Saratoga Investment Corp (SAR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corporation's year-end and fiscal fourth-quarter 2015 financial results conference call. Please note that today's call is being recorded. (Operator Instructions). At this time I would like to turn the call over to Saratoga Investment Corporation's Chief Financial Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal year-end and fourth-quarter 2015 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 year-end and fourth-quarter 2015 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 28. Please refer to our earnings press release for details.

I would now like to turn the call over to our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri, and welcome everyone. As we reach our fiscal 2015 year end, we feel it important to look back over the past year and note on slide two some of the progress we have made during this productive year for Saratoga.

Since we acquired Saratoga Investment Corp., we have been singularly focused on the long-term objective of increasing the quality and size of our asset base with the ultimate purpose of building Saratoga Investment Corp. into a best-in-class BDC.

During fiscal year 2015, we achieved a number of important milestones that have marked a steep steady path towards realizing our long-term objectives.

To briefly recap, first, our steadily growing asset base, consistent yield and improving return on equity have enabled us to adopt a policy to pay regular quarterly cash dividends, which has increased by 22% every consecutive quarter since implementation. We also anticipate another dividend increase next quarter. We will also be talking more about a special dividend of $1 that our Board of Directors has recently declared later on this call.

Second, we adopted a dividend reinvestment plan providing for the reinvestment of these dividends for those shareholders who want to reinvest in Saratoga's ongoing growth.

Third, we approved an open market share repurchase plan that allows for the repurchase of up to 200,000 shares of common stock at prices below net asset value. Although not yet utilized, we continuously assess deployment of this important tool for us.

We amended and extended our revolving credit facility maturity date through September 17, 2022, reducing our borrowing cost by 150 basis points, lowering annual administrative costs and ensuring the availability and flexibility of our liquidity resources. We successfully deployed a significant amount of the capital available to us through our SBIC license and received a green light and go fourth letter from the SBA for a second SBIC license.

And finally, we have significantly augmented our management team with the addition of four professionals.

We continue to work on expanding and diversifying our investors and analyst coverage based on these important improvements. Within this year we have made strides in expanding our base of new institutional and retail ownership and are aware of new institutional investors acquiring our stock. We remain focused on making further progress over the coming months and quarters. We also added analyst coverage this year, something we had sought for some time.

In addition to these corporate milestones, during this year we continued on our path of further strengthening our financial foundation and building scale by expanding our assets under management to $241 million, a 17% increase from $206 million at the end of fiscal 2014. This increase is net of $73 million of redemptions experienced over the past 12 months.

This growth is also 152% increase from $95 million at the end of fiscal year 2012, improving our investment quality and credit with 94% of our loan investments now having our highest rating and increasing performance within our key performance indicators for fiscal 2015.

As compared to last year, our adjusted NII is up 13% to $10 million, our adjusted NII yield is up 50 basis points to 8.5%, and our return on equity is up 160 basis points to 9.3%. We are very excited about these accomplishments and will go into greater detail on each one on today's call.

As I have mentioned, we remain committed to further advancing the overall size and quality of our asset base. As you can see on slide three, our upward trend of quality and quantity of assets has continued. With $240 million in assets under management in our BDC as of February 28, 2015, we have seen a 17% increase in assets year to date with 94% of our loan investments holding the highest internal rating that we award. Thus our overall loan quality continues to increase while we continue to grow assets while doing it in a very measured way.

Although we had healthy originations last year, we also saw some significant redemptions offsetting these originations. We will talk more a little later about the originations we have had in our first-quarter since year-end.

Focusing on the past quarter, our key performance metrics remain strong, actually increasing on a recurring basis as it did not include any significant nonrecurring dividend income like last quarter. Adjusted net investment income per share of $0.50 was up 39% from 36% of the same quarter last year, adjusted net investment income yield on net asset value increasing to 8.8%, up 180 basis points from 7% last year, return on equity of 8.9%.

With that, I would now like to turn the call back over to Henri to review in greater detail our full financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Looking at our quarterly key performance metrics on slide four, we see that for the quarter ended February 28, 2015, our net investment income was $2.9 million or $0.53 on a weighted average per-share basis.

Adjusted for the incentive fee accrual related to net unrealized capital gains and the second incentive fee calculation, our net investment income was $2.7 million or $0.50 per share. This represented an increase of $0.7 million as compared to the same period last year and a decrease of $0.02 million compared to the quarter ended November 30, 2014.

However, last quarter included approximately $400,000 of dividend income that we view as nonrecurring.

In the fourth quarter of fiscal 2015, we experienced a net loss on investments of $0.2 million or $0.03 on a weighted average per-share basis resulting in a total increase in net assets from operations of $2.7 million or $0.50 per share. The $0.2 million net loss on investments was largely comprised of $0.3 million net unrealized appreciation on investments.

Net investment income yield as a percentage of average net asset value was 9.5% for the quarter ended February 28, 2015. Adjusted for the incentive fee accrual, the net investment income yield was 8.8%, up from 7% last year and down from 9.5% last quarter. Excluding the dividend income we view as nonrecurring loss quarter adjusted NII yield of 8.8% was up from the mid-8s last quarter. Return on equity was 8.9% for the quarter.

