Saratoga Investment Corp (SAR) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.'s Fiscal First Quarter 2019 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. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal First Quarter 2019 Earnings Conference Call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law.

Today, we will be referencing a presentation during our call. You can find our fiscal first quarter 2019 shareholder presentation in the Events and Presentation 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 July 18. 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 look back at this most recent fiscal quarter, we're pleased to note the continued progress in credit quality, growth and earnings as well as maintaining our outperformance within the BDC sector.

Our flexible capital structure and diversified sources of cost-effective liquidity continue to support our robust pipeline of available deal sources, growing assets and greater scale. While a challenging and competitive environment persists, our originations and credit quality remain strong. Within this environment, 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 competition, generating meaningful and consistent returns for our shareholders.

To briefly recap the past quarter on Slide 2. First, we continue to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 99.3% of our loan investments having our highest rating, our strongest level yet, generating a return on equity of 14.9% on a trailing 12-month basis, up from 7.1% last year and beating the BDC industry mean of 8.9% and maintaining a gross unlevered IRR of 13.8% on our total unrealized portfolio, with gross unlevered IRR of 13.4% on total realizations of $299 million.

Second, we expanded our assets under management to $343.4 million, an increase from $342.7 million as of last quarter and from $329.7 million as of the same time last year. Taking a longer-term perspective, our current AUM reflects a 328% increase from $80 million at the end of fiscal year 2011. This quarter continues to demonstrate the success of our growing origination platform with a healthy $35 million of originations. Although our repayments equaled our originations, the repayments substantially consisted of exits from nonaccrual or lower-yielding investments, leading to a healthier redeployment of this cash. In addition, we closed 3 new portfolio investments this quarter.

Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the 15th consecutive quarter. We paid a quarterly dividend of $0.51 per share for the first quarter of 2019 on June 27, 2018. This was an increase of $0.01 per share over the past quarter's dividend of $0.50 per share. All of our dividend payments have been exceeded by our adjusted net investment income for the same periods. And as of quarter end, we were comfortably over earning our dividend by 18%, which distinguishes us from most other BDCs. We are also 1 of only 7 BDCs having increased dividends over the past year. And finally, our base of liquidity remains strong and continues to improve.

Just this morning, we priced a public offering of 1,150,000 shares at a price of $25, which is at a premium of 8.4% to our NAV per share as of quarter end. The proceeds from this offering, net of underwriting commission and transaction costs, is estimated to be approximately $27.2 million. We also grant the underwriters a 30-day option to purchase up an additional 172,500 shares of our common stock.

We intend to use substantially all the net proceeds of this public offering to make investments in middle market companies in accordance with our investment objective and strategies and for general corporate purposes. We may also use a portion of the net proceeds to reduce our outstanding borrowings. If all these shares issued in last night's common offering were outstanding in Q1, we would have still over earned our dividend. Importantly, these share increases will increase our float by more than 43%, improving our trading liquidity for our investors. We did not issue any further stock on our ATM, either in or subsequent to our Q1.

This quarter saw continued strong performance within our key performance indicators as compared to the quarters ended February 28, 2018, and May 31, 2017. Our adjusted NII is $4 million this quarter, up 36% versus $2.9 million last year and up 6% versus $3.8 million last quarter. Our adjusted NII per share is $0.64 this quarter, up 28% from $0.50 last year and up 7% from $0.60 last quarter. Our latest 12-month return on equity is 14.9%, up from 7.1% last year and our NAV per share is $23.06, up 6% from $21.69 last year and up from $22.96 last quarter. Henri will provide more detail later.

Overall, we remain pleased with these accomplishments, our progress and our performance. As we've often mentioned in the past, we remain committed to further advancing the overall long-term size of our asset base while maintaining its high credit quality. As you can see on Slide 3, our assets under management have steadily risen since 2011, and the quality of our credit is at its highest level yet. We look forward to continuing this positive long-term 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 May 31, 2018. Across all these metrics, you can see the positive impact of increased assets and improved credit quality on our results. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $4.0 million was up 6.1% from $3.8 million last quarter and up 55.9% from $2.9 million as compared to last quarter's Q1.

Adjusted NII per share was $0.64, up $0.14 from $0.50 per share last year and up $0.04 from $0.60 per share last quarter. The increase from last quarter -- sorry, from last year, primarily reflects our higher level of investments and results in higher interest income for our full quarter, with AUM up 4% from last year and the available cash as of May 31, 2007 (sic) [2017], that was already accruing interest expense, now partially deployed.

