Saratoga Investment Corp (NYSE:SAR) Q1 2020 Earnings Conference Call July 11, 2019 10:00 AM ET
Henri Steenkamp - Chief Financial Officer and Chief Compliance Officer
Christian Oberbeck - Chief Executive Officer
Michael Grisius - President and Chief Investment Officer
- Henri Steenkamp - 首席财务官兼首席合规官
- Christian Oberbeck - 首席执行官
- Michael Grisius - 总裁兼首席投资官
Casey Alexander - Compass Point
Mickey Schleien - Ladenburg
Tim Hayes - B. Riley FBR
- 凯西亚历山大 - 指南针点
- 米奇施莱恩 - 拉登堡
- Tim Hayes - B. Riley FBR
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investments Corp Fiscal First Quarter 2020 Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation all parties will be in a listen-only mode. Following management's prepared remarks, we will open the line for questions.
At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial and Compliance Officer, Mr. Henri Steenkamp. You may begin.
早上好，女士们，先生们。 谢谢你的支持。 欢迎来到萨拉托加投资公司2020财年第一季度财务业绩电话会议。 请注意，今天的通话正在录制中。 在今天的演讲中，所有各方都将处于只听模式。 在管理层准备好的评论之后，我们将打开问题。
在这个时候，我想把这个电话转给Saratoga Investment Corp的首席财务和合规官Henri Steenkamp先生。 你可以开始吧。
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal first 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 first quarter 2020 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night. A replay of this conference call will also be available from 1 PM 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.
谢谢。我想欢迎大家参加Saratoga Investment Corp的2020财年第一季度财报电话会议。今天的电话会议包括前瞻性陈述和预测。我们要求您参考我们最近向美国证券交易委员会提交的文件，其中包含可能导致实际结果与这些前瞻性陈述和预测存在重大差异的重要因素。除非法律要求，否则我们不承诺更新我们的前瞻性陈述。
Thank you, Henri, and welcome, everyone. During this first fiscal quarter, Saratoga continued to build on the growth of our high-quality portfolio utilizing our strong capital base and maintaining our industry leadership within the BDC sector as reflected in our key performance metrics and overall performance. A particular note, is a continued strong credit performance of our overall portfolio this quarter. While a challenging competitive environment persists, our origination efforts combined with our flexible capital structure and diversified sources of cost-effective liquidity continue to support our robust pipeline of available deal sources driving greater scale.
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 98.7% of our loan investments having our highest rating. Generating a return on equity of 11.7% on a trailing 12-month basis with 16.6% annualized return on equity in Q1, both significantly beating the BDC industry mean of 8.7%, recognizing a $4 million unrealized gain on the overall portfolio this quarter and registering a gross unlevered IRR of 13.4% on our total unrealized portfolio with grossed unlevered IRR of 13.9% on total realizations of 376 million.
Second, our assets under management grew to $410 million this quarter, a 2% increase from $402 million as of last quarter, primarily reflecting the strong portfolio performance and a 19% increase from $343 million as of the same time last year. This quarter continues to demonstrate the success of our growing origination platform with a healthy $27 million of originations. Importantly, our new originations included three new portfolio company investments.
Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the ninth consecutive quarter. We paid a quarterly dividend of $0.55 per share for the first quarter of 2020 on June 27, 2019. This was an increase of $0.01 per share over the past quarter's dividend of $0.54 per share. All of our dividend payments have been exceeded by our adjusted net investment income for the same periods. We are one of only seven BDCs having increased dividends over the past year.
And finally, our capital structure and base of liquidity remained strong and has the potential to improve. We sold 76,448 shares with gross proceeds of $1.8 million through our ATM equity offering during the quarter and we continue to have significant dry powder to meet future potential opportunities in a changing credit and pricing environment. Our existing available year-end liquidity of 107 million allows us to grow our current assets under management by 26% without any new external financing.
This quarter saw strong return on equity performance as noted above and continued solid performance within our key performance indicators as compared to the quarters ended May 31, 2018 and February 28, 2019. Our adjusted NII is $4.6 million this quarter, up 16% versus $4.0 million last year, and down 6% versus $4.9 million last quarter. Our adjusted NII per share is $0.60 this quarter, down 6% from $0.64 last year, and down 9% from $0.66 last quarter, and our NAV per share is $24.06, up 4% from $23.06 last year, and up 2% from $23.62 last quarter. Henri will provide more detail later.
As in the past, we remain committed to further advancing the overall long-term size and quality of our asset base. As you can see on Slide 3, our assets under management have steadily risen since we took over the BDC and the quality of our credits remain high. We look forward to continuing this positive trend.
With that, I would like to now turn the call back over to Henri to view over financial results, as well as the composition and performance of our portfolio.
