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Edited Transcript of SAR earnings conference call or presentation 10-Oct-19 2:00pm GMT

Q2 2020 Saratoga Investment Corp Earnings Call

NEW YORK Oct 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Saratoga Investment Corp earnings conference call or presentation Thursday, October 10, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian L. Oberbeck

Saratoga Investment Corp. - Chairman & CEO

* Henri J. Steenkamp

Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO

* Michael J. Grisius

Saratoga Investment Corp. - President & Director

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Conference Call Participants

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* Benjamin Ira Zucker

Aegis Capital Corporation, Research Division - Analyst

* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Mitchel Stuart Penn

Janney Montgomery Scott LLC, Research Division - MD of BDCs

* Timothy Paul Hayes

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentleman, thank you for standing by. Welcome to the Saratoga Investment Corp. Fiscal Second Quarter 2020 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.

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [2]

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Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal second quarter 2020 earnings conference call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law.

Today, we will be referencing a presentation during our call. You can find our Fiscal Second Quarter 2020 Shareholder Presentation in the Events & 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 p.m. today through October 17. 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.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [3]

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Thank you, Henri, and welcome, everyone. This second fiscal quarter has been a particularly strong and important one for us, with many significant accomplishments. All of this quarter's achievements will support our efforts to build upon our industry leadership within the BDC sector and grow our high quality portfolio, utilizing our strength in capital and liquidity base. While a challenging and competitive environment persists, our origination efforts combined with our flexible capital solutions and diversified sources of cost-effective liquidity continue to support our robust pipeline of available deal sources driving greater scale.

To briefly recap this past quarter's highlights on Slide 2, first, we received approval for a second SBIC license, providing us access up to $175 million in additional long-term cost-effective capital in the form of SBA debentures to further enable us to support our core small-business constituency.

Second, we continued to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 99% of our loan investments having our highest rating. Generating a return on equity of 14.3% on a trailing 12-month basis, 14.7% annualized in Q2, both significantly beating the BDC industry mean of 8.7%. Increasing NAV by a net $2.6 million realized and unrealized gain in this quarter and registering a gross unlevered IRR of 13.5% on our total unrealized portfolio and a gross unlevered IRR of 14% on total realizations to date of $393 million.

Third, our assets under management grew to $487 million this quarter, a 19% increase from $410 million as of last quarter and a 24% increase from $393 million as of the same time last year. This quarter continues to demonstrate the success of our growing origination platform with a healthy $93 million of originations. This -- importantly, our new originations included 4 new portfolio company investments, with 2 more closed since quarter end, and 8 in total since year-end.

Fourth, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the 20th consecutive quarter, representing 5 consecutive years of dividend increases. We're one of only 2 BDCs that have achieved that record. We paid a quarterly dividend of $0.56 per share for the second fiscal quarter on September 26, 2019. This was an increase of $0.01 per share over the past quarter's dividend of $0.55 per share. All of our dividend payments have been exceeded by our adjusted net investment income for the same periods. We're one of only 8 BDCs having increased dividends over the past year.

And finally, as we look to the future, our capital structure and base of liquidity increased and strengthened meaningfully in this quarter. In addition to the receipt of the SBIC license in August, with its long-term benefits and potential accretive returns, we also sold 1.4 million common shares with gross proceeds of $34.1 million to our ATM offering during the quarter. These shares were sold at a gross premium of 3.3%, resulting in a $0.06 accretion to NAV per share. Subsequent to quarter end, we sold another 543,000 shares with gross proceeds of $13.6 million also at a similar premium to NAV, for a total issuance of $47.7 million. These share issuances provide initial equity capitalization for our new SBIC subsidiary, while also funding further BDC asset growth. The total equity capitalization required for the second license is $87.5 million in order to access the $175 million of debentures, pursuant to a 2:1 debt-to-equity ratio. The most recent debenture pooling priced on September 17th at 2.283%, with added fees and expenses combining for an all-in rate of approximately 3% on recent SBIC debentures. We now have significantly increased dry powder to address future investment opportunities, the change in credit and pricing environment. Our existing available quarter-end liquidity of $244 million allows us to grow our current assets under management by 50% without any new external financing.

Saratoga delivered strong return-on-equity performance this quarter, and year-to-date as noted above, and continued solid performance within our key performance indicators as compared to the quarters ended August 31, 2018, and May 31, 2019. Our adjusted NII is $5.6 million this quarter, up 18% versus $4.8 million last year and up 22% versus $4.6 million last quarter. Our adjusted NII per share is $0.68 this quarter, down from $0.69 last year and up 13% from $0.60 last quarter. Our NAV per share is $24.47, up 6% from $23.16 last year and up 2% from $24.06 last quarter. Henri will provide more detail later.

As you can see on Slide 3, our assets under management have steadily risen since we took over management of the BDC more than 9 years ago, and the quality of our credits remains high. We are working diligently to continue this positive trend.

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

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [4]

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Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended August 31, 2019, when adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $5.6 million was up 22% from $4.6 million last quarter and up 18% from $4.8 million as compared to last year's Q2. Adjusted NII per share was $0.68, down $0.01 from $0.69 per share last year, but up $0.08 from $0.60 per share last quarter. The increase in adjusted NII from last year and last quarter primarily reflects the higher level of investments and results into higher interest income with AUM up 19% from last quarter and up 24% from last year.