The sequential quarterly increase was primarily due to increased interest income as our nonaccrual Taco Mac investment and certain lower-yielding assets were redeployed into new investments, including 3 new portfolio companies. Adjusted NII yield was 11.1% when adjusted for the incentive fee accrual. This yield is up 190 basis points from 9.2% last year and up 40 basis points from 10.7% last quarter.

For this first quarter, we experienced a net loss on investments of $0.1 million or $0.01 per weighted average share, resulting in a total increase in net assets resulting from operations of $3.8 million or $0.61 per share. This $0.1 million net loss on investments was comprised of $0.2 million in net realized gain on investments and $0.6 million in net unrealized appreciation on investments, offset by $0.9 million of net deferred tax expense on unrealized gains in our Saratoga Investment's block of subsidiaries. The $0.6 million unrealized depreciation includes $0.8 million unrealized depreciation on Saratoga Investment's Easy Ice investment.

Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains. Our return on equity was 14.9% for the last 12 months, up from 7.1% last year and is well above the BDC industry average of 8.9%.

Quickly touching on expenses. Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees, increased to $1.2 million this quarter from $1.1 million in the same period last year, reflecting higher broken deal fees and administrative expenses this quarter as well as higher professional fees due to increased Sarbanes-Oxley activities, now that the company qualifies as an accelerated filer. Despite this, expenses remained unchanged as a percentage of average total assets at 1.4%.

We have also, again, added the KPI slides starting from Slide 28 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 9 quarters and the upward trends we have maintained. A particular note is Slide 31, highlighting how our net interest margin run rate has tripled since Saratoga took over management of the BDC.

Moving on to Slide 5. NAV this quarter was $144.8 million as of this quarter end, a $1.1 million increase from NAV of $143.7 million at year-end and a $17.2 million increase from NAV of $127.6 million as of the same quarter last year. NAV per share was $23.06 as of quarter end, up from $22.96 as of year-end, and up from $21.69 as of the same period last year.

For the 3 months ended this quarter, $3.9 million of net investment income, $0.2 million of net realized gains and $0.6 million of net unrealized appreciation were earned, partially offset by $0.9 million deferred tax expense on net unrealized gains in Saratoga Investment's block of subsidiaries and $3.1 million of dividends declared.

In addition, $0.5 million of stock dividend distributions were made through the company's DRIP plan. No shares were sold through the ATM equity offering during the quarter. Our net asset value has steadily increased since 2011 and we continue to benefit from a history of consistent realized gains.

On Slide 6, you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis. Starting at the top, NII per share increased from $0.60 per share at Q4 to $0.64 per share at Q1. The significant changes were a $0.04 increase in total interest income, reflecting the redeployment of some nonaccrual and lower yielding assets into new investments and a $0.01 increase in CLO incentive fee income. These increases were offset by a $0.01 reduction in other income and all changes are shown net of incentive fees.

Moving on to the lower half of the slide, this reconciles the NAV per share increase from $22.96 at year-end to $23.06 for this quarter. The $0.63 generated by our NII for the quarter and $0.14 net appreciation on investments was offset primarily by the $0.50 dividend declared for Q4, with a Q1 record date, and a $0.15 cumulative recognition of GAAP deferred tax expense as previously mentioned. During this quarter, we also adopted the new revenue recognition standard ASC 606, which impacted the timing of our CLO incentive fee accrual and we issued shares under our DRIP program, both of which reduced NAV by $0.01.

Slide 7 outlines the dry powder available to us as of May 31, 2018, which totaled $71.0 million. This was spread between our various sources of available cash, undrawn SBA debentures and undrawn Madison facility. As Chris mentioned earlier, we completed a public offering of common stock last night, receiving net proceeds of approximately $27.2 million. Following various post-quarter investments and draws, as well as the proceeds received from this offering, our available liquidity remains relatively similar from where it was at the end of Q1.

We remain very pleased with our liquidity position, especially taking into account the overall conservative nature of our balance sheet and the fact that all our debt is long term in nature, actually, all 5 years plus. For the most part, we have also primarily fixed our interest cost in this rising rate environment, with all our borrowings, except our Madison facility, being fixed rate.

Now moving across to the asset side of our balance sheet on Slide 8. Over 81% of our interest-earning investments have floating rates. And although they have LIBOR floors, we are through all of them, which means we remain a big beneficiary of rising short-term rates. Assuming that our investments as of May 31, 2018, were to remain constant for a full fiscal quarter and no actions were taken to alter the existing interest rate terms, a hypothetical increase of 100 basis points in interest rate will increase our interest income by approximately $0.6 million per quarter. This is all incremental to our existing earnings without any other changes.

