that amount is something that's still under consideration. And also, we'll be affected by their performance over the next quarter. So, it's not something that we can go into in great detail on this call.

Okay. Thank you for taking my questions.

Thank you.

Thank you. And our next question comes from Ben Zucker with Aegis Capital. Your line is open.

Good morning. Thanks for taking my questions. And I'd echo the congratulations on those two big gains that you guys have mentioned. I want to kind of flip the script on that ATM question you guys got. Pro forma for the subsequent Easy Ice gain and notwithstanding the other investment activity in fiscal 4Q that we haven't seen yet, the stock now appears or might be trading at a discount to your forward NAV per share. So, with this in mind, is it possible that you kind of flip the lever and look at potential share buybacks? I do believe you have an authorization with some capacity. And, obviously, it's always a balancing act between new investment opportunities, but is there a general kind of price to NAV multiple where you think that could look like an attractive use of your capital?

Well, I think that's a good question. I think, historically, there have been periods of time where we have repurchased shares at a discount. We didn't have a specific described percentage of NAV that we would target. And then, we've also sold our ATM at a premium. So, we have worked on both sides of that equation in the past. I think we have both programs available to the company to utilize as we and the board determine is in the best interest of shareholders. So, yes, those two programs are alive and able to be activated.I think going through our earnings release today, there's a lot of moving parts. Fortunately, they're positive moving parts. So, exactly where our share price settles out and the investors decide to put it as a result of all this is to be determined. So, it's not something that we can really get into in significant detail or talk about how we will perceive it. On the other side, we also have our investment pipeline to focus on.So, all those things will be taken into consideration as they always are both at quarter-end and as we go through each quarter.

Okay. That's helpful. And kind of just going about that Easy Ice gain in a different way, and I know there's only so much you can say, but is it my understanding that at least the $1.50 that we're calling out is based off of the $17 million gain over the quarter-end share count? So, like, there might be – that's a gross NAV increase figure that could be offset by some incentive fee triggers and stuff like that as well that could also not eat up as much of the NOLs? Am I thinking about that properly?

I think what we tried to do there – and again, we're trying to do this in a proper disclosure fashion, right? We have our full quarter-end and we have a subsequent event. So, what we tried to do is to provide some basic information on the way the gain might be characterized, but recognize that's an estimate. It's not a final determined number. And that $17 million gross number is intended to be a net number. So, that would be the net addition. And the idea was – is that you could add it to the prior quarter's NAV to give you a sense directionally of where we think NAV will probably be. However, we still have two months to go in this quarter. There's lots of dynamics going on. And so, the final NAV might be different to that depending on other things in the portfolio. So, we don't want to hang too much on that. We just wanted to make sure that shareholders have the benefit of understanding that material realization.

Ben, it's the old-fashioned Article 11 pro forma calc treating the Easy Ice transaction as a totally discrete item.

Standalone item, sure. I understand, Henri. On the 6.75% notes, these weren't coming due for a few more years. So, what was the motivation to redeem these baby bombs so early? Is it kind of just a dual function of having so much cash on hand and your share count going up that you might as well reduce some of this immediate interest expense burden and also improve your all-in debt cost as a firm?

I think that's very well said. I think that is part of the consideration. Also, when we issued these baby bonds at 6.75%, that was a very different time and place for us as a company. If we were to reissue baby bonds today in the same amount, the interest rate would be substantially lower. So, that is a high cost of funds for us as a general corporate financial matter. We have in the past been able to readily access the baby bond market, so that if we did want to reissue that, it's not – all things being equal, no crisis in the world. But in these type of circumstances, we could reissue that capital should we desire to.And then, as you point out, we do have a lot of liquidity. And rather than having it sit in short-term accounts, by redeeming this, in effect, we're getting a 6.75% yield on the use of that cash.And then, a further consideration is having gotten our SBIC license this summer and we haven't drawn on it, many of our deals are going to be – many of our investments are going to be in the SBIC fund. And so, when we relever – as we grow our portfolio and re-lever, most probably – again, for those investments that fit the SBIC criteria, we'll be using SBIC debentures, which are about a 3% all-in cost. So, the forward re-leveraging should be a substantially improved grade. And then, the like kind – if we were to like-kind issue it, it would also be substantially lower. So, all in, it was a sort of a corporate financial decision.

Yeah. I hear you there and I think that people who are thinking about your all-in weighted cost of capital, with the removal of these notes and then looking down the line to where you have the fully funded SBIC at, call it, whatever, 3.25%, it's really going to do some nice things for the earnings power of the vehicle.I guess, lastly, just I can pick on Mike, I might've missed your comments on this, but the increased competition and challenging operating environment that you mentioned, how much downward pressure, if any, do you think that you might see with your portfolio yield? Obviously, LIBOR has seemed to kind of bottom out and settle over the last few weeks, which is one component of the all-in yield, but curious about where you're seeing your spreads over LIBOR go from here?

I think the rate at which we're deploying capital most recently are reflective of what's market today. One of the things to give consideration to is, even though there is some downward pressure on yields for assets, we are the beneficiary of lower cost of capital as well. So, as we referenced earlier, that SBIC cost of capital has come down. It's lower than I think it's been since we've been associated with the program. And so, what's really nice about what we see in the marketplace is, we can deploy capital in – I'll just give you an example. A first lien investment at the lower end of the middle- market, one that we've done extensive due diligence on, we like, et cetera, and we might get a 9% to 10% return on that investment, which is lower than where the portfolio has achieved on average historically. But if you can then get 2:1 leverage on that at all-in about 3%, I don't need to do the rest of the math for you, but that's highly accretive to shareholders.So, we feel good about our ability to deploy capital in a way that's very accretive for shareholders. The thing that I would add, because we've seen this mistake happen so often, it's just human nature, is that when you're sitting on a bunch of capital, people race sometimes too fast to deploy capital and they let their guard down on diligence. We're focused on making sure that the additional capital that we put to work and additional portfolio companies that we invest in are every bit as good as they have been historically. Fortunately, for us, over time, our presence in the marketplaces has grown. The investment in people that we have made over the years is paying off and we're continuing to actively look for additional business development talent as well, so that we can kind of ramp up that pace of investment without sacrificing any credit quality.

Yeah. I hear you there. And I think that goes back to the prudent decision to maybe take a little wait-and-see approach with the dividend as you work through the higher share counts and kind of watch where the portfolio shakes out. So, that's it from me, guys. Appreciate you taking my questions. And again, congratulations on a strong quarter.

Thank you.

Thanks for the questions, Ben.

Thank you. There are no other questions in the queue. I'd like to turn the call back to Christian Oberbeck for closing remarks.

Well, thank you, everyone, for joining us today and we look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.