Saratoga Investment Corp (SAR) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corp.'s Fiscal Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. Please note that today's call is being recorded. (Operator Instructions)

At this time, I would now like to turn the call over to Saratoga Investment Corp.'s Chief Financial and Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.

Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law.

Today we will be referencing a presentation during our call. You can find our fiscal fourth quarter and fiscal year 2018 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 p.m. today through May 22. Please refer to our earnings press release for details.

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

Thank you, Henri, and welcome, everyone. In reflecting on the longer-term achievements during the past year and the context of our core objectives of credit quality, sustained growth and solid earnings, we're pleased to report that we achieved strong performance against all 3 over the past year, building on a long-term trend we have maintained over many years. We are proud of the strong operating investment performance resulting from our team's efforts, placing us at the top of the industry in terms of key performance indicators and in many categories far outpacing our competitors.

We have deployed capital at below-average multiples and maintained a moderate risk profile. Our flexible capital structure and diversified sources of cost-effective liquidity continue to support our robust and growing pipeline of available investment opportunities, increased assets and greater scale. Importantly, we've accomplished this in a highly competitive and challenging market environment.

We continue to progress towards our long-term objectives of increasing the quality and size of our asset base, with the ultimate purpose of continuously 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 96.8% of our loan investments having our highest internal rating; generating a return on equity of 13.2% on a trailing 12-month basis, outperforming the last 12 months' BDC industry average of approximately 8.5%; and maintaining a gross unlevered IRR of 12.2% on our total unrealized portfolio, with a gross unlevered IRR of 16.2% on $249.4 million of total realizations.

Second, we expanded our assets under management to $342.7 million, a 17% increase from last year and a 1% increase from Q3. From a longer-term perspective, our current AUM reflects a 328% increase from fiscal year 2011. In addition, this year is illustrative of the success of our growing origination platform. We originated investments totaling $108 million, offset by repayments of $66 million. In Q4, $21 million of originations were matched by the same number of repayments.

Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the 14th consecutive quarter. We paid a quarterly dividend of $0.50 per share for the fourth fiscal quarter of 2018 on March 26, 2018. This was an increase of $0.01 per share over the last quarter's dividend. 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 14%, which distinguishes us from most other BDCs.

Fourth, our base of liquidity remains strong and promises to improve. 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 21% without any new external financing. And on April 16, 2018, pursuant to the Small Business Credit Availability Act, the noninterested Board of Directors of the company approved the company increasing its leverage from 1.1x to 2.1x effective on April 16, 2019. This provides us potential future access to more than $100 million of additional borrowing capacity based on NAV at the end of fiscal 2018, allowing further potential growth of more than 50% of our current assets under management.

And finally, we continue to opportunistically utilize our at-the-market, or ATM, offering with Ladenburg Thalmann & Co. As of February 28, 2018, the company had sold 348,123 shares with a principal of $7.8 million at an average price of $22.52.

This year also saw a continued steady performance within our key performance indicators as compared to the previous year ended February 28, 2017. Our adjusted NII of $13.7 million was up 39% from the previous fiscal year, which was $9.8 million. Our adjusted NII per share of $2.27 per share was up 13% from $2.01 per share last year. Our NAV per share of $22.96 was up 5% from $21.97 last year, and our return on equity was 13.2%, up from 9% last year and beating the industry average of 8.5%.

Looking at the quarter ended February 28, 2018, as compared to the quarters ended November 30, 2017, and February 28, 2017, adjusted NII is $3.8 million this quarter, up 31% from $2.8 million last year and up 16% from $3.3 million last quarter. Adjusted NII per share is $0.60 this quarter, up 22% from $0.49 last year and up from $0.54 last quarter. And adjusted NII yield is 10.7% this quarter, up from 8.8% last year and up from 9.6% last quarter.

Henri will provide more detail later on any significant variances. Overall, we remain extremely pleased with these accomplishments.

As 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, our assets under management have continued to steadily grow and the quality of our credits remain 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, 2018 and our usual presentation of this data. Across all these metrics, this quarter again shows the positive impact of increased assets we have always spoken about. When adjusting for the incentive fee accrual related to net unrealized capital gains and the various impacts of the refinancing of the 2020 baby bonds in last year's numbers, adjusted NII of $3.8 million this quarter was up 15.5% from $3.3 million last quarter and up 31.3% from last year's Q4. Adjusted NII per share was $0.60, up $0.06 from $0.54 last quarter and up $0.11 from $0.49 last year.