Now I would like to move on to Slides 9 through 11 and review the composition and yield of our investment portfolio. Slide 9 shows that our composition and weighted average current yields remain consistent with the past, with $343 million invested in 52 portfolio companies and 1 CLO fund and 57% of our investments in first lien.

On Slide 10, 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 relatively consistent in the 11% range for the past several years, despite high levels of repayments and the continued replacement of these assets. This quarter, our overall yield increased slightly to 11.3%, with core asset yields increasing from 11.2% to 11.3% and our CLO increasing to 23.2%. This primarily reflects the increased 1 month and 3 months LIBOR rates offset by

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our last investments in our syndicated assets category were repaid this quarter.

Turning to Slide 11. During the first fiscal quarter, we made investments of $55.2 million in 3 new portfolio companies and 3 follow-ons and have $56.5 million in 4 exits plus amortization, resulting in a net decrease in investments of $1.3 million for the quarter. 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, health care and education services. We continue to have no direct exposure to the oil and gas industry.

Of our total investment portfolio, 9.3% consists of equity interest, which remained an important part of our overall investment strategy. In Q1, we have net realized gains of $212,000. For the past 6 fiscal years, including Q1, we had a combined $12.0 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality, has helped grow our NAV and is reflected in our healthy long-term ROE.

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'll take a couple of minutes to describe the current market as we see it, and then I'll comment on our portfolio performance and investment strategy. The market's extremely competitive conditions have remained challenging since our last call in May. Slide 13 indicates a continued downward trend in the number of transactions per deal sizes in the U.S. below $25 million.

As we have seen in past periods of sustained economic growth, spreads have narrowed and competition is significant. This reality reflects the broad capital markets trend of an overabundance of liquidity, due in part to continued fund formation. Not surprisingly in this environment, terms remain borrower-friendly. Thankfully, the LIBOR continued to increase again this past quarter and provided some counterbalance to spread compression.

We continue to believe the lower middle market, our target market segment, is the most attractive part of the market to deploy capital. The sheer number of companies at this end of the marketplace and our experience there allows us to sift through and find transactions that we believe are most likely to deliver the best risk-adjusted returns to our shareholders, regardless of market dynamics.

Now on Slide 14, you can see that industry debt multiples remain extremely high as lenders continued to be aggressive in their pursuit of putting money to work. As of March 31, 2018, average leverage multiples were above 4x. With this as a backdrop, we've been able to achieve our results while remaining a relatively modest risk profile.

Total leverage for the overall portfolio is 4.57x, up slightly from the previous quarter, reflecting primarily the repayment this quarter of numerous lower leverage deals. Nevertheless, we continue to focus our investing on credits with attractive risk-return profiles and [extrap] 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 over the long-term, despite difficult market dynamics. With 11 originations through the second calendar quarter, including 4 new portfolio companies and 7 follow-ons, we have established an origination level that is ahead of last year's record pace, while applying consistent investment criteria. We are also pleased to have closed investments in 2 further new portfolio companies in July, increasing our investments in new portfolio platforms to 6 for the past 2 months.

Although our healthy Q1 originations were offset by repayments, we redeployed our nonaccrual Taco Mac investment and lower-yielding syndicated loans into new investments, which will be accretive to our future earnings. We continue to emphasize that quarterly originations and repayments can be lumpy. Nonetheless, we remain confident that we can continue to grow our AUMs steadily over the long term and this quarter's originations, both size and nature, illustrate the health of our pipeline.

Having said that, we continue to believe successful investing rests on sound judgment

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Continuous discipline, taking one decision at a time and on a basis focused purely on credit quality. We do not waver on this critical criteria, which remains first and foremost in all decisions.

Now 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. As you can see on the slide, our number of deals 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, underscoring the importance of proprietary relationships in our deal sourcing, the rest come from private equity sponsors.

The chart also underscores our originations discipline. While the size of the funnel at the top has grown, increasing from 613 deals sourced in 2015 to 848 deals sourced in the last 12 months ended June 30, 2018, term sheets issued have not increased by the same percentage. In fact, due to inconsistent quality, we are looking at many more deals now in order to find a similar number of high-quality deals as we have in past years. It means we have to work harder to get the same outcome, something we recognize as the price of doing business in today's market.

