Saratoga Investment Corp (SAR) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Saratoga Investment Corp.'s Fiscal Fourth Quarter and Fiscal Year 2017 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 Corp.'s 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 Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. Today's conference call includes forward-looking statements and projection. 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-end 2017 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 1:00 p.m. today through May 24. 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. As we consider our accomplishments during this most recent fiscal year, I'm pleased to note the success of our activities in pursuit of credit quality, growth and earnings and the strong operating and investment performance that has resulted from these efforts. In addition, we have achieved certain milestones that have served to expand and enhance our capabilities.

Saratoga Investment has risen to and remains at the top of the industry in terms of key performance indicators and in many categories, far outpacing our competitors. Importantly, we have accomplished this in a highly competitive and challenging market environment. We continued to progress towards our 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 generating meaningful returns for our shareholders.

Slide 2 highlights our continued progress and achievements during the past quarter and fiscal year. To briefly recap, first, we continued the strengthening of our financial foundation this year by: maintaining a high level of investment credit quality, with 94.1% of our loan investments having our highest rating; generating a return on equity of 9% on a trailing 12-month basis, outperforming the last 12 months of BDC industry average of approximately 7.5%.

Excluding the $1.6 million realized and unrealized losses in our legacy investments in Targus Group International and Elyria Foundry Company LLC over the past 12 months as well as the loss associated with the extinguishment of our 2020 notes and interest paid on the 2020 notes during the call notice period, our return on equity for the last 12 months ended February 28, 2017, was 11.3%.

Both Targus and Elyria are legacy investments that predate Saratoga's management of the BDC and generating a gross unleveraged IRR of 17% on $108 million of realizations for the fiscal year.

Second, we expanded our assets under management to $292.7 million, a 3.1% increase from $284 million as of February 29, 2016, and a 5.4% increase from $277.5 million as of November 30, 2016.

From a longer-term perspective, our current AUM reflects a 208% increase from $95 million at the end of fiscal year 2012. In addition, this year is illustrative of the success of our growing origination platform. In fiscal year 2017, we originated investments totaling $126.9 million, offsetting -- offset by repayments of $121.2 million experienced this year. This is inclusive of $41.1 million of originations and $26.5 million of repayments in Q4.

Our growth in AUM over the past few years is evidence of our continued long-term upward trajectory in asset growth, despite the significant repayments we've had to outpace this year, and also reflects the growth we are seeing in our pipeline.

Third, we recently completed 2 significant refinancings that are important to our long-term objectives and strategy. On November 15, 2016, we completed the second refinancing of the Saratoga CLO, extending its reinvestment period to October 2018 as well as its legal maturity date to October 2025. And on December 21, 2016, we issued $74.5 million, in aggregate principal amount of 6.75% fixed-rate notes due 2023, for net proceeds of approximately $72.1 million after deducting underwriting commissions and offering costs.

This issuance of 7-year fixed-rate covenant free notes extends the maturity of this part of our capital structure by almost 4 years and reduces interest expense by 75 basis points. Our existing 2020 notes were repaid in January.

Fourth, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the 10th consecutive quarter. We paid a quarterly dividend of $0.46 per share for the fourth fiscal quarter 2017 on March 28, 2017. This was an increase of $0.01 per share over the past quarter's dividend of $0.45 per share. All of our dividend payments have been exceeded by our adjusted net investment income for the same periods. As a result, we are comfortably overearning our dividend currently by 9%, which distinguishes us from most other BDCs.

Fifth, our base of liquidity remains strong and promises to improve. The new baby bonds issuance extends the maturity of our capital structure and reduces our weighted average financing costs, and we continue to have significant dry powder to meet future potential opportunities in a changing credit and pricing environment. Our existing available year-end liquidity allows us to grow our current assets under management by 36% without any new external financing. This incremental investment capacity places us in a leading position, vis-à-vis our competitors, whose existing capacity averages 12.9%.

And finally, on March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which Saratoga may offer for sale, from time to time, up to $30 million of its common stock through an At-the-Market or ATM offering. As of May 16, 2017, the company sold 60,679 shares, for gross proceeds of $1.4 million, at an average price of $22.49. Aggregate net proceeds was $1.3 million net of transaction costs.