The increase from last year reflects our higher level of investments and resultant higher interest income, with AUM up 17% from last year. The sequential quarterly increase was primarily due to additional interest income from accelerated OID on certain early repayments, as well as additional other income earned from prepayment penalties and increased originations compared to last quarter.

These factors led to adjusted NII yield of 10.7% for the quarter, up 190 basis points from 8.8% last year and up 110 basis points from 9.6% last quarter.

In addition, we experienced a net gain on investments of $2.2 million for the quarter or $0.35 per share, resulting in a total increase in net assets resulting from operations of $5.5 million or $0.89 per share. The $2.2 million net gain on investments was comprised of $0.2 million in net realized losses and $2.4 million in net unrealized appreciation. The unrealized appreciation includes $1.3 million related to our Taco Mac Restaurant Group investment, restructured subsequent to year-end.

Moving on to Slide 5, you will find our 12-month key performance metrics for our fiscal year with comparable periods. When looking at our numbers on an annual basis, the strength of our performance over the longer term becomes apparent, eliminating any quarterly lumpiness. Year-over-year, all of our metrics are up. Adjusted NII is up 18.5% to $13.7 million; adjusted NII per share is up $0.26 to $2.27 per share; and adjusted NII yield is up 110 basis points to 10.2%.

As we've always reiterated, return on equity is an important performance indicator, including both realized and unrealized gains. Return on equity was 13.2% for the year, up 420 basis points from 9.0% last year and up 380 basis points from 9.4% for fiscal year 2016. This figure also easily beats the current BDC industry average of 8.5%.

A quick note on expenses. Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees, increased slightly from $4.3 million last year to $4.8 million this year, but it remained consistently at 1.4% of average total assets for both years. This increase is primarily due to: one, increased professional fees from this year's Sarbanes-Oxley control activities now that the company is an accelerated filer and requires an audit opinion over the control environment, which by the way was a clean, unqualified audit opinion issued by E&Y for the year; and two, increased administrator expenses pursuant to the administrator agreement. For the quarters ended February 28, 2018 and 2017, these total expenses remained relatively unchanged at $1.2 million.

The additional KPI slide and net interest margin analysis is again included on Slides 29 to 52 in the appendix, highlighting our BDC's strong performance and continued increased results. Fiscal '18 is of particular note, demonstrating the earnings power of the most recent AUM growth as our cash and SBA debentures were further deployed during the year.

As you can see on Slide 6, NAV this year was $143.7 million as of year-end, a $16.4 million increase from NAV of $127.3 million last year and a $5.1 million increase from $138.8 million last quarter. NAV per share was $22.96 as of year-end, compared to $21.97 as of last year and $22.58 as of last quarter.

NAV changes for the year includes $12.7 million in net investment income and $4.9 million of net realized and unrealized gains earned, offset by $11.4 million of dividends declared. In addition, $2.4 million of stock dividend distributions were made through the DRIP, and $7.7 million of net share sold through our at-the-market equity offering.

In addition, our NAV increase is net of a $7.7 million realized write-down of our legacy My Alarm Center investment, partially offset by $1.8 million in other realized gains, mainly from the sale of our Mercury Network investment in Q2.

Net unrealized depreciation for the year was due primarily to $1.9 million unrealized depreciation on our CLO equity investment; $1.9 million unrealized depreciation on our Easy Ice preferred equity investment; $2.6 million unrealized depreciation on our Elyria equity investment; and net unrealized depreciation being adjusted to 0 to reflect the recognition of the net realized loss on the 2 realizations above.

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 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 increased from $0.54 per share at Q3 to $0.60 per share at Q4. The significant movements were a $0.05 increase in total interest income, primarily from increased prepayment penalties and accelerated amortization of OID, resulting from early repayments. As this slide shows, a higher weighted average shares outstanding had a $0.02 dilutive 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 $22.58 at Q3 to $22.96 for this quarter. The $0.53 generated by our GAAP NII for the quarter and a $0.59 net appreciation on investments were offset by the $0.49 dividend declared for Q3, with a Q4 record date as well as a $0.05 dilution from an increased share count.