Nevertheless, it's worth underscoring that no matter how many deals we see at the top, our overarching goal is to maintain the same high level of credit quality. Now especially noteworthy is that the strength of our pipeline has enabled us to close deals with 6 new portfolio companies in the past 2 months, giving further validation of our strengthening business development platform.

New portfolio companies have the added benefit of frequently serving as a foundation for future deal flow. With a measure of consistency, we have completed numerous follow-on investments supporting existing portfolio companies, such as Easy Ice, Identity Automation, CLEO, HMN, Vector, Nolan and many others, demonstrating our ability to deliver outsized returns to our shareholders by recognizing fundamental value in businesses and supporting their growth over time.

Our overall portfolio credit quality is strong and is even stronger when taking into account the assets originated by us since taking over the BDC management in 2010. As you can see on Slide 16, the gross unleveraged IRR on realized investments made by the Saratoga Investment management team is 13.9% on approximately $209 million invested in our SBIC, and 12.5% on approximately $90 million invested in the rest of our BDC. On a combined basis, the gross unlevered IRR is 13.4% on $299 million of realizations.

On the chart to the right, you can see that the total gross unlevered IRR on our $337 million of combined weighted SBIC and BDC unrealized investments is 13.8% since Saratoga took over management.

Slide 17 highlights that the mix of securities in our SBIC portfolio is conservative, with 53.4% of our investments comprised of senior debt, senior first lien investments. The leverage profile of these 21 investments remains relatively low at 4.44x, especially when compared to overall market leverage. Our favorable cost of capital from this program allows us to deliver highly accretive returns to our shareholders without stretching out on the risk spectrum.

Moving on to Slide 18, you can see our SBIC assets increased to $223.5 million as of quarter end, up from $217.1 million last quarter. As of quarter end, we had $19 million total available SBIC investment capacity including cash, of which $12 million was leverage capacity within our current SBIC license. This represented approximately 27% of our total available firm capacity as of quarter end. Now subsequent to quarter end, we drew our remaining debentures to fund new investments.

Overall, this quarter's operating results demonstrate the growing strength of our sourcing and origination capabilities, leading to a growing base of high-quality assets over the long term. High-quality growth continues to come from both new platforms as well as follow-ons. Producing these results has required us to remain extremely diligent in our overall underwriting and due diligence procedures, culminating in high-quality asset selection within a tough market. Credit quality remains our top focus and we remain committed to this approach.

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 19, following our most recent increase to our first quarter dividend at $2.51, our quarterly cash dividend payment program has grown by 183% since the program launched. This represents 15 sequential quarters of dividend increases. Despite these consistent increases, as of quarter end, we were over earning our dividend by 18%, giving us one of the higher dividend coverages in the BDC industry. If all the shares from last night's common stock offering was outstanding in Q1, we would still be overearning our dividend this quarter.

As you can see on Slide 20, we've had an 8.5% year-over-year dividend growth, which easily places us near the very top of our peers, and 1 of only 7 BDCs have 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 directly comparable. We have now had 15 sequential quarters of dividend increases, while most BDCs have either had no increases or decrease the size of their dividend payments. We believe our continually increased dividend has truly differentiated us within the marketplace. We also continue to see Saratoga outperform the industry.

Moving to Slide 21, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of more than 25%, significantly beating the BDC index of 0%. And when viewed over a longer time horizon, as you can see on Slide 22, which is when we took over the management of the BDC, our 3- and 5-year return places us in the top 2 of all BDCs for both time horizons. Over the past 3 years, our 92% return exceeded the 19% return of the index. And alternatively, as compared with when our management team became the investment manager of the BDC 8 years ago, our 381% return exceeded the index's 103% return.

On Slide 23, you can further see our outperformance placed in the context of the broader industry and specific to certain key performance metrics. We continue to achieve high marks across diverse categories, including interest yield on the portfolio, latest 12 months NII yield, latest 12 months return on equity, dividend coverage, year-over-year dividend growth, net asset value per share and investment capacity.

Of note is that as our assets have grown and we're starting to reach scale, our expense ratio is moving closer to the industry averages, while we're outperforming the industry in most other metrics. We continue to emphasize our latest 12-months return on equity and NAV per share outperformance, which reflects the growing value our shareholders are receiving.

Moving on to Slide 24. All of our initiatives that 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 maintained that our differentiated characteristics, outlined in 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

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At 24%, a strong and growing dividend overearning our adjusted latest 12 months NII by 18% as of quarter end, and continuing to overearn at post-equity raise, strong long-term 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. Our high credit quality portfolio contains minimal exposure to cyclical industries, including oil and gas industry. With this overall performance, Saratoga Investment has achieved recognition among the premier BDCs in the marketplace. Last night's equity offering further supports this belief.