This year also saw a continued steady performance within our key performance indicators as compared to the previous year ended February 29, 2016. Our adjusted NII and adjusted NII per share of $11.5 million and $2.01 per share, respectively, was up 6% from the previous fiscal year, which was $10.6 million and $1.90 per share, respectively. Our adjusted NII yield of 9.1% was up 50 basis points from 8.6% for fiscal year 2016. And our last 12 months return on equity for February 28, 2017, was 9% or 11.3%, excluding the items I mentioned earlier, beating the industry average of 7.5%.

Looking at the current quarter ended February 28, 2017, as compared to the quarters ended November 30, 2016, and February 29, 2016, adjusted NII is $2.9 million this quarter versus $2.5 million last year and $3.1 million last quarter.

Adjusted NII per share is $0.49 this quarter as compared to $0.45 last year and $0.53 last quarter. And adjusted NII yield is 8.8% this quarter versus 8% last year and 9.5% last quarter. Henri will provide more detail later on any significant variances.

Overall, we remain extremely pleased with these accomplishments. As we've mentioned often in the past, we remain committed to further advancing the overall size and quality of our asset base. As you can see on Slide 3, on a year-by-year comparative basis, our assets under management have steadily risen and the quality of our credit remains high. We look forward to continuing this positive trend.

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

Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended February 28, 2017, in our usual presentation of this data. Net investment income of $1.1 million, or $0.19 on a weighted average per share basis, was down as compared to the quarters ended November 30 and February 29, 2016.

There are a couple of adjustments necessary this quarter to get through our adjusted metrics. In addition to the incentive fee accrual related to net unrealized capital gains and the second incentive fee calculation that we always adjust for, the refinancing of our 2020 baby bonds also resulted in 2 additional adjustments, namely, a $1.5 million loss on extinguishment of the baby bonds as well as the interest and deferred financing costs of $0.3 million on the old baby bonds during the call notice period while the 2023 baby bonds were already issued and outstanding. Both these expenses are directly attributable to the issuance of the 2023 notes and the subsequent repayment of the 2020 notes and are deemed to be nonrecurring in nature and not representative of the operations of the business.

When adjusting for these items, adjusted NII per share was $0.49, up $0.04 from $0.45 per share last year and down $0.04 from $0.53 per share last quarter. The increase from last year primarily reflects the 3% higher level of investments and results in higher interest income, while the decrease from last quarter is driven by a couple of factors: first, interest income is slightly down with our Taco Mac investment on nonaccrual this quarter, while the increased investments were primarily closed in the last month of the quarter, thereby not really benefiting interest income much yet; second, increased interest expense from our new 2020 baby bonds are not yet fully deployed; and third, increased administrative costs and $45,000 in excise tax accrued in Q4 consistent with prior years.

These impacts resulted in a NII yield of 8.8% for the quarter, up 80 basis points from 8% last year, but down 70 basis points from 9.5% last quarter. For this fourth quarter, we experienced a net gain on investments of $0.2 million or $0.03 per share, resulting in a total increase in net assets resulting from operations of $1.3 million or $0.22 per share.

The $0.2 million net gain on investments was comprised of $0.1 million in net realized gains and $0.1 million in net unrealized appreciation. The unrealized appreciation was net of a $2.3 million unrealized loss on our My Alarm Center investment, reflecting declining fundamentals, which we will discuss in more detail later. This loss was more than offset by unrealized gains in many of our other investments.

Moving on to Slide 5, you will find our 12-month key performance metrics for our fiscal year. We're looking at our numbers on an annual basis. The steadiness of our performance over the long-term becomes apparent, despite the fact that performance can appear lumpy when viewed on a quarterly basis. Year-over-year, all of our metrics are up. Adjusted NII is up 8% to $11.5 million, adjusted NII per share is up $0.11 to $2.01, and adjusted NII yield is up 50 basis points to 9.1%.

I'd like to continue to highlight return on equity as an important performance indicator, which includes both realized and unrealized gains. Return on equity was 9% for the year, this is slightly down from 9.4% last year and 9.3% for fiscal year 2015. However, this includes the significant Q4 items Chris and I highlighted earlier. Excluding these items, our return on equity for the last 12 months ended February 28, 2017, was 11.3%. This figure beats the current BDC industry average of 7.5%, and we expect this figure to continue to improve as we deploy cash and we grow assets with the benefits of scale becoming more visible and our operating expenses stabilizing and diminishing as a percentage of assets.