Looking at our key performance metrics for the fiscal year on slide five where we will also focus on our balance sheet metrics, we see that for the year ended February 28, 2015, our net investment income was $9.7 million or $1.80 on a weighted average per-share basis. Adjusted for the incentive fee accrual related to net unrealized capital gains and the second incentive fee calculation, our net investment income was $10 million or $1.85 on a weighted average per-share basis. This represented an increase of $1.2 million or $0.06 on a weighted per share basis as compared to last year.

In fiscal 2015, we experienced a net gain on investments of $1.3 million or $0.24 on a weighted average per share basis, resulting in a total increase in net assets from operations of $11 million or $2.04 on a weighted per share basis. The net gain on investments was comprised largely of $3.3 million net realized gains offset by $1.9 million in net unrealized appreciation.

Net investment income yield as a percentage of average net asset value was 8.2% for the year ended February 28, 2015. Adjusted for the incentive fee accrual, the net investment income yield was 8.5%, up from 8.0% last year. Return on equity was 9.3% for this year, up again from 7.7% last year.

These are all performance metrics we feel are important indicators of our success in pursuing our strategy of growing the asset base, building scale and generating competitive yields while continuing to focus on the quality of our portfolio. As these metrics continue to improve each quarter, it demonstrates two important points about the value of our asset growth.

Firstly, as our SBIC assets continue to grow as compared to our overall assets under management, the greater net investment income on these investments financed through lower cost SBA debentures contributes more to our bottom-line. Secondly, we see the benefit of scale becoming more visible as our operating expenses stabilize and reduce as a percentage of our total assets.

Our total investment income was $27.4 million and $7.5 million for the fiscal year and fourth quarter 2015 respectively. Total investment income for the fiscal year increased $4.5 million or 19.6% compared to last year and increased $1.8 million or [31.0%] compared to last year's fourth quarter.

Our total investment income for the year was comprised primarily of $24.7 million of interest income, $1.5 million of management fee income associated with the investment in our CLO and $1.2 million of other income.

For the quarter, total investment income was comprised primarily of $7 million of an interest income, $0.4 million of management fee income associated with the CLO, and $0.1 million of other income. As a reminder, other income includes dividends received from portfolio companies as well as origination, structuring and advisory fees.

Our total operating expenses were $17.7 million for the fiscal 2015 and consisted of $7.4 million in interest and debt financing expenses, $6.7 million in base and incentive management fees, $2.3 million in professional fees and administrator expenses and $1.3 million in insurance expenses, director's fees and general administrative, excise tax and other expenses.

For this fiscal year 2015, total operating expenses increased by $3.7 million as compared to last year. This increase in total operating expenses was primarily attributable to higher interest and credit facility financing expenses as well as increased management and incentive fees as our asset base continues to grow and outperform. Total expenses when you exclude interest and debt financing expenses, base management fees and incentive management fees actually decreased from $3.7 million for the year ended February 28, 2014 to $3.6 million for this year. This represents a decrease from 2.1% of average assets under management for last year to 1.6% for this fiscal year.

For the quarter ended February 28, 2015, this percentage actually went down further to 1.5%. This demonstrates the benefit of scale as our assets continue to increase while our cost structure remains consistent.

Our total operating expenses were $4.6 million for the fiscal fourth quarter 2015 and consisted of $1.9 million in interest and debt financing expenses, $1.5 million in base and incentive management fees, $0.6 million in professional fees and administrator expenses and $0.5 million in insurance expenses, directors fees, general administrative, excise tax and other expenses.

For this past quarter, total operating expenses increased by $0.4 million as compared to the same period last year. But as previously mentioned, this increase is primarily attributable to higher interest in credit facility financing expenses as well as higher management and incentive fees as our asset base continues to grow.

Net asset value was $122.6 million as of February 28, 2015, a $9.2 million increase from an NAV of $113.4 million as of last year end. NAV per share was $22.70 as of the end of this year compared to $21.08 as of the same time last year.

As you might have noted our prior period numbers have been revised to reflect adjustments outlined in our notes to the financial statements included in our Form 10K, including the early adoption of a new accounting standard.

Slide six outlines the dry powder available to us as of February 28, 2015. As of the end of the fiscal year, we had $9.6 million outstanding and borrowings under our revolving credit facility with Madison Capital and $79 million in outstanding SBA debentures. Our baby bonds had a carrying amount and fair value of $48.3 million and $49.5 million, respectively.

With the $35.4 million available on the credit facility, $71 million additional borrowing capacity at our SBIC subsidiary and $20.1 million in cash and cash equivalents, we had a total of $126.5 million of available liquidity at our disposal as of this year end. This available liquidity approximates -- equates to approximately 52% of the value of our investments, meaning we can grow our assets under management by a further 52% without any additional external financing.

We continue to be pleased with our liquidity position especially taking into account the conservative composition of our balance sheet and the ability we have to substantially grow our assets without the need for external financing.

We do continue to assess all our various capital and liquidity sources and will manage our sources and uses on a real-time basis to ensure optimization of liquidity.