Slide 8 outlines the dry powder available to us as of year-end, which is $71.1 million in total. This is spread between our available cash, undrawn SBA debentures and undrawn Madison facility. All our borrowings, except for our Madison facility, is fixed rate debt in this rising interest rate environment, with at least 6 years of maturity remaining.

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 21% without the need for external financing.

At the same time, almost 80% of our investments have floating rates and although they have LIBOR floors, we are through all of them already, which means we will be a big beneficiary of rising short-term rates.

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 terms, a hypothetical change of 100 basis points in interest rates would increase our interest income by approximately $2.3 million. This is all incremental to our existing earnings without any other changes.

Now I would like to move on to Slides 10 through 12 and review the composition and yield of our investment portfolio. Slide 10 is our usual slide highlighting the portfolio composition and yield at the end of the fiscal year. Both our composition and weighted average current yields remain relatively consistent with the past, with $342.7 million invested in 30 portfolio companies and 1 CLO fund, and approximately 58% of our investments in first lien.

On Slide 11, you can see how the yield on our core BDC interest-earning assets excluding our CLO and syndicated loans, as well as our total portfolio 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. Our core BDC asset yield increased slightly, reflecting increased 1- and 3-month LIBOR rates, offset by slightly tighter spreads. Year-over-year, the CLO yield has increased significantly as the CLO term moves closer to the end of its reinvestment period in October 2018.

Turning to Slide 12, during 2018, we made investments of $107.7 million in 5 new and 9 existing portfolio companies and had $66.3 million in 8 exits and repayments, resulting in a net increase in investments of $41.4 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.

At other total investment portfolio, 8.7% consists of equity interest. Equity investments remain an important part of our overall investment strategy. As you can see on Slide 13, realized losses this year was $5.9 million, primarily from the $7.7 million loss on our My Alarm Center investment we have previously discussed.

Despite this onetime loss, for the past 6 fiscal years, we had a combined $11.8 million of net realized gains from the sale of equity interest or the sale or early redemption of other investments. This consistent performance reflects the quality of our portfolio credit, has helped grow our NAV and is reflected in our healthy, long-term return on equity.

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

The market has only gotten more competitive since our last earnings call in January. Slide 14 shows a continued downward trend in the number of transactions per deal sizes in the U.S. below $25 million. The number of transactions in the 12 months ended February 28, 2018 is even less than 2017, which was already down 18% from the previous year, reflecting continued early weakness in 2018. Opportunities in closings continued to decrease in this market, and it is not just volume. Total transaction value for the same periods are down as well.

In the midst of these market dynamics, industry participants are competing for strong credits in an extremely aggressive fashion. The supply and demand imbalance has fueled continued pricing pressure and aggressive leverage for quality deals in the broader market -- the broader middle market that has been -- as it has been for some time. While our experience is at the lower middle market, our target market segment, is still the most attractive one to deploy capital and deliver the best risk-adjusted returns, we have seen spreads in terms historically reserved for significantly larger issuers creep into our space. Terms have become increasingly borrower-friendly, and thankfully, LIBOR has continued to increase this quarter and has provided some counterbalance to spread compression.

As we frequently highlight, the lower middle market appeals to us because the sheer number of companies at this end of the marketplace allows us to sift through and find transactions that we believe are most likely to deliver the best risk-adjusted returns to our shareholders. It is worth pointing out that our commitment to steady, risk-adjusted performance has also positioned us well for market downturns, should they occur. We believe that successful investing rests on sound judgment and steady, continuous discipline, taking one decision at a time.

In the chart on Slide 15, you can see that debt multiples remain high in 2018, with 2/3 of market multiples above 5x. Lenders remain aggressive in putting money to work. Against this backdrop, we've been able to achieve our results while maintaining a relatively modest risk profile. Our total leverage is 4.37x, up slightly from the previous quarter, reflecting both the repayments this quarter of numerous lower-leveraged deals as well as the add-ons to our existing investments increasing their immediate leverage profile. Nevertheless, we continue to focus on investing in credits with attractive risk-return profiles and exceptionally strong business models, where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investments.