A quick note on expenses. Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees increased slightly from $4.2 million last year to $4.3 million this year but have remained consistently at 1.4% of average total assets for both years. For the quarters ended February 28, 2017, and February 29, 2016, these total expenses actually decreased from $1.25 million to $1.16 million.

As you can see on Slide 6, NAV this year was $127.3 million as of February 28, 2017, a $2.2 million increase from last year. NAV per share was $21.97 as of year-end compared to $22.06 as of the end of last year and $22.21 as of November 30, 2016. NAV includes $11.1 million of dividends declared, offset by $9.7 million in net investment income and $1.7 million of net realized and unrealized gains earned. In addition, $5.1 million of stock dividend distributions were made, offset by $3.3 million in share repurchases.

In addition, our NAV increase is net of a $1.6 million unrealized write-down of our legacy Elyria and Targus investments and the $2.3 million unrealized write-down of our investment in My Alarm Center. Our total investment in Targus and Elyria is down to $1.8 million at fair value as of year-end.

Our net asset value has steadily increased since 2011, and we continue to benefit from our history of consistent realized gains.

Moving on to our relatively new waterfall Slide 7, you will see a reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. This helps break down the numbers into a couple of more manageable variances.

Starting at the top, NII per share decreased from $0.53 per share at Q3 to 49% per share at Q4. The significant movements were a $0.02 decrease in total interest income, a $0.01 increase in interest and debt financing expenses and a $0.02 increase in operating expenses, offset by a $0.01 increase in other income, resulting in a $0.04 total decrease. At the slide's footnote, a higher weighted average shares outstanding had a very minimal impact, and all changes are shown net of incentive fees.

Moving on to the lower half of the slide, this reconciles NAV per share from $22.21 at Q3 to $21.97 for this quarter. The major change here is the $0.25 loss on extinguishment on our baby bond. Otherwise, the $0.44 generated by our NII for the quarter, a $0.16 net impact of stock dividends and share issuances and the $0.03 net depreciation on investments were offset by the $0.45 dividend declared for Q3 with a Q4 record date and $0.17 dilution from an increased share count.

Slide 8 outlines the dry powder available to us as of year-end, which is $104.4 million in total. We've recently added some information to this chart that gives you a better sense of how in managing our assets and liabilities, we have positioned our investments and our capital structure within this rising rate environment. You will immediately notice a couple of important characteristics of our capital base: first, all of our long-term capital is fixed rate, with only our revolver being variable and 0 outstanding on that currently; second, following our successful baby bonds issuance in December 2016, where we both reduced our interest rate by 75 basis points and extended our maturities by 4 years, our debt is currently all long-term in nature and 5 years plus in maturity, which sets us up well for our long-term goals and strategies. We have, therefore, primarily fixed our interest cost in this rising rate environment. We are pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the ability we continue to have to grow our assets by 56% without the need for external financing.

At the same time, over 87% of our investments have floating rates. And although they have LIBOR flows, we are all through but 3 of them already, which means we will be a big beneficiary of rising short-term rate.

As you can see on Slide 9, we have analyzed the potential impact of changes in interest rates on interest income from investments. Assuming that our investments as of year-end were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate term, a hypothetical change of 1% in interest rate would increase our interest income by approximately $2.2 million. This is all incremental to our existing earnings without any other changes.

Moving on to Slide 10, this summarizes the impact of our recent baby bonds issuance certain aspects which we mentioned earlier. There are 2 nonrecurring financial impacts related to the baby bond refinancing: first, there was a write-down of deferred financing costs related to the previous baby bonds and ATM program of approximately $1.5 million. This is disclosed as a loss on extinguishment of debt in the income statement on its own line, separate from operating expenses but within NII and excluded from the incentive fee calculation; and second, there was additional interest and deferred financing expenses related to the capital management decision to only call the 2020 bonds once the 2023 bonds had been issued. We purposefully delayed the calling of our existing bonds until the new bonds were issued. The required call period was 30 days, and the impact of this additional interest, while having both baby bonds issuances outstanding, was $0.3 million in Q4 2017.