And finally during December, we also received a Notice of Effectiveness from the SEC on our N-2 shelf registration statement, further enhancing our flexibility in the capital markets. This enables us current access to the capital markets relatively quickly when it makes sense.

Now we would like to move on slides seven through nine and review the composition and performance of our investment portfolio.

Slide seven highlights the portfolio composition and yield of our portfolio at the end of the quarter. As of February 28, 2015, the fair value of the Company's investment portfolio was $241 million, principally invested in 36 portfolio companies and one CLO fund. Our portfolio was composed of 60.4% of first lien term loans, 14.8% of second lien term loans, 7.6% of syndicated loans, 1.8% of unsecured notes, 7.6% of subordinated notes on the Saratoga CLO and 8.4% of common equity.

As of year-end, the weighted average current yield on Saratoga investments portfolio for the three months ended February 28 of this year was 11.8%, which was comprised of a weighted average current yield of 11% on first lien term loans, 11.2% on second lien term loans, 6.2% on syndicated loans, 13.7% on unsecured notes and 25.2% on our CLO subordinated notes. Despite downward pressure on yields due to continued competition, our yields have remained strong as compared to the previous fiscal quarters.

To further illustrate this point, slide eight demonstrates how the yield on our core BDC assets excluding our CLO and syndicated loans has remained consistently above 11% while our asset base has continued to grow. Subsequent to the decrease in our CLO assets under management and higher refinancing costs over the past year related to this, the CLO's yield has remained strong for four quarters in a row. Syndicated yields have remained largely stable during the same period.

Moving on to slide nine, during the fiscal fourth quarter 2015, we invested $20.9 million in new and existing portfolio companies and had $20.5 million in exits and repayments, resulting in net investments of $0.4 million for the quarter at our BDC. During the full fiscal year 2015, we invested $104.9 million in new and existing portfolio companies and had $73.3 million in exits and repayments, resulting in net investments of $31.6 million for the year.

As you can see on slide nine, our investments continue to be highly diversified by type as well as in terms of geography and industry with a large focus on business, consumer and healthcare services, as well as software while spread over 15 distinct industries. It is worth noting that we have no significant exposure to the oil and gas industry.

Of our total investment portfolio, 8.4% consists of equity interest. Equity investments are and will continue to be an important part of our overall investment strategy.

Slide 10 demonstrates how realized gains from the sale of equity investments, combined with other investments has helped enhance shareholders capital. For the past two years, we have had a combined $5.1 million of net realized gains from the sale of equity interest or sale of early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality.

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.

Thanks, Henri. I would like to take a couple of minutes to update everyone on the current market as we see it. The markets extremely competitive conditions persist as there remains an abundance of capital chasing a historically low volume of new investment opportunities. Last quarter we noted that middle-market leverage equaled precrisis levels and we have seen that multiples for both senior and total debt have been trending upwards since 2012.

Excess liquidity within the private equity community as well as an increase in the number of middle-market lenders relative to the quantity of new deal opportunities have helped drive debt and purchase (technical difficulty). 41% of all middle-market deals last quarter were leveraged over 4.6 times. Against this backdrop, pricing remains under pressure as lenders compete for mandates.

We also watched yield closely across deals, but despite pressure that some BDCs are experiencing on their investment portfolios, we have yet to observe any significant increase in yields in the marketplace.

As mentioned earlier, the lower middle markets increased leverage is very much being driven by fever investment opportunities. Slide 11 demonstrates how the number of calendar year 2014 transactions for deal sizes in the US below $25 million was down about 15% from the previous year. Calendar year 2015 is off to a slow start as well. Only 153 debt deals in that size range closed as of March 2015, with the first quarter 2015 run rate down 47%.

Despite this, we remain optimistic, not only of our own pipeline and originations, but of the outlook for our market. We continue to believe that the lower middle market is the most attractive market segment to deploy capital and the fundamentals here remain strong.

Slide 12 outlines the strength of the lower middle market in terms of employment growth, business confidence and valuation multiples.

In 2014, employment growth at lower middle-market businesses was almost 3 times that of larger corporations. According to a survey of over 600 C-Suite executives, the companies with annual revenues between $10 million and $100 million, 62% of lower middle-market executives expect the national economy to expand in the next year while 73% expect to grow their own companies' revenues.

Finally, while deal multiples have remained high, the most reasonable are to be found at the lower end of the middle-market.

We remain focused on the lower end of the middle market as the place to be on a relative basis with the best risk-adjusted returns. Despite challenging market dynamics, there are substantial opportunities found here as banks and other capital providers remain less focused on this end of the market. Additionally, the sheer quantity of businesses at this end of the market make it less efficient and less competitive.

Despite the rise of market wide leverage, we have been able to invest in deals with relatively low multiples. In the chart on slide 15, you can see that 56% of the market's debt to EBITDA multiples were 4.1 times or higher. The majority of our closed deals are beneath that level, with the average SAR leverage below 4 times this past year. We are very careful to exercise extraordinary investment discipline and invest only in credits with attractive risk return profiles.