The decrease in adjusted NII per share from last year was primarily due to a steady increase in the number of shares outstanding. Weighted average common shares outstanding increased from 6.9 million shares for the 3 months ended August 31, 2018, to 7.7 million shares and 8.3 million shares for the 3 months ended May 31, 2019, and August 31, 2019, respectively. Adjusted NII yield was 11.0% when adjusted for the incentive fee accrual. This yield is up 90 basis points from 10.1% last quarter and down 90 basis points from 11.9% last year, primarily reflecting the impact of our growing NAV and the effect of our currently undeployed capital, coupled with Q2 only reflecting the partial benefit of our new investments this quarter.

For the second quarter, we experienced a net gain on investments of $2.6 million or $0.31 per weighted average share, resulting in a total increase in net assets resulting from operations of $7.6 million or $0.91 per share. The $2.6 million net gain on investments was comprised of $1.9 million net realized gain and $1.5 million net unrealized depreciation on our portfolio investments, offset by $700,000 of net deferred tax expense on unrealized gains in Saratoga Investment's blocker subsidiaries. The $1.9 million net realized gain reflects a $1.3 million gain from the realization of the company's Fancy Chap investment during the quarter as well as a $0.6 million gain on the company's Censis Technologies investment, resulting from the receipt of a dividend in excess of the investments' cost basis.

The $1.5 million unrealized depreciation reflects multiple notable changes. First, a $1.3 million unrealized depreciation on the company's Censis Technologies investment; second, a $1.9 million unrealized depreciation on our Easy Ice investment; third, a $1.3 million unrealized depreciation on our Netreo Holdings investment; fourth, a $0.6 million unrealized depreciation on our GreyHeller investment; and also numerous smaller unrealized depreciations across the portfolio on various other investments. These depreciations were offset primarily by $1.2 million reversal of previously recognized appreciation, following the realization of the company's Fancy Chap investment, and a $2.7 million unrealized depreciation on the company's CLO equity investment, reflecting both the equity distribution received during the quarter as well as the impact of a 2% increase in the discount rate used to fair value this equity.

Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains. Our return on equity was 14.3% for the last 12 months and 14.7% annualized for the quarter, well above the BDC industry average of 8.7%.

Quickly touching on expenses. Total expenses, excluding interest and debt financing expenses and base and incentive management fees, increased to $1.0 million this quarter from $0.9 million in the same period last year. Excluding the deferred income tax benefits in both quarters, operating expenses increased 13.9% from $1.3 million to $1.4 million. Expenses increased as a percentage of average total assets from 0.9% to 1.0%. We have also again added the historical KPIs in slides 25 through 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. Of particular note is Slide 28, highlighting how our net interest margin run rate has more than tripled since Saratoga took over management of the BDC, with our current year run rate ahead of last year as well.

Moving on to Slide 5, NAV was $224.3 million as of this quarter end, a $43.4 million increase from $180.9 million at year-end and a $51.6 million increase from $172.7 million as of the same quarter last year. NAV per share was $24.47 at quarter end, up from $24.06 as of last quarter, up from $23.62 as of year-end and up from $23.16 as of the same period last year. NAV has not only increased in total dollars, we have now had 3 sequential quarters of NAV per share increases and growth in 7 of the last 8 quarters, you can see this on the previously referenced Slide 25.

For this past quarter, $5 million of net investment income and $3.3 million of net realized and unrealized depreciation were earned, partially offset by $4.3 million of dividends declared and $0.7 million deferred tax expense on net unrealized gains in Saratoga blocker subsidiaries. In addition, $0.7 million of stock dividend distributions were made through the company's DRIP plan and 1,371,666 shares were sold or a net $33.6 million raised through the company's ATM equity offering during the quarter. Our stock issuances during this quarter added $0.06 to our NAV per share. Our net asset value has steadily increased since 2011, reflecting our accretive stock issuances and the benefit of our history of consistent realized and unrealized 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 last quarter to $0.68 per share in Q2. The significant increases were a $0.01 increase in CLO interest income, a $0.10 increase in other income and a $0.04 increase in deferred tax benefit that is nonrecurring. These increases were offset by a $0.02 increase in base management fees, $0.01 increase in operating expenses and $0.04 dilution from increased shares from the ATM and DRIP programs.

Moving on to the lower half of the slide, this reconciles the $0.41 NAV per share increase for the quarter. The $0.59 generated by our NII in Q2, $0.51 (sic) [$0.31] net realized and unrealized gains on investments and $0.06 accretive net impact of our ATM and DRIP programs in Q2 were partially offset by the $0.55 dividend declared for Q1 with a Q2 record date.

Slide 7 outlines the dry powder available to us as of August 31, 2019, which totals $244.1 million. This consists of our available cash, our undrawn SBA debentures and our undrawn Madison facility. As Chris mentioned earlier, our recently approved second SBIC license has added $175 million to our dry powder in the form of undrawn SBA debentures. This significantly increases our available capacity, allowing us to grow our assets by an additional 50% without the need for external financing. The composition of this capacity is also more accretive to NII when deployed, with $24 million of it being cash with no additional interest expense attached, and $175 million of undrawn SBA debentures with a low 3% total cost of capital based on the current pricings. We remain extremely 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 4 years plus.

Now I'd like to move on to slides 8 through 10 and review the composition and yield of our investment portfolio. Starting with Slide 8, our $486 million of assets are invested in 36 portfolio companies and 1 CLO fund, and 63% of our investments are in first lien, of which 16% is in first lien last out positions.