Now I would like to move on to Slide 11 through 13 and review the composition and yield of our investment portfolio. Slide 11, as our usual slide, highlighting the portfolio composition and yield at the end of the fiscal year. Our composition and weighted average current yields remain consistent with the past, with $293 million invested in 28 portfolio companies and 1 CLO fund and more than 54% of our investments in first lien.

On Slide 12, you can see how the yield on our core BDC assets, excluding our CLO and syndicated loans as well as our total assets yield, has remained consistent around 11% for the past several years, despite high levels of repayments and the need to continue to replace these assets.

The CLO yields has decreased slightly, reflecting the highest CLO interest expense on the CLO refinancing we discussed last quarter.

Turning to Slide 13. During the fourth quarter, we made investments of $41.1 million in 5 new or existing portfolio companies and had $26.5 million in 5 exits and repayments, resulting in a net increase in investments of $14.6 million for the year.

Our investments remain highly diversified by type as well as in terms of geography and industry, spread over 10 distinct industries, with a large focus on business, consumer and healthcare services. We continue to have no direct exposure to the oil and gas industry, a fact that has served us extremely well.

Of our total investment portfolio, 6.5% consists of equity interest. Equity investments remain an important part of our overall investment strategy. As you can see on Slide 14, our net realized gains for fiscal year 2017 were $12.4 million, significant in comparison to past years. And for the past 5 fiscal years, we have also had a combined $17.7 million of net realized gains from the sale of equity investments or sale or early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality and has helped grow our NAV.

That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our President and Chief Investment Officer, for an overview of the investment market.

Thank you, Henri. I'll take a couple of minutes to describe the current market as we see it, then I'll comment on our portfolio performance and investment strategy.

The market's extremely competitive conditions persist. Slide 15 indicates the continued downward trend in the number of transactions per deal sizes in the U.S. below $25 million. The number of transactions in the last 12 months ended February 28, 2017, is already down significantly as compared to calendar 2016. Total transaction value for the 12 months ended February 28, 2017, is the lowest that it has been for comparative 12-month period since 2013. Opportunities in closings continued to decrease. Strong credits remain aggressively sought after.

As a result, pricing in the broader middle market remains under pressure, driven by an intensely competitive environment. Generally, we have seen less change in spreads in the lower middle market where we operate. In fact, our experience is that the lower middle market is still the most attractive market segment to deploy capital and the most likely to deliver the best risk-adjusted returns.

In addition, we believe long-term secular trends bode well for the BDC industry as a whole. In the chart on Slide 16, you can see that debt multiples in the industry seemed to have created somewhat of a barbell, with lower leverage credits below 3.5x increasing, while higher leverage credits above 5x increased as well.

However, irrespective of the fluctuation of market's leverage levels historically, we have been able to invest in deals with relatively low multiples. Our total leverage is 4.25x, up slightly from previous quarter. This reflects both the repayment this quarter of numerous lower-leverage deals as well of the add-ons to our existing investments increasing their immediate leverage profile. Nevertheless, the majority of our closed deals remained beneath overall market levels. We are careful to exercise extraordinary investment discipline and invest only in credits with attractive risk-return profiles and exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment.

In addition, this slide illustrates our consistent ability to generate new investments despite difficult market dynamics. With healthy originations in the calendar first quarter of 2017, including 3 new portfolio of companies, we have already established an origination level that outpaces past years while remaining unchanged in our investment criteria.

Moving on to Slide 17. Our team's skill set, experience and relationships continued to mature and our significant focus on business development has led to new strategic relationships that have become sources for new deals. This slide highlights that the number of deals we've sourced and evaluated has increased materially over the past couple of years despite competitive market conditions. 50% of these deals come from companies without institutional ownership. The rest come from private-equity sponsors.

The chart also illustrates our discipline over the past 15 months. While the size of the funnel at the top has increased, term sheets and deals executed has not -- have not increased in the same percentage. No matter how many deals we see, the overarching goal remains to maintain the same high level of credit quality.

One of our strengths is that we have been able to grow through the current soft market for quality deals in 3 main ways: first, by building targeted new relationships with top-quality investors and deal sources; second, by gaining repeat businesses in our business from existing relationships; and third, by deploying capital in support of the existing portfolio of companies that are healthy and growing.