In addition, this slide demonstrates the growth we have had in a number of executed investments. With a strong execution track record the past couple of quarters as well as year-over-year growth, our executed investments doubled from seven last year to 14 in calendar year 2014.

In the first quarter of calendar year 2015, we saw four deals close, a number on pace with previous quarters. We achieved this growth in an extremely competitive market while managing to reduce our average leverage at the same time. This speaks to the risk profile of our investment portfolio and the investment philosophy of the firm.

I would also like to note that although we had healthy originations last quarter, we also saw some significant redemptions offsetting these originations, thereby causing our assets to basically be flat quarter over quarter.

Looking at the current first quarter of fiscal 2016, we have seen our originations match our historical trend with only minimal redemptions thus far this quarter.

I would like to go into a little bit more detail regarding our pipeline. Our deal flow remains robust. Since 2012 the number of deals that we have looked at has increased materially, 64% of these coming from companies without institutional ownership and the remainder from private equity sponsors.

As you can see on slide 14, in 2014 we looked at 456 deals and executed on 14. Over the past couple of years, the number of deals we sourced has continued to increase and we believe it shows the significant impact our efforts have had in growing our origination platform.

We have also made great strides in expanding our relationships and are confident these relationships will create high origination activity in the future.

Since taking over management of the BDC, we have understood the importance of getting the assets right. As a consequence, our highest priority was to build one of the premier execution teams in the business. We believe we have accomplished that. We are now dedicating additional resources to our origination effort which we believe will allow us to accelerate our growth while maintaining our disciplined investment approach.

Most folks focus on the deals they have actually done. As a change of pace, I thought it might be helpful to give you a sense of Saratoga's investment style by talking about the types of deals we haven't done or won't do and give you an idea of a thought process by which we turned down 442 investments of those that we reviewed this past year.

As many of you know already, we never embraced the energy boom and have very little exposure to that segment relative to many of our BDC peers. A recent LCD news article noted that of the $2.2 billion of distressed assets held by BDCs, 23% are in the energy sector. Many of the opportunities reviewed in that sector have pricing that was appealing to the BDC model and low debt to EBITDA multiples at least at the time.

Deploying capital in that sector would have been quite easy. However, during underwriting we always struggled with risks like short operating histories, customer concentration and unjustifiably high margins, concerns that ultimately proved to be well-founded as pricing pressure transformed the landscape. Moreover, we fundamentally struggled getting comfortable investing debt capital into businesses that could be practically shut down due to one unpredictable macroeconomic event, a decline in energy prices. Sticking to our principles kept us out of trouble.

In the current market, finding attractive yields relative to risk is a challenge for all lenders. To a degree, Saratoga has been navigating this challenge by biasing towards senior and secured structures, favoring lower risk over higher yields, but it is never that simple. Evaluating risk and return on investment is never as easy as merely looking at leverage -- the leverage point or yields. We believe it is dangerous to think that the risk of lending to an undifferentiated business can be simply mitigated by obtaining a higher yield or lower leverage.

In our experience, a low leverage senior loan may not make sense if the character of the company's cash flow is weak or highly volatile. In a similar vein, we believe that simply charging a higher interest rate is insufficient compensation to our shareholders if we think we are undertaking the risk of a material loss of principal. Sometimes these investment opportunities can be good equity investments but do not make sense for us as a lender with limited upside.

We regularly decline to lend to companies with troublesome characteristic such as low margins, high cyclicality, customer concentration, low barriers to competition, shifting regulatory environment or declining end markets to name a few.

I don't want to dwell on too many negative credit characteristics and give the impression that we don't like anything. As you look at our portfolio, you can see that we have been investors up and down the balance sheet in a wide variety of companies and industries. We get excited when we find a business that offers a strong and sustainable value proposition to its customers. In these cases we get appropriately aggressive to win the deal. We try to mask the structure and the return to the risk profile.

As I mentioned earlier, while a low leverage senior loan can sometimes be a poor investment opportunity, a higher leverage unsecured mezzanine loan can make perfect sense if the company has strong and highly sustainable cash flow. My point here is that every opportunity has its own story and you cannot afford to be seduced by a high yield or low leverage as an investor.

At Saratoga we always work to understand the core business of our investments and analyze opportunities against a sound template of fundamentals. The key for us is to build our portfolio around differentiated business models that allow our portfolio of companies to produce dependable cash flow.

We continue to believe our shareholders will benefit from our experienced investment perspective and our measured approach to deploying capital.

Now our objective is to maximize our risk-adjusted returns in a manner that utilizes the low cost of capital and the 2-to-1 leverage advantage we possess through the our SBIC license. By focusing on a smaller, less competitive end of the market, we are able to reduce the risk profile of our portfolio while delivering highly accretive returns to our investors.

As you can see on slide 15, as of February 28, 2015, over 75% of our SBIC investments are in senior debt securities, which is slightly down from last quarter due to recent redemptions. The leverage profile of these investments is very low, especially when compared to market leverage. Because of the leverage and lower cost of capital advantages inherent in the SBIC program, we can achieve strong returns for our shareholders without moving far out on the risk spectrum. Therefore and as demonstrated this past year, we intend to grow our net investment income by continuing to dedicate the majority of our effort and resources to growing that portion of our portfolio.