On Slide 9, you can see how the yield on our core BDC assets, excluding our CLO and syndicated loans as well as our total assets yield, is now below 11% as LIBOR continues to decline and a buyer-friendly market continues to place downward pressure on yields. Our overall yield decreased to 10.1% from 10.6% last quarter due to core asset yields decreasing from 10.8% to 10.4% and our CLO yield decreasing from 16.0% to 14.7%. These changes in the core asset yield primarily reflects the 36 basis points reduction in LIBOR here in Q2, while the reduction of the weighted average effective interest rate generated by the CLO valuation is driven by the 2% discount rate increase also this quarter.

Turning to Slide 10. During the second fiscal quarter, we made investments of $93.2 million in 4 new portfolio companies and 6 follow-ons, and had $19.0 million in 1 exit and 1 refinancing plus amortization, resulting in a net increase in investments of $74.2 million for the quarter. Our investments remain highly diversified by type as well as in terms of geography and industry, spread over 8 distinct industries with a large focus on business, health care and education services. We are often asked about the business services classification, as this category really represents investments in companies that provide specific services to other businesses across a wide variety of industries. As of quarter end, the business services classification currently includes investments in 20 different companies whose services range broadly from education to financial advisory, to IT management, to restaurants supply, to human resources and to many other services, 15 in total. This breakdown is provided in our featured presentation on our website.

Of our total investment portfolio, 9.2% consists of equity increase, which remain an important part of our overall investment strategy. We had net realized gains during Q2 of $1.9 million as previously described. For the past 7 fiscal years, as you can see on Slide 11, including the first half of fiscal 2020, we had a combined $18.6 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. As a reminder, for tax purposes we continue to have unused capital loss carryforwards that were carried over from when Saratoga took over management of the BDC, resulting in these gains being fully accretive to NAV. This consistent performance highlights 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.

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [5]

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

The highly competitive landscape that I have described in past calls has continued to intensify. Deal activity is healthy, as evidenced this quarter, and our pipeline remains robust. But the underlying borrower-friendly conditions dominating the market still persist. Generally, commercial banks and non-bank direct lenders are becoming more aggressive, exacerbating a supply and demand dynamic that tightens price and expands leverage tolerances. We continue to see no spread expansion and in fact, absolute yields continued to decline due to the impact of decreasing LIBOR with another 36 basis point reduction experienced this quarter. We have been reasonably successful in obtaining floors that reflect current market conditions on most of our new deals, which helps reduce the long-term impact of a decreasing rate environment. Overall, we have not sacrificed quality, but these dynamics have served to put downward pressure on yields, generally. In the face of this kind of market, we believe sticking to our strategy has and will continue to serve us best. Our approach has always been to underwrite each investment working directly with management and ownership to make a thorough assessment of the long-term strength of the company and its business model. With the possibility of a market downturn always in our minds, we seek to invest in durable businesses. We invest capital with the objective of producing the best risk-adjusted accretive returns for our shareholders over the long term. Having a record originations quarter does not mean that approach has changed in the least, nor has there been a change to our credit profile. In fact, our first-lien proportions of investments this quarter actually increased to 63% from 54% in Q1, through a healthy combination of new platform companies and follow-ons. And our internal credit quality rating hit 99% for the first time. We believe this approach has contributed to our successful returns and has also positioned us well for any future market downturns. With net portfolio appreciation of $3.3 million in Q2 and $7.3 million year-to-date, we are also pleased with how our overall portfolio is performing. We believe this reflects the strength of our underwriting approach, team and portfolio and the quality of opportunities that exist in our market.

Now looking at leverage on Slide 12, total leverage for the overall portfolio was 4.89x, up slightly from the previous quarter, but below average. Year-to-date market leverage multiples, which are all well-above 5x across our industry. The increase was primarily due to slightly higher leverage of portfolio companies in which we completed follow-ons this quarter. We have been able to maintain a relatively modest risk profile and the new portfolio company investments this quarter have generally been in line with or below our historical average leverage. As we frequently highlight, rather than just considering leverage, our focus remains 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 investment.

While absolute leverage metrics are an important consideration, we always evaluate leverage relative to the strength of the underlying business. For example, we have developed an expertise in lending to businesses that deliver their services through a software platform. Our investments in this space span a widely diverse set of industries including education, health care, insurance services, board governance, hospitality, payroll services and many others. Good businesses utilizing a software-as-a-service platform can have terrific credit characteristics with exceptional recurring revenue, customer retention and gross margins. As a result, the valuations for these businesses are high and the corresponding debt multiples are also higher than average. These businesses are typically valued and our underwriting is performed in part on a recurring revenue basis. Because the credit profiles of some of these businesses are so strong, we believe we can achieve attractive risk-adjusted returns lending to good businesses of this type. In fact, the average loan-to-enterprise value of these portfolio investments is considerably lower than the rest of our portfolio. In addition, this slide illustrates our consistent ability to generate new investments over the long term, despite difficult market dynamics. With 19 originations through the third quarter, including 5 new portfolio companies and 5 follow-ons in this quarter alone, we have established an origination level that is on par with last year's record pace, while applying consistent investment criteria. We always emphasized that quarterly portfolio growth can be lumpy from one quarter to the next and is dependent on various factors, including a robust pipeline, credit quality within that pipeline and the pace of repayments. This past quarter was a perfect example as we benefited from all 3 of the above factors and saw a big jump in AUM. We continue to focus on the longer term and remain confident that we can continue to grow our AUM steadily over the long term, supported by a healthy pipeline as demonstrated on Slide 13.