In the last 12 months since calendar quarter of 2017, our transaction volume reflected a healthy mix of all 3 of these avenues of growth. One example of our ability to support existing portfolio of companies and the value of add-ons is our current investment in Easy Ice. This is a business we really like, with an exceptional business model that offers a terrific value proposition to its customers. As a result, it produces strong cash flows and is growing rapidly.

We have supported the company and management since our initial investment in 2013 and have again done so this past quarter. We increased our first lien investment to $26.7 million to facilitate a change of control transaction and also invested $8 million in a significant preferred equity position.

Our ability to answer the call and help facilitate the growth of healthy portfolio of companies that we know well has produced generous returns for our shareholders. Easy Ice is an example where we are optimistic about the outsized growth potential of the business. Although the size of the investment is larger than normal for us, we made the investment with tested confidence that we could downsize our position.

As part of a further recapitalization currently in advanced stages, there is -- expected to be a repayment of a significant portion of the first lien investment in the near term.

Our overall portfolio quality is strong and it's even stronger when taking into account only the assets originated by us since taking over the BDC management in 2010. As you can see on Slide 18, the gross unleveraged IRR on realized investments made by the Saratoga Investment management team is 17.5% on approximately $138.5 million invested in our SBIC, and 13.1% on approximately $71.1 million invested in the rest of our BDC.

Similarly, for the fiscal year 2017, we have seen 18 realizations for a total of $108 million of invested capital, which generated a gross unlevered IRR of 17%. This included 5 realizations this past quarter.

Of note is that our repayments have been outsized this past year, with almost 43% of our portfolio turning over the past year. This is higher than the industry where most BDCs have seen between 15% and 30% of their portfolio repaid. While repayments naturally curtail our asset growth, we believe repayments are also a strong indicator of the strength of our investment team and our investment selection process.

On the track to the right, you can also see that gross unlevered IRR on our $254.2 million of SBIC unrealized investments is 15.6%. In addition, our gross returns on the SBIC have remained consistently strong across vintage years, including 18.1% this past year.

The total gross unlevered IRR on the rest of our BDC unrealized investments since Saratoga took over management is 11.8% on $40.3 million of investments, for a total of 15.1% on $294.5 million of investments across our combined SBIC and BDC.

Now within the track record numbers discussed above, are 2 investments with -- worth discussing further. First is a $9.3 million first lien investment called Taco Mac that currently carries $0.9 million of unrealized appreciation, reflecting declining business fundamentals. We put this investment on nonaccrual in Q4, as discussed on last quarter's earnings call. While there have been developments the past couple of months, we continue to work closely with the company and the other first lien lenders to pursue various options. We will keep this investment on nonaccrual until this is resolved.

Second is a $9.4 million second lien investment called My Alarm Center that currently carries $2.3 million of unrealized appreciation, also reflecting declining business fundamentals. Subsequent to quarter end, we were notified by management and the sponsor that they will postpone the payment of interest from March onwards, and we will put this on nonaccrual in Q1. There are currently various restructuring and sale options being pursued.

With respect to our SBIC, our objective remains 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 our SBIC license. This less-competitive end of the market allows us to reduce the risk profile of our portfolio while delivering highly accretive returns to our investors.

As you can see on Slide 19, the mix of securities in our portfolio is conservative, with 62% of our investments first lien and the leverage profile of these 20 investments remains low at 4.3x, especially when compared to overall market leverage. We continue to have discussions with the FDA about the timing of a potential second license.

Moving on to Slide 20, you can see our SBIC assets increased to $221.5 million as of February 28, 2017, up from $200.6 million as of February 29, 2016. It is important to note as well that as of February year-end -- or year-end February 28, 2017, we had $41.8 million total available SBIC investment capacity, including cash, of which $37 million is leverage capacity within our current SBIC license. We continue to feel exceptionally good about our team, platform and portfolio while remaining extremely diligent in our overall underwriting and due diligence procedures. Credit quality remains our top focus.

This concludes my review of the market, and I'd like to turn the call back over to our CEO, Chris.

Thank you, Mike. As many of you know, our quarterly cash dividend payment program has grown by 156% since the program launched.