Moving on to slide 16, you can see our SBIC assets increased to $135.8 million as of February 28, 2015, from $86.5 million last year. As a percentage of our total portfolio, SBIC assets have grown from 0% of our portfolio at fiscal year-end 2012 to 42% last year and now to 56% this year. This growth in SBIC assets is an important part of our continued increase in net investment income as the lower financing costs help grow our NII yield at a healthy pace.

Also it is important to note that as of fiscal year-end February 28, 2015, we had $104.9 million total available SBIC investment capacity of which $71 million is leverage capacity with our current SBIC license. Now if we were to obtain a second license, our leverage capacity would increase by another $75 million, with the ability to increase assets by $112.5 million.

In our view, our origination platform is among the very best at our end of the market and we are dedicating more resources towards it. We are seeing a steady flow of SBIC eligible investments and are optimistic about our ability to grow that portfolio at a healthy rate, while remaining extremely diligent in our underwriting and due diligence procedures.

This concludes my review of the market and I'd at like to return the call back to our CEO. Chris?

Thank you, Mike. As I mentioned earlier on the call, during this fiscal year we were very pleased to meet an important milestone that has been an important goal for us since our inception, namely to commence the payment of a regular quarterly cash dividend. From the start we said our expectation was that this dividend would continue to increase which it has by 22% over the last couple of quarters.

As outlined on slide 17, during our fiscal year 2015, Saratoga has paid quarterly dividends of $0.18 per share for the quarter ended August 31, 2014, $0.22 per share for the quarter ended November 30, 2014. On April 9, 2015, we also announced a dividend of $0.27 per share for the fiscal quarter ended February 28, 2015 payable on May 29, 2015 to all stockholders of record at the close of business on May 4, 2015.

Consistent with our new policy, shareholders will have the option to receive payment of the dividend in cash or receive shares of common stock pursuant to the Company's dividend reinvestment plan or DRIP plan that Saratoga adopted in conjunction with a new dividend policy and provides for the reinvestment of dividends on behalf of its stockholders.

Our goal with this policy is to allow stockholders who want cash to receive their dividends in cash. However, it also provides the opportunity for many stockholders we have spoken to who are interested in reinvesting their dividends to receive additional shares of common stock. Experience has shown that those stockholders who hold their shares with a broker must affirmatively instruct their brokers prior to the record date if they prefer to receive this dividend and future dividends in common stock.

The number of shares of common stock to be delivered shall be determined by dividing the total dollar amount by 95% of the average of the market prices per share at the close of trading on the 10 trading days immediately preceding and including the payment date. For more information, see the stock information section of the Company's investor relations website.

In addition, our Board of Directors has also recently declared a special dividend of $1 payable on June 5, 2015 to all stockholders of record at the close of business on May 26, 2015. Consistent with our quarterly dividends, this dividend will be paid pursuant to the Company's DRIP plan. The payment of the special dividend allows us to conclude an open item that we discussed on our last earnings call and that existed in the transition to our new dividend policy as well as meet our RIC requirements for the year.

In addition during this fiscal year, we announced the approval of an open market share repurchase plan that allows us to repurchase up to 200,000 shares of common stock at prices below our net asset value, as reported in our then most recently published financial statements.

Although we have not availed ourselves of this option, we continue to assess its potential on a regular basis.

On April 6, 2015, we also announced that the US Small Business Administration issued a green light or go forth letter inviting us to continue our application process to obtain a license to form and operate a second SBIC subsidiary. A second license, if ultimately granted, will allow us to grow our asset base significantly as previously highlighted.

All of these initiatives are important corporate tools being employed by us in realizing the Company's vision and combined with our results for the year, we feel extremely positive about the Company's development and continued expansion.

Moving on to slide 18, all of our initiatives are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We hope to drive the size and quality of our investor base while continuing to add institutions to the roster. During this past fiscal year, we added analyst coverage for the first time and hope to expand that as well.

We have spoken today about many of the components of our competitiveness that is highlighted on slide 18, strong and growing dividend, ample low-cost liquidity, strong earnings per share and NII yield, and expansion of assets under management. In addition, we have had only limited exposure to the oil and gas industry and had no write-downs as many other BDCs have experienced. We believe that Saratoga Investment is on the path of being a premier BDC in the marketplace.

Moving on to slide 19, our final slide, we have accomplished a lot in this past year and are happy to be able to provide you with all these updates. We are also very proud of the financial results generated by our accomplishments. These achievements however have not altered our objectives but are complementary to them. Our objectives remain consistent with what we have discussed with you in the past.

We continue to execute our long-term strategy to expand 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.

Our primary focus remains on maximizing the potential high teen returns on the equity invested in our SBIC and utilizing the 2-to-1 leverage that that provides. This is the optimal means to increase our assets under management and net investment income yield, enabling us to increase returns to shareholders and achieve growth in our net asset and stock values.

In closing, I again 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 I would now like to open the call for questions.

(Operator Instructions). Casey Alexander, Gilford Securities.