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. Our number of deals sourced continues to increase, despite a market that is competitive and frothy. Notably, 25% of term sheets issued in 2 of our new portfolio companies over the past 12 months are from newly formed relationships, reflecting solid progress as we expand our business development efforts. The breadth of our deal funnel also evidences how we continue to maintain our investment discipline. We say no to a lot of deals, but maintaining discipline is ingrained in our culture and we will continue to say no if opportunities do not fit our credit profile. We know this is how we will preserve and grow the enterprise value of Saratoga for our shareholders.

Our overall portfolio credit quality remains strong with Q2 again demonstrating this. As you can see on Slide 14, the gross unlevered IRR on the realized investments made by the Saratoga Investment management team is 14% on approximately $393 million of realizations. On the repayments in Q2, the weighted average unlevered IRR is just over 77%, with our Fancy Chap investment being outstanding for a very short period of time before realizing the $1.3 million gain. On the chart to the right, you can also see that gross unlevered IRR on our $476 million of combined weighted SBIC and BDC unrealized investments is 13.5% since Saratoga took over management.

We also previously highlighted that our Roscoe Medical second-lien investment was on nonaccrual. Our total investment comprises the $4.2 million second lien that has been marked down a further $0.5 million to a fair value of $1.9 million this quarter as well as an equity investment of $0.5 million that has previously been written down to 0. There is no real update since we last reported, these marks reflect both fundamental weakened performance as well as operational issues. We continue to work with the senior lenders and sponsors to pursue strategic alternatives in the near to medium term. We also note that we have increased our Censis investment this quarter by $20 million. Having been a lender and investor in this company since 2014, we are extremely confident in the strength of the business and our upsized position in this credit. Censis is the leader in its growing end market and is led by exceptional management and equity sponsorship.

So this quarter is another good example of how a solid high-quality portfolio interacts as a whole. Our total realized and unrealized appreciation for the quarter was a net positive $3.3 million, which included significant value increases in our Censis Technologies, Easy Ice, Netreo Holdings and GreyHeller investments, among others, and more than offset notable unrealized depreciation in our CLO.

And moving on to Slide 15, you can see our first SBIC license is fully funded with $235 million invested as of the quarter end. This quarter, we received approval from the SBA for a second SBIC license. And as of quarter end, had already funded that with $35 million of equity, including assets, which allows us to access $70 million of SBA debentures. Overall, we feel the operating results of the quarter demonstrate the strength of our team, platform and portfolio, while we remain 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, 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 Chris.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [6]

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Thank you, Mike. As outlined on Slide 16, this past quarter, we again increased our dividend by $0.01 to $0.56, a 2% increase, the 20th sequential quarter of dividend increases, representing 5 years of sequential increases. We are only one of 2 BDCs to accomplish this.

Slide 17 shows that the 7.7% year-over-year dividend growth easily places us near the very top of our peers and one of only 8 BDCs that have grown dividends in the past year. With most BDCs having either no increases or decreasing the size of their dividend payments, our continually increasing dividends, which we have overearned in each quarter, has differentiated us within the marketplace.

Moving to Slide 18, our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 12%, double the BDC index of 6%. Our longer-term performance is outlined on our next slide, 19. Our 3- and 5-year returns place us in the top 2 and 4, respectively, of all BDCs for both time horizons. Over the past 3 years, our 81% return exceeded the 22% return of the index. And over the past 5 years, our 161% return exceeded the index's 27% return.

On Slide 20, 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 and outperform the industry 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 and NAV per share growth. Of note is that as our assets have grown and we are increasingly achieving scale, our expense ratio is moving closer towards the industry averages. Notably, our latest 12 months' return on equity and NAV per share outperformance plus the growing value our shareholders are receiving.

Moving on to Slide 21, all of our initiatives and achievements discussed today 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, as outlined on the slide, will help drive the size and quality of our investor base including adding more institutions. Differentiating characteristics include maintaining one of the highest levels of management ownership in the industry at 16%, which has been updated for recent equity issuances, with no shares sold by management. A strong and growing dividend covered by NII, access to low-cost and long-term liquidity, with which to grow our current asset base by another 50% further strengthened this quarter with the receipt of our second SBIC license, a BBB investment grade rating, solid earnings per share and NII yield with substantial growth potential, high-quality expansion of AUM and an attractive risk profile. In addition, our high credit quality portfolio contains minimal exposure to cyclical industries, including the oil and gas industry.

Finally, looking at Slide 22, we continue to progress on 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, enabling us to execute on our simple and consistent objectives.

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'd like to now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Casey Alexander with Compass Point.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [2]

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Obviously you guys have done a great job managing this portfolio. I have a couple of questions. Henri, you alluded to the increase in other income as a contributing factor to the strong results this quarter. And that is a number, that $1.3 million, that the company has never achieved before and is well over historicals. What drove that and to what extent is that other income recurring or not?

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [3]

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Yes. So Casey, absolutely I highlighted that, obviously, on purpose. I think 2 things to consider. One is, there is no unusual items in the other income this quarter. So there is no dividend or any other unusual item. It really includes sort of just the 2 things that you'd always expect in other income. Firstly, it's the 1% advisory fee that relates to new originations that we have in a quarter. And then secondly, there was a prepayment fee of a couple of hundred thousand that related to the realization of our Fancy Chap investment. So no unique items in other income this quarter, however, why we highlighted it was obviously that our originations was at a very, very high level this quarter. And so therefore, that advisory fee that relates to it was at a high level as well. We always view it as partially recurring because of the fact that we are originating every single quarter, but because of the high level of originations, it was at a much higher level than it normally is, as you noted.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [4]

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So that advisory fee by itself was a little less -- just a little less than $1 million then, based upon your originations.