As outlined on Slide 21, during the fiscal year 2017, we declared and paid dividends of $1.93 per share, gradually raising the dividend through the year. In addition, during the beginning of fiscal year 2018, we paid an additional dividend of $0.46 per share, continuing the trend of raising the dividend every quarter. We have now had 10 sequential quarters of dividend increases.

We're also still overearning our dividend by 9%, giving us one of the higher dividend coverages in the BDC industry. We are also pleased to see our relative standing in the industry consistently improve over time. As you can see on Slide 22, and reflecting our strong key performance indicators we have discussed earlier, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 47%, significantly beating the BDC index at 27%, after the rally the industry have seen over the last couple of months.

Turning to Slide 23. When viewed over a longer time horizon, such as 6 years, which is when we took over management of the BDC, our 3- and 6-year return places us in the top 2 of all BDCs.

Moving on to Slide 24, you will see how our dividend yield has dramatically improved relative to the rest of the industry over the last couple of years. We have moved from consistently below the BDC average to now beating internally managed BDCs in line with the total BDC index and the externally managed BDCs index.

And Slide 25 highlights how our dividend growth has been the highest year-over-year quarterly dividend growth in the whole BDC industry, with only 2 other BDCs also growing dividends during this period, while all others have either 0 growth or were shrinking.

On Slide 26, you can see our outperformance placed in the context of a broader industry. We continue to achieve high marks across a diversity of categories, including interest yield on the portfolio, latest 12 months return on equity, dividend coverage, dividend growth, NAV per share and investment capacity. Latest 12 month NII yield is also now very much in line with the industry, actually beating the mean.

Moving on to Slide 27, all of our initiatives we have discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics, outlined on this slide, will help drive the size and quality of our investor base, including the addition of more institutions. These characteristics include a strong and growing dividend, industry-leading return on equity, ample low cost available and long-term liquidity, with which to grow our current asset base, solid earnings per share and NII yield with substantial growth potential, steady, high-quality expansion of AUM, and an attractive risk profile with protection against potential interest rate risk.

The high credit quality of our portfolio is buttressed by our minimal exposure to cyclical industries, including oil and gas. Importantly, our stock trading volume has increased substantially from an average of 11,300 shares traded per day last year to 35,000 shares per day during the most recent quarter, thereby providing increased liquidity for our investors.

With this overall performance, Saratoga Investment remain solidly on the path to being a premier BDC in the marketplace.

Finally, looking at Slide 28, we've accomplished a lot this quarter and are proud of our financial results. We remained on course, and there's no change to our simple and consistent objectives, continue to execute on our long-term strategy to expand our asset base without sacrificing credit quality while benefiting from scale. We also continued to increase our capacity to source, analyze, close and manage our investments by adding to our management team and capabilities.

Continuing to execute on these objectives should result in our continued industry leadership and shareholder return performance.

In closing, I would again 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) And your first question comes from Casey Alexander with Compass Point Research.

First of all, as it relates to Easy Ice, you said this was a change of control. So this was almost -- this was a re-underwriting where the previous commitment was considered paid off, the previous '16, and this is a new commitment of $26.7 million, is that right?

Casey, basically, Easy Ice -- I think we noticed in your writeup from last night that -- I mean, clearly, you're correct. Easy Ice has been a really solid performing investment for us for many years. Their -- management has a certain investment stake and they have a majority owner that we were able to help the company effectuate a change of control where, in effect, management and we were able to take out this other equity investor, and that was the transaction. So there was not a refinancing of all our position per se, but there was incremental capital that we contributed in support of our management team facilitating an increase in both their equity share and our equity share of the company by taking out the majority shareholder.

Right. Okay. And what percentage is your equity share? Because I noticed it was moved from noncontrolled to a controlled investment.

Yes, it's -- and some of that's just the way the accounting regs are. It's less than 50%. But I think the way that disclosure works is that if you have more than 25%, it falls into that category, so we are not in a control position, as if you were to define that by having greater than 50%, but it is a significant equity position, actually structured as preferred equity as well, so there's some safety in the structure that we devised in this case.

Right. That's -- but it would be fair to call it somewhere between 25% and 50% then?

That's correct.

Okay. Secondly, in Slide #3, we now have -- one loan is listed as underperforming and one loan is listed as payment default risk, and I assume that those refer to Taco Mac and My Alarm Center, but can you tell us which is which?