Good morning and thank you for that comprehensive review. I have a few questions. First of all, since it is a little bit opaque to us in terms of its construction and development, can you give us a little bit of color on the current construction and the expected development of the CLO over the course of the next year?

Thank you for your question. I am not sure I fully understand your question. It is opaque in that --?

The returns on it are highly variable based upon the construction and its development in terms of repayments and so it is a little hard for us sitting outside the Company to see that so I was wondering if you had any comments related to that?

I will give a total overview and then Henri can go into the specifics but basically our CLO has a finite life to it and the earnings off the CLO are determined by the spread that we are able to realize in the marketplace and as you correctly point out, we have a cost of our capital which is a floating-rate cost and we also have the spread we are earning on our assets and there are periods of time when that spread declines and it has been declining a little bit recently so it has been a little construction and there are other times where it expands so there is variability driven off the CLO by the changes in the spread in our portfolio.

In terms of the performance of it, it has been fairly steady. We have a steady flow of earnings and not all the earnings show up in GAAP. In other words, not all the receipts from the fund show up in our GAAP reporting and that is the difference between GAAP and tax and maybe this is part of what the opaqueness is you are referring to.

So we get what is effectively a principal repayment for GAAP but it is actual taxable income for earnings as well as the yield off the portfolio and then we also get the management fee on that portfolio.

Casey, if you look at the financials it is actually very discreet. There is sort of the two streams that come into the BDC through the financials which on the income statement would be the interest from our control investment, the CLO being the only control investment and that has been relatively consistent between 600,000 and 700,000 over the last year per quarter and then there is also of course the management fee income which is also a separate line on the P&L which has been around about $350,000, $370,000 per quarter over the last year.

Okay, great. Thank you. That is very helpful.

Secondly, Michael, your slide on the deal counts in calendar Q1 is very telling in that the deal counts are down. How are those deal counts and deals below $25 million developing during Q2?

Well, there is an uptick is the short answer. I would also add that the first quarter tends to be a light quarter in our business. There is often a run to calendar year end to get transactions done and the first quarter tends to be a bit slower but that slide also demonstrates that the first quarter relative to prior quarters, first quarters is down. We have seen deal flow pick up pretty substantially though since then.

That is good to know. Lastly, as it relates to the share repurchase plan, I am a little curious in that the dividend reinvestment program which I think is very beneficial for shareholders and is very well constructed also does present a little bit of dilution to NAV. So I am curious when you say you are assessing the potential of the share repurchase plan, why you haven't used any of it up until this point of time when the shares have at least at some point in time during the last few quarters been trading at a 30% discount to NAV. Why you haven't used some of the share repurchase plan to offset some of that dilution and if you think maybe you plan to in the future? F

That is a very good question, Casey, and an important point. We do have the share repurchase plan in place to be able to take advantage of situations where we feel our stock is substantially undervalued we do feel like it is undervalued at this time. We also need to balance our liquidity relative to stock repurchases at this point in time. I think we made a very strong point in our presentation that within those four corners of Saratoga Investment Corp., we have the ability to increase our assets under management by more than 50% and we don't require any outside capital to do that. I think that is in contrast to many of the companies in our industry right now where they are pushing up against their leverage requirements and they are trading below NAV so their access to capital is somewhat constrained.

So we need to be mindful of retaining our ability to finance the growth of our SBIC opportunity where we can invest as we mentioned in high teens type of returns and build the scale that is going to drive profitability in addition to looking at the opportunities in our own stock.

I would remark that we think with some of the progress we are making the stock price seems to be increasing in value based on our actions and your recommendations, thank you, and also more exposure to the type of investment management performance we are delivering and the metrics of our increase.

In terms of your very specific question, yes, there is some dilution that does occur as a result of shareholders exercising the DRIP but we feel that -- we hope that the shareholders view that as an opportunity and we would like as broad a participation in that in this transitional period we are in right now as we move towards paying a higher dividend on a regular quarterly basis.

All right, I just -- you did point out that you have over $100 million of available capacity for investing and the share repurchase plan at 200,000 shares is only $3.5 million so I don't think that exercising the share repurchase plan would necessarily be squeezing your ability to deploy capital but it would go to some extent to offset the dilution of the share repurchase plan. But we will keep recommending that investors reinvest because we think it is a well constructed plan. Thank you for taking my questions.

Andrew Kerai, BDC Income Fund.

Good morning and thank you for taking my questions. Just on the CLO equity investment you guys hold, I noticed the discount rate moved up again I think from 10% to 12% this quarter and that obviously had and associated and realized mark. Just wanted perhaps a little bit more color with the strength in the liquid low markets here so far in 2015 I mean is there something from just a default outlook that you are seeing in the underlying loan collateral? Just wondering why you decided to take up that discount rate and as a result have the markdown on the CLO equity again this quarter.

As you remarked, that was the one variable that we changed and I think just looking at the market we felt that was the most appropriate discount rate to use slightly upping it from 10% to 12%. I would note that if you think of sort of the adjustment to our CLO valuation for the quarter, that actually that change in the discount rate had a relatively small impact to the CLO from a valuation perspective. But we did feel just looking at the market and the recommendations we were getting that was probably the appropriate thing to do.