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [5]

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Yes. It's -- I think it was a little less than that. But, yes, close, probably somewhere around $800,000.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [6]

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Yes, okay. Secondly, when you calculate adjusted NII, and I know it's a non-GAAP number, I'm curious, why you don't also pull out the income tax benefit from that number? Because that's clearly an unusual item, nonrecurring item and has dropped in maybe once a year. I'm curious why you didn't take that out of adjusted NII also?

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [7]

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Yes, it's a good question. We obviously work with our accountants on sort of assessing what should be excluded from adjusted NII. As you know, non-GAAP measure is quite a high hurdle around what you can be -- what you can exclude. And because the deferred tax benefit relates to our blockers and you'll have an element of that every single quarter, the view has been to leave it in, to not exclude it from adjusted NII. However, to your point, we have really tried to highlight it in the NII per share role. And also always in our prepared remarks, so that people can understand that, that's sort of a unique element to our blocker structure and strategy, and can be volatile on a quarter-over-quarter basis.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [8]

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Okay. And for Michael, I have to ask and I have discussed this before in Easy Ice, and now I'm going to lump in Censis, is the concentration issue. You have 2 portfolio companies that encompass almost $90 million of the portfolio, 18% of the total portfolio, 38% of net assets. I know Censis and Easy Ice have been very successful investments but how would you suggest the investors get comfortable with that degree of concentration in just 2 names?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [9]

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I think the way we look at this, Casey, is that when we evaluate a credit, especially a new credit, we take into account the size of our investment as well as the strength of the underlying business. One of the things that we've had the benefit of, as we've grown our businesses, is that we've been able to invest in businesses that have been pretty long-dated investments where we've come to know the business extremely well. And as our relationship with the business has grown and our experience with the business has grown, so has our confidence in the strength of that business. And so in both of those cases, these are businesses that we've been investors in for quite some time. Censis, it was 2014, and I think Easy Ice may go back to 2012 or '13. So fundamentally, they're businesses that we know extremely well. They're both leaders in their -- the industry verticals that they operate in and we feel like they're fundamentally terrific investments. And that's what's giving us confidence to upsize our exposure to those 2 credits.

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Operator [10]

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Our next question comes from Mickey Schleien with Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [11]

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I also want to congratulate you on a strong quarter. I want to start out by talking a little bit about leverage. So back of the envelope, if you drew, say, half of the availability on the credit facility and half of the cash you have as of the end of the quarter for additional capital in the new SBIC subsidiary, including the equity you've already injected there, then you'd have access to about $100 million of new SBA debentures and that would take you to total debt to equity of 1.7, all else equal, and I do realize you've issued some equity since this quarter was reported. So that level is above the 1.5 you've been operating at the last several quarters. Are you willing to go up to the 1.7? Or is the 1.5 more your comfort level or any guidance you can give us?

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [12]

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Mickey, thank you for that question. I think that among the concepts we constantly talk about every quarter is the relative lumpiness of our business on a quarter-by-quarter basis. There's a lot of very good things that happen, and we're very concentrated in this most recent quarter. And as we go forward, our leverage levels may fluctuate. As you point out, in our SBIC license, we funded $35 million, which gives us access to $70 million. If we put in some more, we can have access to $100 million as you discussed. How we fund that whether with -- it's more equity or more debt or cash on hand or maybe we have redemptions that come in and fund it. That's a constantly fluid situation as to how we allocate our capital. In any given point in time, we might be relatively higher leverage or relatively lower leveraged. I think that -- so as we go forward, we'll be looking at a -- on a case-by-case basis. And so we don't have a fixed number in terms of exactly where we think our leverage should be, we do note however, that the structure of our leverage is, we think, very sound, you look at the SBIC debentures are 10-year interest only, bullet maturity debentures with no covenants. So there's only a requirement to pay. There's no -- pay the interest, no amortization at all. Our baby bonds are similar; in our structure of our baby bonds, we have no maturities for, what, 4 years now?

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [13]

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Yes.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [14]

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And then we do have our revolving line of credit, which we go in and out of as you see depending on fluctuations and investment rates and redemptions, et cetera. And that too has no hard covenants -- hard defaults in it. So we are very soundly structured in terms of the -- in terms of how our leverage interacts with our assets. And we've been originating assets and our book of assets is mostly floating rate, as you know. And as a result of that, we have -- we feel very comfortable with our leverage profile and our leverage structure.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [15]

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Thank you for that, Chris. That's helpful. If I could move on, it looks like you helped finance the dividend recap for Censis? And we're all aware that dividend recaps are usually looked at pretty skeptically by the market. So I'd like to understand what was the thesis behind that particular transaction?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [16]

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Yes, what -- I'm trying to figure out exactly what I can relate to you. I think what I said in my prepared remarks is the company's performing exceedingly well. We have a very high degree of confidence in the management team that we know well as well as the equity sponsorship. The company had an opportunity to recapitalize itself. We actually believe that we recapitalized it, Mickey, on terms that were better than market. We know that the market -- the company had offers to finance the business and refinance the capital structure on terms that were much more aggressive than what we propose, but given the fact that we were in the deal already and knew the management team very well and most importantly, the ownership group, we were in the pole position to lead that financing. But just in terms of the way we look at it primarily is, are we comfortable with the enterprise value of the business and do we feel like we're well covered, well supported by that enterprise value and I would say, on that credit, we feel exceedingly comfortable with the business.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [17]