Finally, looking at Slide 25, we've accomplished a lot this quarter 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. Executing on our simple and consistent objectives should result in our continued industry leadership in shareholder total return performance.

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

(Operator Instructions) Our first question is from Mickey Schleien from Ladenburg.

My question is about the developing trade war with more news about that this morning. It seems, obviously, to be gaining some traction, so those tariffs may actually end up sticking. I'd like to understand how you are positioning the portfolio in terms of your investment strategy with those developments in mind?

Well, that's obviously a very good and very complex question because I think the implications of these tariffs are sort of yet to be seen and the supply chains that they're going to affect are kind of opaque right now. Not everyone knows exactly the consequences of all of this. I would like to say though, I think, that we, as an investment organization, given where we focus on a very smaller -- the smaller side of the middle market, the type of companies that we're investing in are largely domestic oriented, not as much export or import oriented. We have a lot of business services, software as a services companies. So what we seek in our investments -- our investments that aren't cyclical and have their own niches, and so we believe that our portfolio right now is reasonably positioned for problems from the trade issues and even if we had economic issues more broadly, and that's kind of our approach to investments. We're not macroeconomists, not trained in that, and what we try to do is find companies that kind of will disperse power through whatever environment we're in based on the internal dynamics in their marketplaces. And so we feel very comfortable with our portfolio as it stands right now in really almost any circumstance that we can foresee. But the exact implications of a potential trade war are kind of hard for us to dimension right now and we also believe our portfolio, being domestically focused and with the strength of the U.S. economy in general and the strength of the markets they're operating in, we don't perceive that as a substantial risk.

Our next question is from Jim Hayes from B. Riley FBR.

Can you just help us size how much spreads have come in over the past couple of quarters and the impacts that spread compression would have had on yield this quarter if not for the benefit of higher LIBOR and redeploying those proceeds?

That's a good question. And the reason I'm hesitating is, just to give you a sense, as we negotiate our deals, each one of these deals is a primary originated transaction, less dependent on the capital market. So when we look at larger market deals, that end of the market is very fluid and I could probably tell you week to week where spreads are going. But in our market where we operate, certainly we feel the pressure of narrowing spreads, but it's not a week to week thing. It's just more general competitive dynamics. And each of the deals that we do are so different that it's really hard to say how much directly spreads are being affected. But if you push me to an answer, it's probably 25 basis points, something in that range, that spreads have been tightening and that's really over, say, the last 6 months. But again, each deal that we do is so different. Some of them are -- the variation in how we price our deals can be several hundred basis points, just depending on where we think the risk profile is of the business.

Got it. That's helpful. And then repayment activity was fairly high this quarter, just wondering how much of an impact fees and accelerated OID amortization had on earnings this quarter?

It's actually -- it had a lesser impact this quarter than it did last quarter. So if you recall, we noted that last quarter the sort of the prepayment and OID acceleration was around $0.04 impact. This quarter it had a $0.03 impact, so actually, slightly less.

Got it. Okay. And clearly, you're focused on growth at this point. Just wondering, you touched on some of the expense line items, if there's any near intermediate-term focus on managing the expense base or should we just kind of continue that to grow as you continue to scale?

No. Tim, I think we view our expense base, and I'm assuming you're referring to our sort of operating expenses, we view that as a relatively fixed. We are, obviously, sensitive to sort of quarterly spikes. For example, when -- the stock's implementation now has had a little bit of a spike and if we, perhaps, have a broken deal fee like we did this quarter, that could spike expenses a little. But I think from an overall run rate, we view this as a pretty good level and that, generally, our expenses are relatively fixed and do not move in line with increased assets.

Our next question is from Christopher Testa from National Securities.

Just on Easy Ice, I know it's been a while since you guys picked a bunch of the interest to let Easy Ice improve their cash flow position and help them expand further. Just curious if you could just comment a bit on how they've been expanding and growing and whether or not you guys are looking at any point in the near future where you may go back to getting more cash interest from Easy Ice?

Let me take that. Easy Ice continues to perform very well, and I think as we've referenced in the past, we look at that business and to the extent that we can pick some of our interest on our second lien notes and allow the business to redeploy that capital into growth and that's accretive to our equity investment, that's something that we plan to do. And that's evidenced in the valuation this last quarter, where we continued to pick the second lien and capitalize that component of the interest there. But also, the value of the business, we believe, continues to grow as well and we're not changing the fundamentals of how we're valuing the business. The increase in the equity value that you saw in this most recent quarter is reflective in just growth in cash flow of the business.