The remaining bulk of the actual change in the CLO valuation related to some cash flow changes as we sort of modeled out the remaining cash flows through the life of the CLO and that actually resulted in most of the change in the CLO evaluation.

That is certainly helpful color. Noticed obviously with your portfolio relatively static quarter over quarter your interest income ticked up about $1 million this quarter. Was there some prepayment fee income or something that pulled through in Q4 for you guys?

No, any prepayment or origination fees, etc., come through the other income line -- (multiple speakers) see how that moved. I would just say that we had still healthy originations this quarter and we've managed to maintain the rate at which we've sort of been investing as you saw on the various life we did. We also had a couple of redemptions, some of which have been more toward the middle of the quarter, middle and back end. But no, those would go through other income if those types of changes happened.

Certainly, that makes sense and then just Elyria Foundry obviously you guys have the common equity piece now as well as the revolver. Can you give us just any update on how the business is performing? Have they seen an uptick in just from an earnings perspective and just your outlook, having both the equity and the revolver piece now?

Andrew, this is Mike. I would comment on both. So the incremental capital that we put into the Company this past quarter is the debt capital which resides at the top of the capital stack. It is the very most senior securities in the Company's balance sheet so we feel like the risk-adjusted return there is just terrific. That is a fairly simple one to analyze given the Company's enterprise value.

The Company is continuing to experience some softness and so their outlook for this year remains pretty soft. That will be and we expect that that will be somewhat offset by the fact that the debt securities in that portion of the capital structure have been converted to equity so the Company is going to be producing a lot more free cash flow and therefore increasing its enterprise value from that fact alone.

The folks that control the Company have a bullish outlook on the business in the long run certainly could have exited the deal prior to the transaction and chose to pursue this course with the confidence that they could grow enterprise value significantly and generate higher returns. So the long run outlook is good from the owners but the current situation is pretty soft.

Sure. Certainly I appreciate the color. And then just lastly just a comment to go back to the stock repurchase as well too, certainly appreciate a lot of the things that you guys are doing and like the DRIP giving the 5% and all that. But just looking obviously if you just assumed roughly a $0.50 run rate for earnings that is about a 9% ROE for you guys. So you can basically get to a low double-digit at least sort of return from buying back your stock as opposed to obviously issuing for the new shares.

Just wanted to maybe reiterate my advice to perhaps at least offset some of that dilution because I think you are doing a lot of the right things, I appreciate the value and would just like to -- I personally feel that your investment is a great value and I think would make the story even more compelling if that was enacted at least partially to offset some of the dilution from that perspective for those that choose to take the stock in the DRIP.

Well, we appreciate the input. We will and we continue to and we have been actively considering that and just one final comment on that subject is that we are also looking to balance the maybe the shorter run opportunistic opportunities of purchasing the stock at a discount with the longer run fundamental growth of the Company and so that is one thing in terms of our capital allocation.

We do appreciate your input and we have heard it from a number of other parties as well so we understand there is a lot of input coming about offsetting some of that dilution and that is something that we actively consider.

Great, thanks guys and congrats again on another strong quarter.

Thank you.

(Operator Instructions). Barry Bergman, ALB Investments.

Hi, Chris, and everybody else there. I do applaud you for what you guys have done in the last couple of years upgrading the portfolio and actually more recently doing that as probably things get more aggressive in the high-yield and this private lending market and you guys have done a great job.

I guess I have two questions. One of which relates to both those last comments about NAV and buybacks. With this 30% NAV discount, I too would like to see you guys consider that more aggressively. Obviously that is offset by the liquidity in the stock which if we could figure out a way to get more shares outstanding without diluting the whole package, I think that would help to narrow NAV just by itself getting some more institutional investors or something like that.

So that is a statement but it is sort of a reiteration of what everybody else and was one of my questions and may be a solution.

My other question just relates to legacy positions and any that are on your radar screen or any of the new investments over the last couple of years that you might be wary of or anything that could be on your watch list that could maybe result in as you see these companies that you have made loans to result in a potential write-down and some of the NAV?

As it relates to the portfolio, the values that we are holding them at now reflect our assessment of the value of those investments so we take a very comprehensive approach to that evaluation and we look at the opportunities for the business their historical financial performance, etc. and so that is all reflected in what you see in the valuations and the marks there.

I think as a prior caller asked, certainly Elyria is a business that is continue to evidence softness in its business. I think the owners have a long-term positive outlook on being able to build that business and grow its enterprise value but in the present moment they are experiencing softness so we are watching that one very carefully.

Importantly on Elyria is the capital structure right now is, because of the conversion, restructuring that took place, while we do have a debt instrument that is at the very senior end of the scale. So there is really no risk in that investment of ours and because of the capital structure being all equity after that, the impact of the softness isn't -- we are not being driven by bank restructuring type of actions that might further diminish equity value. We are structured to handle the softness and get to as Mike described, sort of this the long-term -- because the company does have a tremendous franchise. It's just that at this point in time it has got some cyclical characteristics to it and there are some sector issues. It has some exposure to different sectors that are weaker now than they have been but can recover.