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Mike, and the dividend recap, I'm assuming the sponsor obviously got a big chunk of that, but was there also an incentive or reward paid to the management for their efforts?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [18]

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Well, that's the -- I can't get into the details of the recapitalization just given that it's a private company. But I can say that the sponsorship that we work with typically understands how important it is to align management's interests with their own, and in this case, they did a great job of doing that as well.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [19]

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Okay. Mike, your investments this quarter were overwhelmingly focused on first liens, and I appreciate the thoughts behind that. But the portfolio's average leverage continues to climb, so I'd like to understand what's driving that increase? Is it lending to larger companies, which may deserve a higher multiple? Or is it just how difficult the market environment is? Or is it something else?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [20]

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I think from our perspective, we always just evaluate each credit on its own merits and we've always said that just because a credit is a low leverage credit, it doesn't necessarily make it a good deal and we pass on those transactions all the time and did so this quarter. So it's really just reflective of the opportunities that we saw before us. The thing I would point out in our originations this quarter because it might give you some more color and it's reflective of a playbook that we've capitalized on for years, $56 million of that production this quarter was in follow-on investments to very-well-performing companies. And then $36 million of it was to businesses that are new portfolio companies. We've been very successful doing the work to get close to businesses when they're at the smaller stage of their development and doing the work to write a smaller check at the front end, and that's put us in the pole position to support the company as they grow over time and that's what we did a lot of this quarter and have done a lot of successfully over time. And if you look at some of the most successful investments that we've made and exited over time, certainly we upsized Censis this quarter, but if you look historically, deals like Community Investors and Expedited and HMN and NTP and Mercury, I'm just thinking off the top of my head, were many of our most successful investments, they started off smaller and we grew with them. As the companies grew, sometimes the leverage profile grew as well, getting back to your question. And so some of those follow-ons also were situations where the company's credit profile grew quite a bit and we expanded the leverage profile consistent with that.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [21]

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So there is not a meaningful deterioration of EBITDA on the portfolio that's causing the multiple to climb?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [22]

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No. No, we feel very good about the performance of the underlying portfolio. We're not seeing any trends that would reflect softness in our portfolio at all.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [23]

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Okay. And sticking to risk management, again, I understand that you've been focused on first liens, but second liens are still meaningful proportion of the portfolio. Could you give us a sense of the relative risk in your first- versus second-lien investments in terms of the size of the borrowers, maybe their average leverage or overall how you manage that risk?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [24]

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Well, the way we manage that risk and it's the approach that we've taken all along. We recognized that there is talk in the marketplace about whether a strategy for BDCs is to be in second lien or in first lien, and we've never really taken that broad-brush approach. We've always said, let's evaluate the business and gain comfort with the underlying credit metrics of that business, and once we assess a business and feel like we understand it, then we figure out where we feel is appropriate to position ourselves in the balance sheet. So in some cases a business that is a strong enough we'll get comfortable making a second-lien investment. Certainly, the bar is higher for a second-lien investment than a first-lien investment. There certainly are deals that we'll look at and we'll have a second-lien opportunity to invest and we don't feel comfortable being in that position in the balance sheet. There are other deals where we look at and say, being dollar one in the capital structure is a safer place to be, we feel like that's a position where our chance to recoup our capital if things don't go right is much better, so that's a place where we'll deploy capital. So we think about it that way, but we don't think about it in broad strokes, where we say, let's allocate X percent of our portfolio to second lien and Y percent to first lean. It really is a function of looking at each deal, evaluating the strength of the credit and determining where we want to play in the balance sheet.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [25]

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I understand. Just a couple of more questions focused on the CLO. I see that the estimated yield came down and that's consistent with what I'm seeing elsewhere. Could you give us a sense of what the -- what changes in your assumptions were made that caused that reduction?

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [26]

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Yes, sure, Mickey. If you look at sort of that $2.7 million, really the reason why there was that unrealized depreciation is 2 different buckets, and they are sort of almost 50-50. The first one is just the fact that we are getting a larger, obviously, equity distribution now. And that therefore, as a starting point that will reduce the fair value. And so probably about a half of the change relates to that. The other half of the change relates to any changes in your inputs that you include in your model and the largest by far and the main driver of that other 50% of the change was the discount rate, as I noted in my comments. We actually increased it by 200 basis points, which we believe was appropriate and that drove, obviously, a significant decrease or significant unrealized depreciation.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [27]

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No, I appreciate that, Henri, and I did see the change in the discount rate and that's also consistent with what I'm seeing elsewhere. I was referring to the estimated yield of the equity of the CLO, it was down from 19.5% to 16%, which applies you've become more pessimistic about something or the cash flows perhaps are not performing well. That's what I was asking about.

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [28]

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No. No. So on the estimated yield, it's obviously an output from the actual evaluation. So once you put in all your cash flows and then once you discount it based on your inputs, such as the discount rate, that would drive the effective interest yield down. So again, the primary driver of that was also the discount rate change, which resulted in the low evaluation and a larger adjustment to the cash flows, which brought the weighted average effective interest rate down.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [29]

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But Mickey, just -- Mickey, I've just one comment though, this is -- none of this is a reflection of the credit in the portfolio. This is more about market change...