It's actually -- it's a little bit of scale here, Casey. Actually both of those are what we call are underperforming, so both Taco Mac and My Alarm Center I believe are in underperforming. I know it's showing here it's -- I guess it's a scale issue. Really, we only have the small little residual, I think it's like $25,000 of [MC Communications], that legacy investment that's in the payment default risk category. I believe they're both underperforming.

Okay, so it's just the way it looks on the slide representatively?

Yes, we'll -- we can fix that. The point is that both of those are on nonaccrual.

Right. Okay.

Yes, but still on accrual at year-end, but it's now -- for Q1, it will be a nonaccrual.

From a strategic standpoint, as you continue to create originations, you still have some capacity in the SBA subsidiary, that you have nothing outstanding on the revolver, where would new leverage likely to come from as you expand originations? Would you start to tap the revolver or -- because the SBA balance hasn't moved in quite a while.

Casey, yes -- while that's true that those debentures are callable debentures, and so that would be a source of capital and a revolver and it'd be -- have to do with the characteristic of the investments, but those are both sources of capital for the deployment.

But just to add a little bit clarity to that, so if it's an SBIC-qualified investment, you would expect that we would avail ourselves to the SBIC debentures and continue to leverage or access that leverage first. And then, when we're through that leverage, the next source of capital would be the revolver or LC.

And how much cash do you have available in the SBIC subsidiary?

So well, we have about -- as of year-end, we had about $4 million of cash, Casey. But to Chris' and Mike's point, we have the debentures callable and available, the $37 million, that makes up the $41 million you described, and we are able to then either invest in the SBIC or actually distribute the cash out of the SBIC subsidiary, draw the debenture and distribute the readout of the SBIC subsidiary to our BDC.

Right. But I think in previous quarters, you had a lot more cash than $4 million in that subsidiary. Then you've -- you've successfully gotten some of that put to work.

Correct. Yes, in Q4, we had a couple of new investments, 3 new portfolio companies. And although we had some repayments, we had some new -- our new investments exceeded the repayments and we utilized some of that cash. A lot of it was towards the end of the quarter, as I mentioned in my remarks.

Mike, the total portfolio leverage your attachment point of 4.25x, how does that compare to previous quarters?

I can't give you the exact number. It's up, it's up over the last 6 months. And there is certainly noise in that number, we don't view that as a long-term trend necessarily. As you know, we have so much turnover in our portfolio, with reference, 43% of our portfolio turned over last year. That -- that can vary quarter-to-quarter. We continue to see a healthy amount of first lien unitranche deals. We also see deals that are quite attractive, we're in the second lien position, and depending on the mix of those securities, that's going to affect that number.

Okay. And how do you view the sort of velocity of repayments? I mean, we are hearing that across the space, the velocity of repayments has increased. Is -- how do you view it going forward? Are you starting to assume a higher velocity of repayments? And are you seeing that because of some sort of change in the competitive dynamics?

It's a good question. We do not expect to have 43% of our portfolio turned over this year. That could happen, but we're not planning on it. And it's interesting, we asked ourselves that question. Is there something fundamental about our business model or the way that we're approaching deals that we're selecting that is causing a higher-than-average repayment experience? And the answer that we've concluded is no, that it's just somewhat of an anomaly. Most of the repayment experience that we had was due to sales of the company. So we exited because the company was sold, in most cases, and I think that was 75%.

75%.

And so a lot less to do with robust capital markets and people just refinancing us. So I think, it -- from our perspective, we expect to see less repayment. The most important thing is that with all of the resources that we're dedicating to business development, especially in the lower end of the middle market where we operate, there's many more companies at the lower and the middle market that we think that the number of opportunities that we'll generate and looks that we'll get, if you will, will exceed what we've had in the past and will still be able to outpace our repayments.

Okay. That's very helpful. Henri, the ATM sales, did those primarily take place in the second quarter? You gave them as a date as of yesterday. I mean, in second calendar quarter, excuse me.

Yes, that is correct, yes. Yes. (inaudible) have been part of that calendar quarter, because we also -- we intend to, as the market allows it, just to continue to do that. But we also go into a blackout period around our earnings as well and then, well, you have to sort of just wait.

Your next question comes from Mickey Schleien with Ladenburg.