In addition, this slide illustrates our consistent ability to generate new investments despite difficult market dynamics. With continued healthy originations in the calendar first quarter 2018, we are maintaining an origination level that is consistent with past years despite a more challenging environment and not relaxing our investment criteria.

Moving on to Slide 16, our team's skill set, experience and relationships continue to mature. And our significant focus on business development has led to new strategic relationships that have become sources for new deals. That 50% of these deals come from companies without institutional ownership underscores the importance of proprietary-light relationships in our deal sourcing. Although 80% of our term sheets issued are still for transactions with private equity sponsors, we are also seeing more deals from a greater variety of sources.

This chart illustrates our discipline over the past 3-years-plus. While the size of the funnel at the top has increased significantly, deals executed have not increased but rather remained relatively steady throughout. In this market, we find ourselves having to work harder to maintain the same measured pace of growth. But no matter how many deals we see, the overarching goal is to maintain the same high level of credit quality.

In the last 12 months since February 28, 2018, our transaction volume reflected a healthy mix of follow-on and new portfolio company investments. We take pride in the success we have had making initial investments in portfolio companies and then supporting many of those companies with additional debt and equity capital to fuel their continued growth. Examples of current and past portfolio companies where we successfully deployed follow-on capital include Easy Ice, Health Media Network, Community Investors, vector, Mercury, Identity Automation, Expedited and many others.

Looking at our growing base of investment relationships and our current prospective investment pipeline, we are confident that we can continue to add new portfolio companies to our portfolio that in turn will become a source of follow-on investment activity.

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 17, the gross unlevered IRR on realized investments made by the Saratoga Investment management team is 17.3% on approximately $177.5 million invested in our SBIC and 13.3% on approximately $71.9 million invested in the rest of our BDC. On a combined basis, the gross unlevered IRR is 16.2% on $249.4 million of invested capital. These numbers include $66.3 million of realizations in fiscal 2018, including the realized loss on our My Alarm Center investment discussed earlier.

On the chart to the right, you can also see the total gross unlevered IRR on our $349.4 million of combined weighted SBIC and BDC investments is 12.2% since Saratoga took over management.

The track record numbers just discussed also include a $9.8 million first lien and revolver investment called Taco Mac. As of our last discussions with you all, this investment carried a $1.5 million unrealized appreciation, reflecting declining business fundamentals. Shortly after year-end, these investments were restructured in a change of control transaction, with Saratoga Investment receiving $7.3 million in cash and a $2.2 million subordinated term loan. This transaction resulted in $1.3 million unrealized appreciation for the quarter ended February 28, 2018, with the investment being fair valued in our financial statements at year-end to reflect the value of the transaction shortly after year-end.

A $0.2 million loss is to be realized for the 3 months ended May 31, 2018. This realized loss will be accounted for as a reclassification from unrealized to realized, resulting in no net impact to the financial statements in the first quarter.

As a reminder, this year is a good example of how a solid, high-quality portfolio interacts as a whole. Despite the recognition of $7.7 million loss on My Alarm Center, our year-to-date net realized and unrealized gains and losses equal a gain of $4.9 million.

As you can see on the slide on 18, the mix of securities in our portfolio is conservative, with 59% of our investments comprised of senior debt first lien investments and the leverage profile of these 20 investments remain relatively low at 4.57x, especially when compared to overall market leverage. Our favorable cost of capital for this program allows us to deliver highly accretive returns to our shareholders without stretching out on the risk spectrum.

And moving on to Slide 19, you can see our SBIC assets are relatively unchanged at $217.1 million as of February 28, 2018. It's important to note as well that as of year-end, we had $19 million total available SBIC investment capacity, including cash, of which $12 million is leveraged capacity within our current SBIC license.

Overall, we feel this quarter's continued strong results demonstrate the strength of our team, platform and portfolio while remaining extremely diligent in our overall underwriting and due diligence procedures. This culminates in high-quality asset selection within a tough market. 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 outlined on Slide 20, following the most recent increases to our fourth -- increase to our fourth quarter dividend to $0.50, our quarterly cash dividend payment program has grown by 178% since the program launched in September 2014. This includes 14 sequential quarterly dividend increases. Despite these consistent increases, we continue to overearn our dividend by approximately 14%, giving us one of the higher dividend coverages in the BDC industry.