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [30]

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Right. So the cash flows are still performing well?

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [31]

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Arbitrage differentials. Yes.

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [32]

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Correct. Yes, the -- obviously, most of the input that go into the evaluation like the discount rate are driven by market comparables primarily.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [33]

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Right. Yes. And that market's been very weak, I understand.

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Operator [34]

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Our next question comes from Tim Hayes of B. Riley FBR.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [35]

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My first one, just as you noted growth obviously very strong this quarter and the portfolio is performing very well, you guys seem pretty optimistic overall. But you look at the NFIB survey data and just see that small businesses continue to report they're facing headwinds with trade, rising labor cost, margin compression, all that good stuff. How do you balance growth in light of these headwinds? And as a follow up, and you kind of touched on this a bit, Michael, with Mickey's question, but we've seen you guys move more first lien and invest in some more health care services companies over the past couple of quarters. Would you say this is an intentionally defensive move on your part to position the portfolio for the later stages of the cycle? Or it's just a function of what's in the pipeline?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [36]

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Let me answer them in order. So the first question was, are we're seeing any headwinds in the small-to-medium-size businesses that we support, and we haven't seen that. If you think about our portfolio, for instance trade, most of the businesses that we invest in, lend to, really aren't doing a whole lot of international trade or affected by that too much. And when you look, at another example you highlighted was higher labor cost, most of the businesses that we have in our portfolio have really strong margin profiles and they are very efficient. So they can withstand a little bit of increase in labor cost and still ride through that very successfully. So we really haven't seen those headwinds in our portfolio. We're always on the watch for that. We don't invest entirely thinking about macro trends. We're always investing thinking what if there is a downturn and evaluating a business with the assumption that during our investment period, there will be a downturn and try to determine how well that business could hold up. And that'll affect our interest in moving forward on a deal or not based on that determination.

As it relates to the second question which is, are we making any moves in the portfolio to shift our concentration one way or another? And the answer there is no, not really. That's not how we think about it either. We -- the bar is higher, as I said before, on making a second-lien investment just because you're in a riskier position in the balance sheet. So there are plenty of deals that we'll decide not to do if we only have an opportunity to invest in the second lien, and therefore that'll affect the number of transactions that we're doing in that space. But it really depends on our pipeline in a given quarter, what are the opportunities we're seeing. Even in a downturn, if we saw a business that was strong enough and had characteristics that were just fantastic, we would evaluate doing the second-lien investment. And at the same time, there are plenty of businesses that we see where we have an opportunity to do a low-leverage first-lien deal and we don't think the business has sufficient strength to warrant an investment of that nature.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [37]

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Tim, building on Mike's comments, I think this sort of points up one of the opportunities we have at Saratoga given our size, which is relatively small and our focus, which is very much on secular growing companies, we're not necessarily buying the market or the industry or the broad economic circumstances. And I think as Mike articulated, we're very much a bottoms-up driven organization in that we're doing the transactions as they arise and we just happen to have more first liens that came about more recently, but if we'd had good second liens, we would've probably gone ahead and done those, too.

So we're very much driven by the bottom up, but we also don't have to participate across the board. And so we're very selective and we have the good fortune with our new business generation activities to be finding really attractive businesses that are kind of all-weather businesses that are going to grow despite these type of headwinds.

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [38]

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The thing I'd add to that just to emphasize the point further, we have always said that with our business model and especially with the SBIC capital that we have, we've never sought to lean out on the risk spectrum. We don't need to do that. Even in this yield environment, we just need to make safe investments that get returns that are consistent with what we can get in this environment, especially at the lower end of the middle market where those opportunities are even more abundant. And if we do that, that's highly accretive to our shareholders. And that's the playbook that we've operated under since we took over management of the BDC and that's what we'll continue to do.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [39]

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Thanks for those comments, guys. That was really helpful and pretty consistent with what I feel like you guys have been saying for the past several quarters, if not years, so makes a lot of sense. And then just on the portfolio yield, you attributed most of the decline there to LIBOR, but you also noted just how competitive it's out there and that you guys are staying pretty disciplined, but even so would you say spread compression played a role at all on the decline? And if so, do you anticipate any further yield compression just based off of either competitive pressures, or it doesn't sound like anything with the mix of the portfolio is changing, so I assume there's no change in yield from that standpoint.

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [40]

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To date, we haven't seen any significant change in spread. The decline in overall yield has primarily been just a result of LIBOR.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [41]

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Okay. Got it, got it. And then one -- just last question for me. I'm going to pry a little bit here, you just mentioned that you had 2 new investments and 2 new portfolio companies this quarter. Would you be able to size those investments for us and give us an idea of any other investment activity so far this quarter?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [42]

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No. We've made a practice of not disclosing that. But we do feel very comfortable with our -- and excited about the progress that we're making with our business development efforts and the new relationships that we're building over time.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [43]

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Yes, I figured that out, but got the answer I figured I'd get too. Congrats on a good quarter.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [44]

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Thank you.

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [45]

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Thanks, Tim.