Just a couple more questions on Easy Ice. Could you expand on the expected further recapitalization for that company? How's that going to work? Are you looking for a credit line or another strategic investor? Can you give us some color there?

Yes, I mean it's a private company, so we've got to be a little bit careful about what we can say in terms of what's going on with the business and so forth. But we can say that when we made that investment, it was opportunistic, we feel like we added a lot of value by stepping up and taking advantage of a really interesting opportunity for ourselves as well as for management. And so we jumped in and bridged the transaction, if you will, and have a lot of confidence that -- and there's ongoing discussions now that we can refinance a portion of the first lien securities with the traditional folks that you might imagine, and so we're in active discussions around that right now.

Okay, fair enough. Mike, does that imply that you're going to keep the preferreds, and do those preferreds at Easy Ice include a contractual dividend?

We are going to keep our investment in the preferred, for sure, and that's one of the things that we're really excited about. The -- we, again, think of the business as just a fantastic business and have known it since 2013, have known management that long as well, and we're excited to be supporting the business, so glad to be in -- increasing our exposure to the business and having some equity upside as well.

And do those preferreds require them to pay a dividend?

Not cash dividend. There's a PIC component to the preferred.

Okay. Moving on to Elyria. I see that, that was refinanced. Could you walk us through that and the thesis for not holding more of the new second lien, which has a very high coupon?

I think that was done on a pro rata basis. So we were taken out of the first lien position by an ABL lender, a traditional senior lender, and a portion of what we had in first lien was put into the second lien security and shared -- for those that were in the first lien, that piece was shared pro rata, so that's essentially what we got. Didn't have -- didn't really have an opportunity to upsize that.

Right. Right. And lastly, just -- in your prepared remarks, you talked about your history of equity investments and the potential to increase NAV down the road. I see that your equity investments are marked at about 20% above their cost as of the last fiscal quarter, do you believe there's scope for that valuation decline even more?

For that value -- okay, I'm -- I was just trying to understand. Do we feel like the return on the equity investments could grow to a higher level? Yes. We feel good about the equity investments in our portfolio on a general basis and when we make those equity investments, we do it with the intent of we getting a return that's quite nice, as we have in the past. Let me add one thing, Mickey, because I think both you and Casey asked a good question in terms of Easy Ice. The Easy Ice investment is certainly not at the departure from a playbook that we've used very successfully since we've taken over management of the SBIC. If you look at some of our best investments, they have been in situations where we supported either a management team or entrepreneur, in some cases, a private-equity sponsor in investment. And then we've upsized that investment over time, in some cases, increased our equity investment and the return experience that we've had in situations like that has been terrific. In fact, we -- because of that track record, we win deals in the marketplace when they call folks and get references on us. If you're to sort of just think about our existing portfolio and some of the deals that we've exited -- expedited, NTP, HMN, Community, Identity Automation, Emily Street or Nauticon, those are all deals that we've made initial investment in the company, came to know the business exceedingly well and then took advantage of an opportunity to leverage the relationship that we have formed with the management team and our knowledge of the business to make an increased investment and then deliver exceptional returns for our shareholders. So we do intend to continue to do that. We did it in the Easy Ice case and there, the dollar amount of our investment is above where our typical hold will be, and so we're working to downsize that exposure on that credit, but super excited about being in that position.

That's helpful. And I do see that Easy Ice is now almost 12% of the portfolio's fair value. So just from a risk management perspective, I can see why you'd want to reduce that, and we look forward to learning more about that in the next quarter.

Thanks, Mickey.

(Operator Instructions) And your -- you do have a follow-up from Casey Alexander.

Yes, Mike, I just wanted to clarify, because on your original remarks when you discussed Easy Ice, you said that it was your intention to downsize the position. But in answer to one of Mickey's questions, it sounded -- I can't tell whether or not the intention is to fully take out the first lien loan or just to downsize the position in the first lien loan plus keeping the equity position, of course?

Well, we're going to downsize our position based on the best deal that we can negotiate in the marketplace. And the portion that we hold will be in a Junior capital position, as you can imagine. So that doesn't necessarily mean that 100% of what is now characterized as first lien will go away, but the capital structure will be changed to reflect the deal that we negotiated in the marketplace.

And I'm not showing any further questions at this time. I would like to turn the call back to Christian Oberbeck for any further remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.