As you can see on Slide 21, we've had a year-over-year dividend growth of 8.7%, which easily up -- which easily places us at the top of all BDCs, not only our peers, and only 1 of 7 BDCs have had grown dividends in the past year. This list also includes some BDCs at the top of the list that have variable dividend policies, therefore not really comparable. While we have had 14 sequential quarters of dividend increases, most BDCs have either had no increases or decreased the size of their dividend payments. We believe our continually increasing dividend has truly differentiated us within the marketplace.

We are also pleased to see that SAR continued -- to see SAR continuing to outperform the industry, both short and long term. As highlighted on Slide 22, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 2%, significantly beating the BDC index of negative 9%. As compared to the last 3 years as well, since we took over the management of the BDC, SAR's total return has beaten the index by a significant margin. For the past 3 years, Saratoga's total return of 72% beat the industry's 11% total return. And for the period since Saratoga took over management of the BDC, Saratoga's return beat the industry by 302% versus 93%.

Turning to Slide 23, when viewed over a longer time horizon, our 3- and 5-year return places us in the top 1 and 2 of all BDCs respectively.

On Slide 24, you can further see our outperformance placed in the context of the broader industry. We continue to achieve high marks across diverse categories, including interest yield on the portfolio, latest 12 months' return on equity, dividend coverage, dividend growth, NAV per share and investment capacity. As we continue to grow our assets, our expense ratio is trending closer to the industry averages while we are easily beating the industry in most of the other metrics. We believe our return on equity and NAV per share outperformance are the most important metrics reflecting the growing value our shareholders are receiving.

Moving on to Slide 25, 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 maintaining one of the highest levels of management ownership in the industry, industry-leading return on equity, a strong and growing dividend, ample long-term liquidity with which to grow our asset base, solid earnings per share and NII yield with substantial growth potential and a track record of steady, high-quality expansion of assets under management.

Importantly, Saratoga has an attractive risk profile, with protection against potential interest rate risk from its almost 80% floating rate portfolio and fixed rate liability structure. Our high credit quality portfolio contains a minimal exposure to cyclical industries. With this overall performance, Saratoga Investment has achieved a standing among the premier BDCs in the marketplace.

Finally, looking at Slide 26, we've accomplished a lot this year and are proud of our financial results. We remain on course with our long-term goal 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. Continuing to execute on these simple and consistent objectives should result in our continued industry leadership and shareholder total 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) The first question is from Casey Alexander of Compass Point.

Just a couple of questions. First of all, you gave your ATM statistics for the year. Did you sell any shares through the ATM during the fourth quarter? And if so, how many? And at what average price?

Casey, off the top of my head, I don't know exactly the average price. There was a small amount sold at the beginning of the quarter, but as you probably were aware, our share price lost a little bit of value over the last couple of months and we were below NAV. So there was a small amount of sales and it was sort of all in the beginning of the quarter. I can get back to you on the exact amount.

Okay, that would be great. And secondly, Michael, I'm just wondering, the weighted average yield quarter-over-quarter went from 11.3% to 11.1%. And there was very little portfolio activity, and yet the benchmark for your floating rate loans rose the previous quarter. So I'm kind of curious why the weighted average yield would have declined by 20 bps.

I have not done the calculus on that exactly. I would say this, as I referenced in our prepared remarks, the marketplace is incredibly competitive right now. There are not as many deals as there have been in the past and there's a lot of capital out there, so we are finding ourselves having to be really careful as we deploy capital. And the approach that we've taken, as we have always, is to make sure that we feel comfortable that our principal is saved. So I would expect if I went back and tried to do the math there, it's probably reflective of some of the newer deals that we booked have a tighter spread. And even though LIBOR has grown within that market or within this market, it's reflective of some of the new deals having tighter spread. Now if you look at that return profile overall, we feel pretty comfortable that, that's sustainable. Time will tell, but the thing that we do most importantly is just make sure that we feel like we're getting risk-adjusted returns that make sense. And with the SBIC program in particular, but just looking at our cost of capital, we can deploy money below that level and still make it very accretive to our shareholders.

Okay. And lastly, and I know I've asked you this before, PIK income is a little better than 10% of interest income. Is that still related to Easy Ice? And is there a point in time where you see them transitioning to cash payments?