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Operator [46]

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Our next question comes from Ben Zucker with Aegis Capital.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [47]

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Most of them have been asked and answered at this point, but your deployment activity really picked up this quarter and it sounds like you guys have been spending a lot of time on business development and growing your book of relationships. So in light of that, I mean is it fair to think that origination levels can generally be higher as we're looking ahead at least relative to kind of where your historical metrics have been? Of course, that's still understanding there's a lot of quarterly volatility and the timing of originations and repayments is largely out of your control and subject to available capital.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [48]

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Ben, I think that certainly, I think we're a lot better at origination than we've ever been. I think we're much more organized and we're covering many more bases out there. However, the one thing we've kind of discovered is forecasting certainly on a quarterly basis what our originations and redemptions will be is really not something -- we get -- sometimes, we get some visibility -- our product -- portfolios that we're going into a process and we think it's going to be over the next 6 months. But we've had them do that and they say, oh, we don't like the result or we want to stick around for a little longer. So it's very unpredictable on a quarter-to-quarter basis, then we get calls and say, okay, that's it. We're getting our money back or we've got an acquisition that needs to close in 3 weeks. And so we -- it's not very predictable. Again, like for a sports analogy, we can focus on our inputs, but we can't focus on the results. So we think we're much better, we're doing much better. We certainly are planning and organize ourselves to have higher rates of origination as our overall asset base has grown because we need to replace all those assets. So we're doing all those things, but we are not necessarily comfortable forecasting any kind of increased level of originations.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [49]

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No, I definitely appreciate that it's kind of -- the business itself is a little bit like a hamster wheel, I suppose. Following up on that on and your comments about the market being as competitive as ever, are borrowers for the most part, broad stroking this, are they just -- a lot of them looking to get as much capital as possible at the lowest rate possible? Or are they actually trying to align themselves with lenders that understand their business and can serve as kind of an advisory or a business partner as well. I'm just trying to think about ways that you guys might be differentiating your capital in this environment?

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [50]

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Well, I think what you just described there is what we spent a lot of time talking about, which is aligning ourselves with the type of sponsors, and not just sponsors but people doing transactions where they do value -- a value-added partner and a constructive, creative, solution-oriented provider of capital. That's where our new business efforts are focused. Those are the type of parties that give us the first look and the last look, when they're coming up with originations or growth inside of their portfolio. So that is where we're trying to align ourselves. I mean there are situations and -- where there is kind of more an auction-like environment and we try to identify those, and we try to avoid those. Because, again, that's not the highest -- best use we find. Ours -- we're trying to do relationship driven, solution-oriented investment services for our relationships, and we're trying to find those that appreciate that. And yes, we have to be competitive and yes, we have to do sometimes come to where the market is. But we want to be in a position where we have a sort of a preferred opportunity rather than just bidding in general.

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [51]

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Yes. And then I'd add to that, that in every market including this one, there are a subset of players who are seeking the absolute highest dollars they can get at the lowest rate. And if we start working with somebody where that behavior is clearly -- if that's how they -- it becomes clear that, that's how they operate, at some point it's time to -- for us to move on to another relationship because we're seeking relationships with people that understand that we bring a lot to the table and understanding these businesses and supporting them over time and seek relationships where they're not focused on getting that last dollar or they're -- you're not going to lose the deal for just basis points. We've been successful building those relationships and are seeking to continue to grow those.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [52]

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Understood. And maybe if you'll let me pick on Henri for a second. On your floating rate loans, where -- I mean, historically, how have you gone about putting in floors? Are they based off a spot LIBOR? Are they, like, 20 to 25 bps below spot? And then has that dynamic started to shift recently? And I'm just, obviously, I'm getting at over the last few years when you were originating floating rate loans, there was an obvious assumption that rates would be moving higher and over the last 6 months or so that's probably completely flipped. So I'm just kind of wondering if there's been any change in that practice and how you think about LIBOR floors now that there is probably a downward bias to short-term rates?

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Michael J. Grisius, Saratoga Investment Corp. - President & Director [53]

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That's a good question. I'll answer that just because it's a negotiated item deal by deal, and it's a good observation on your part as well. Back a few years ago, when LIBOR was lower, the floors were lower as well. So we tip -- the way a negotiation works is that typically we're trying to set a floor as close to the current LIBOR as we can, and there's some back-and-forth on that. And so if you looked at our portfolio a few years ago, many of the floors were in the 1% range or a bit higher and then we had the benefit of lift as LIBOR came up, but you didn't have the production on some of those older dated loans as LIBOR has come down. More recently, in the more recent originations, we've been pretty successful establishing LIBOR floors very close to where LIBOR is today. So those newer originations should have by and large good protection against further declines in LIBOR.

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Operator [54]

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Our next question comes from Mitchel Penn with Janney Montgomery.

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Mitchel Stuart Penn, Janney Montgomery Scott LLC, Research Division - MD of BDCs [55]

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Real quick. Censis and Easy Ice, what portion, if any, is in the SBIC subsidiary?

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Henri J. Steenkamp, Saratoga Investment Corp. - Chief Compliance Officer, Secretary, Treasurer & CFO [56]

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Yes. I think just off the top of my head, Mitchel, I believe Censis about half of it now is in the SBIC subsidiary. So I think the existing loan we had was in the SBIC subsidiary, the new piece isn't. And then on Easy Ice, I believe and I could be stand corrected, but I believe, of our debt about half of it is also in the SBIC, maybe a little more actually. The equity, the preferred equity is not in the SBIC.

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Operator [57]

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And I'm not showing any further questions at this time. I'd like to turn the call back over to Christian.

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Christian L. Oberbeck, Saratoga Investment Corp. - Chairman & CEO [58]

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

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Operator [59]

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Ladies and gentleman. This does conclude today's presentation. You may now disconnect and have a wonderful day.