So anyway that's just a comment on the structure of Elyria. But generally across our portfolio, our credits are in good shape and part of that is our structure. We've been very careful to try and be first dollar lenders or if not absolute first dollar lenders there might be a small revolver ahead of us and we think that's a very good position to be in this type of environment where we are trying to avoid having a lot of debt ahead of us in case the type of softness that you described occurs.

Going to your question number one, again, this is a subject we are hearing a lot of feedback on and we are taking it very seriously. But in what you said is kind of a bit of a dilemma that we've been wrestling with and by the way you phrased your question you are too. Is that one thing we are hearing from institutions is that there's a lot of interest in our stock, there is not a lot of float and so it would be good to get more shares out and available.

But the problem is that if the Company goes out and buy stock it is actually going to actually decrease the supply of shares that might be available for institutions to come in and buy and so we are trying to balance this position of trying to create more float, more trading but we don't want to diminish the supply too much. We do want to offset our dilution and what we are seeing is that basically there's not a lot of people that want to sell their stock at this level. And so we've got to somehow bring the institutions in, bring the stock value up without -- and get to a point where we can add more share.

So the question you ask is something we are very focused on and all those elements we are actively considering and working to basically create that circumstance that is going to get our stock up through NAV and allow us to be a properly trading BDC in terms of value.

I will just add while we have been sort of balancing it and as we are balancing it, we have the reinvesting this cash in our SBIC and as our assets in the SBIC as we previously mentioned have gone from 42% to 56% of our total asset, so a 14% increase, our NII yield overall has gone from 7% to 8.8% in a year, so almost 200 basis points. So it does show sort of while we are balancing this it does show how the power of deploying that cash in the SBIC really impacts the NII yield as well.

Let me add to that. What we are really excited about is that we look at that 8.8% that Henry referenced and if you benchmark that against most of our BDC peers, it compares very favorably and especially favorably given how much dry powder we have, how much room we have to continue to grow our SBIC portfolio so we have a lot of optimism that as we continue to deploy capital through the SBIC that you should see that NII yield grow considerably.

Thanks very much. I don't think this is necessarily a value question or anything else, it is figuring out how to unlock it and maybe I will give you guys a call off-line and I have an idea. Thank you.

One thing I should add because I just realized you were asking about the portfolio, the other deal which should be mentioned is Targus. So if you are looking at the quarter-over-quarter numbers that was one that was written down a bit, that is a legacy portfolio investment that makes cases for notebook computers and tablets and so forth. And it is very dependent on new product launches and that end market is softer than it was and so that write-down is reflecting the softness in that end market.

How much is that investment because I don't have it in front of me?

Just while we are talking about that, both Targus and Elyria, which are our softer ones, those are legacy investments.

Thanks, guys. Appreciate it.

Joshua Horowitz, Palm Ventures.

Congrats on a great quarter, terrific execution. I just want to say you guys have done a tremendous job really at hitting all the goals and targets that you have spoken about over the last years and you are to be commended for that so thank you.

I guess we are talking about oil and gas and saying we have very little attributable exposure to it. Michael, maybe can answer this question, what is the next oil and gas that we are going to be talking about a couple of quarters from now where we are going to say wow, thank God we avoided that sector? Are you seeing as we are in our equity portfolio sort of many bubbles taking place in the marketplace that you are avoiding because of multiples?

That is a great question. We are always thinking about that as it relates to every business and the end markets and oil and gas in particular is just so obvious that these businesses have become so profitable so fast that you could just see that it was not sustainable and it made us very nervous. And so we didn't invest in that space.

The experience that we have had and what we are starting to see a bit and we are being cautious in this respect is we are in the building product space so you can see the housing market starting to come back and a lot of companies that are selling to that end market are experiencing pretty significant upticks in their revenues in cash flow. I think we have even got a legacy portfolio, legacy cabinets that is experiencing a really nice rebound as well.

But as we look at new investment opportunities, we are very cautious in that end market because we have seen those cycles. We feel like if there is a company in that space that has a differentiated product in some way that is not just riding the wave of the ups and downs in the housing market but instead really have something that is unique and is a defensible product position, we will obviously look at that very carefully and likely pursue those deals but we are pursuing that end market with caution.

Not to be too much in jest but fortunately we don't invest in buyout tech so that is one bubble I think we will be sidestepping.

Great. We are seeing a lot of frothiness in the restaurant sector. The multiples seem crazy to us. I don't know if you are being shown any deals in that space as well, maybe you could comment?

The restaurant sector in general and we have got a couple of investments in that sector is a sector that we are very careful with. So we do invest in that sector but we proceed with an awful lot of caution. The fact that people are paying a lot for those businesses is one thing and it is fine if an equity sponsor wants to pay a big price for the company. We just look at it from a debt perspective and really try to make sure that we are positioning ourselves in a spot in the balance sheet where we feel like our money is safe.

Super. Thank you very much and congrats again on a great result.

I'm showing no further questions at this time. I would like to hand the conference back over to Mr. Christian Oberbeck.

Thank you everyone for joining us today. We look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.