That's a good question. I don't know the exact numbers, Casey, but I would tell you that the vast majority of the PIK income, and particularly in Q4, was related to Easy Ice. There are some other credits that have PIK income, but that's the outlier for sure. And the perspective that we have on Easy Ice, just so you know, is -- and we've communicated this before, we are really bullish on this business. You can see how well it's performed over time and continues to perform very well for us and our shareholders. If we were to dial back the PIK income and make more of that cash, it would take some capital away from the business, which would otherwise be used to grow the platform and grow the enterprise value of that company. And so our collective decision along with management is to structure the deal that way because it's certainly paid for our shareholders in spades. As it relates to the intention going forward, for the time being, that's the mix that we're focused on. The longer-range plan, but I wouldn't want to put any specific timeframe on it, is that as we continue to grow the platform and EBITDA grows, the expectation is that we would want to move to a stronger mix of cash versus PIK. But we wouldn't want to put a timeframe on that because we think it's a much better way to deploy our capital right now is to let that money go back into growth of the business.

Just one other little thing to add before -- and Henri is going to give you the exact number on the PIK, Casey, in addition, as Mike said, to providing more capital to the business, it also helps us manage the absolute cost of capital in the business because it allows our senior debt to be priced very favorably, us having this be PIK. I mean, we could have chosen to have more cash and our senior leverage would have been maybe a little lower and more highly priced. So there's also some economy to doing it. And as Mike has said, we're very comfortable about the coverage of the PIK earnings on Easy Ice.

Yes. And just to add some color on the numbers, Casey, so the nice thing is Easy Ice was outstanding now for the full fiscal year of '18. It's also a control investment, so it's pretty easy to pick it out sort of what proportion of our PIK is Easy Ice on both the face of our income statement. It's on the PIK control investment line. That's all Easy Ice. As well as in the schedule of investments, Easy Ice's PIK interest is broken out separately as well. And for the full year, it was about 8% of our interest income. More than 2/3, therefore, of the total PIK is Easy Ice. And so you sort of strip Easy Ice out, the remaining PIK interest of ours is around 3% now of our total interest income.

(Operator Instructions) The next question is from Christopher Testa of National Securities Corporation.

Just to start off, we'd just like your take on a few things regarding the ability for you guys to have reduced [asset] coverage starting next year. I just want to know, are you guys looking to do more lower middle market loans like you currently do that just don't fit because of the pricing on them? Or is this something where you've considered moving upmarket in terms of what you put on the balance sheet?

Well, I think that's a very good question, and that's something that obviously we talked about extensively with our independent directors before we elected to take this -- to make that election for the increased leverage. I think as we -- as one looks at our history, the bulk -- Henri, what percentage of our portfolio is SBIC?

It's probably about 65% now.

So about 65% of our portfolio is in our SBIC. And our SBIC has been operating with a 2:1 leverage metric since its inception, so we've been doing that for over 6 years now. So our origination effort, our underwriting, our management, the companies we invest in, has been very much driven by the kind of filler SBIC portfolio because that's most favorable cost of financing and it shows a lot of very attractive things. So we have been operating our company on a 2:1 metric for years. And so going to this 2:1 across the entire BDC doesn't change very much what we're doing. It's really just more. And it allows us at the BDC level, if you view the BDC as the parent to the SBIC, it just allows us to do more deals at the 2:1 leverage at the BDC level and the same kind of deals and the same nature of investing as we've been doing at the SBIC level. The cost of financing might be slightly different because the funding mechanisms at the BDC are different than the SBIC. So essentially, we will be pursuing business as usual in terms of our origination efforts and the types of investments we make.

Okay. Got it. That's great color, Chris. And also just sticking with the 2:1 leverage, would you guys -- have you guys discussed internally and is there an inclination on your behalf to potentially scale management fees lower as the balance sheet leverage increases?

That's not something that has come up in our discussions or our plans.

Got it. Okay. And should we be expecting maybe less ATM usage even if you guys are above now as you're able to increase the balance sheet leverage and improve your ROEs even more?