Got it. Okay. That's good color, Mike. And looking at, obviously, you guys did the stock offering last night and your total debt to equity is pretty much under 1.5x. I know you guys received the board approval in April to go to 2 to 1. Just curious, obviously, you have the ATM to issue on a flow basis and keep leverage down, but should we expect you guys scaling back on kind of ATM issuance and potentially maybe either upsizing the revolver or doing another note issuance, perhaps, in a quarter or 2 in anticipation of having the higher available leverage?

A couple of comments on that. I guess, first of all this recent equity offering, we're very pleased to have accomplished and we think that the pricing and it being accretive on an NAV basis to all shareholders, we think is very favorable. We think the size of this offering is very much in stride with our growth and our growth trajectory. And as we have in the past, we've layered on baby bond offerings to our equity base, we retained earnings, et cetera. And so the answer is, yes, we would anticipate doing some further financing as we move throughout the year. But again, on a measured kind of way and in stride, much like this offering is, based on what we foresee as a growth in our portfolio. The other dimension that we need to consider is favorability of market conditions. And as you well know, in raising capital, if you have favorable market conditions, it makes sense to avail yourself of some of them because things can change as we all know. Our recent equity offering puts us, capitalization-wise, in a very good position relative to an additional baby bond issuance in terms of all the ratios, et cetera, and so that's something we're absolutely ready to consider. With regard to the ATM, I think that's an important tool of ours. We have just completed an offering and so there's a certain agreed period of time that the ATM will not be in effect, certainly, for that time. And then thereafter, again, it would be something that we would look at on a market condition basis and relative to what our portfolio growth profile is. And I would just point out that in the last quarter, we didn't do any ATM issuances. So we're trying to be as judicious as we can in terms of how and when we raise our capital, but also taking advantage

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And really just trying tune everything to supporting our growth without having much of a lag or much of excess capital on our books. I think, importantly, we said a number of times in our prepared remarks, this -- if 100% of these shares are outstanding, we would still be overearning our dividend. And clearly, the protection of our dividend and our earnings relative to our dividend ranks very highly in how we look at all of our capital raising.

Okay. That's really good detail, Chris. And we do appreciate the color you guys provide on your presentation on deal multiples and what you're seeing in the market and it seems like, obviously, there's more deals being done at plus 6x EBITDA. Obviously, we've seen a major deterioration in terms and docs from the upper middle market and broadly syndicated market. How much are you starting to see that kind of creep into your part of the sandbox and where you guys are looking? Or have there been significant EBITDA add-backs and adjustments in pari-passu debt? Is this something that you're running into or is that still more confined to the larger borrowers?

By and large, that's confined to the larger borrowers. But certainly, some of those more aggressive terms pop up in deals now and again. And that's why we spend a lot of time in the prepared marks talking about -- our response to that is just to make sure that we're scouring the marketplace trying to find as many deal opportunities as we can where we're not facing some of those dynamics. But by and large, in the lower end of the middle market, you don't see as much of those aggressive terms. I think if you look at the deals that we've closed, we referenced 6 deals in the last couple of months and 4 of those deals were post end of the quarter. The ones that we closed even since the end of the quarter are all first lien securities and deals that -- a couple of them were sponsored deals, a couple of them were more proprietary in nature, relationships that we had built through our own business development efforts. And in those types of opportunities, we generally don't face those dynamics.

Okay. All right. That's fair. And sticking with reading things from more of the larger market, there's been kind of a pickup in new money and sort of organic growth in M&A in the past couple of months. Is that something that you guys have seen and have been encouraged by in the lower middle market as well?

There tends to be a lag, and the deals that we see and do don't flow the same way that the larger market is. But having said that, it does feel like there's more activity in the marketplace. That's -- our general sense as we're getting potential deal opportunities across our desk, but we're really aiming at trying to find more of our own proprietary opportunities and building relationships that way.

I mean, I think, to quote Alan Greenspan from years ago, I mean, yes, there's definitely little more animal spirits in the system. There seems to be a little more confidence. Add-ons are coming a little more frequently inside of our portfolio. So we do feel encouraged by -- sort of the confidence levels that we're seeing from our portfolio of companies.

At this time, I'm showing no further questions. I would like to turn the call back over the Christian Oberbeck for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.