Well, I don't know if we're getting to our forward-looking statement or not in terms of our intentions. I think we'd be careful about that. I think the stated policy of our ATM is to sell -- to raise equity capital as when available at favorable prices above NAV. I think as we've talked about in this call and historically, our objective is to continuously grow our total portfolio and assets under management. And obviously, we have the ability to increase leverage, but we also want to grow and be prudently financed throughout our opportunity set that lies ahead of us. And equity is clearly an important building block in our capital structure. So much like -- I think, what this -- the way we're looking at this 2 to 1 leverage at the BDC level is it just opened up more capital-raising alternatives for the company, which we think is very favorable for us. And so it allows us to look at many different types of products and approaches on the debt side as well as on the equity side. And what we will do is we will try and optimize our choices depending on what the markets ahead present. There may be times where debt is more favorable to raise, and there may be times when equity is more favorable. And we will make our decisions accordingly and always with the objective of what we've done historically, which is continuous, steady, well-considered asset growth.

I think this past year, actually, Chris, is just a great example of that, how strong underwriting can really drive strong performance. I mean, this is the year in which we raised $8 million of equity and we've posted probably our highest return on equity yet.

Okay, great. And just with the dividend, obviously, congratulations on another sequential increase. You guys have been doing that for quite some time. The earnings are, of course, a bit lumpy, and they are, with a lot of your peers, due to the OID acceleration season whatnot. Just wondering, how are you looking at the dividend going forward? And are you looking to continually stair-step this up? Or is there a point where you take a pause because you don't want to risk underearning, and then in the event fee income comes in lighter, the balance sheet becomes underlevered if there's not enough attractive investment opportunities for you?

Well, I think the last few part -- the last things you said in the last part of your question are things we consider all the time, right? We absolutely want to make sure that we're never in a position where we have to move backwards on our dividend. And so we would look at this very carefully, and we do not want to get ahead of ourselves and in a position where we're squeezed. And so I think our raises historically, we have been -- we'll be careful about talking about the future, but I think if you look at our policy historically is we've -- over the past, we've raised it quite rapidly in the beginning, and then more recently we have been fairly measured in our increases. And that has been reflective of us -- I mean, if you look at the amount by which we've been overearning our dividends on a trend line basis, recognizing what you said, absolutely, earnings can be lumpy, but if you look on a trend line basis, we've had a pretty good cushion above our payouts. And you can also notice that, I mean, in prior years, we had special dividends to cover our RIC requirements. And I think now we've gotten ourselves into a position where we're not paying special dividends, and so we're getting into a balance between our RIC requirements and what our dividend is. And so I guess, we can't give you a concise, precise answer on what we plan to do next quarter or the quarter after because we analyze those things at the moment and at the time. But I think if you look at the way we've done it historically, we've tried to be prudent and not get in a position where we're overextending ourselves. And again, our management's total desire is to never have to backtrack on our dividend.

Yes, got it. Okay. And you guys have mentioned that the CLO is -- the reinvestment period ends relatively soon. Just wondering if there's an inclination on your behalf to do a reset on that.

Again, I think if you look in the past, we've reset it twice, and at each reset, it's kind of like a refinancing, a refi of the CLO. And a lot of new CLOs have a 4-year investment period, and we've elected to go with 2-year investment periods because we felt that the overall pricing made us more competitive at a 2-year investment period. And so it has been -- the CLO has been a terrific performer for us, and we would like to keep it healthy and moving forward and part of our portfolio in the future. Obviously, we are subject to market -- the market environment as to what the terms and pricing are, and then we have to make decisions at the time when that's available.

Got it. And given that you guys have the experience with the CLO and risk retention seems just about dead per the decision from the appellate court the other month, I'm just wondering if you guys are considering securitization as another part of the financing flexibility that you were discussing with regards to the increased leverage?

I think that's a very interesting approach. As we've discussed earlier, we're just into this new era, if you will, of BDC finance, and all approaches to financing are open to us. In fact, we've had meetings on it. We have maybe a much longer list that we used to have in terms of how to go about our financing going forward, and that's certainly on that list.

Okay, got it. And last one for me, if I may. Just, Henri, how much acceleration or an amortized OID was there during the quarter?

I think between the acceleration of OID and the prepayment penalties, of the 2 sort of factors that I mentioned, it was about between $0.03 and $0.04.

This concludes the Q&A session. I'd like to turn the call back over to Christian Oberbeck for closing remarks.

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

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Everyone, have a great day.