与过去一样，我们仍致力于进一步提升资产基础的整体长期规模和质量。 正如您在幻灯片3中看到的那样，自我们接管BDC以来，我们管理的资产稳步上升，我们的信用质量仍然很高。 我们期待继续这一积极趋势。
Thank you, Chris. Slide 4 highlights our key performance metrics for the quarter ended May 31, 2019. When adjusting for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, adjusted NII of $4.6 million was down 6.2% from $4.9 million last quarter, and up 15.9% from $4.0 million as compared to last year's Q1. Adjusted NII per share was $.60, down $0.04 from $0.64 per share last year and down $0.06 from $0.66 per share last quarter.
Just a reminder, that it is important to adjust NII for the second incentive fee expense as the significant appreciation to our portfolio, which drives the incentive fee expense is not included in NII, while the incentive fee expense is. So, only one side of the transaction is in NII. ROE of course includes both the gain and the expense. The increase in adjusted NII from last year, primarily reflects the higher level of investments and resultant higher interest income with AUM up 19% from last year.
The decrease from last quarter primarily reflects the deferred tax benefit recognized last quarter that did not recur. 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 6.3 million shares for the three months ended May 31, 2018 to 7.5 million and 7.7 million shares for the three months ended February 28, 2019 and May 31, 2019 respectively.
Adjusted NII yield was 10.1% when adjusted for the incentive fee accrual. This yield is down 100 basis points from 11.1% last year, and 110 basis points from 11.2% last quarter, reflecting the impact of our growing NAV and the effect of our currently undeployed capital. For this first quarter, we experienced a net gain on investments of $4.0 million or $0.51 per weighted average share resulting in a total increase in net assets from operations of 7.7 million or $0.99 per share.
The $4 million net gain on investments was comprised entirely of net [unrealized] appreciation on our portfolio offset by 0.02 million of net deferred tax expense on unrealized gains in Saratoga Investment's blocker subsidiaries. The $4 million unrealized appreciation reflects multiple notable changes. First, a $1.6 million unrealized appreciation on the company's Censis Technologies investment. Second, a $1.2 million unrealized appreciation on the company's Fancy Chap investment that was realized subsequent to quarter end.
Third, a $1.2 million unrealized appreciation on Saratoga's CLO equity investment, reflecting first quarter performance exceeding projected cash flows. And fourth, a $0.8 million unrealized appreciation on our Ohio Medical investment, reflecting improved performance. This appreciation was offset primarily by $0.7 million unrealized appreciation on the company's My Alarm Center investment. Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains.
Our return on equity was 11.7% for the last 12 months and 16.6% 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, base management fees and investment incentive management fees increased to $1.3 million this quarter from $1.2 million in the same period last year. Excluding the deferred income tax benefit in Q1 last year, operating expenses actually decreased 14.6% from 1.5 million last year, reflecting various operating efficiencies realized during the past year. Expenses decreased as a percentage of average total assets from 1.4% to 1.1%.
400万美元的投资净收益完全由我们投资组合的净[未实现]升值所抵消，抵消了萨拉托加投资的阻碍子公司未实现收益的净递延税费净额0.02百万美元。 400万美元的未实现升值反映了多项显着变化。首先，对该公司的Censis Technologies投资进行了160万美元的未实现升值。其次，该公司的Fancy Chap投资实现了120万美元的未实现升值，该投资是在季度结束后实现的。
第三，对萨拉托加的CLO股权投资实现了120万美元的未实现升值，反映出第一季度的业绩超过了预计的现金流量。第四，我们对俄亥俄州医疗投资的未实现升值80万美元，反映出业绩改善。这一升值主要被该公司My Alarm Center投资的70万美元未实现升值所抵消。股本回报率仍然是我们的重要绩效指标，包括已实现和未实现的收益。
We have also again added the KPI slides starting from Slides 25 through 27 in the appendix at the end of the presentation, which shows our income statement and balance sheet metrics for the past nine 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 and increased by 25% versus last year.
Moving on to Slide 5, NAV was $186.8 million as of this quarter end, a $5.9 million increase from $180.9 million at year end, and a $42 million increase from $144.8 million as of the same quarter last year. NAV per share was $24.06 as of quarter end, up from $23.62 as of year-end, and up from $23.06 as of the same period last year.
For this past quarter, $3.7 million of net investment income and $4.0 million of net unrealized appreciation were earned, partially offset by $4.2 million of dividends declared and $0.02 million deferred tax expense on the net unrealized gains in Saratoga's blocker subsidiaries.
In addition, $0.7 million of stock dividend distributions were made through the company's DRIP planned and 76,448 shares were sold or $1.8 million raised through the company's ATM equity offering during the quarter. Our net asset offering value has steadily increased since 2011 and we continue to benefit from 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 decreased from $0.66 per share last quarter to $0.60 per share in Q1. The significant increases where a $0,01 increase in CLO interest income and a $0.02 decrease in operating expenses.
These increases were more than offset by a $0.02 decrease in CLO incentive fees no longer earned following our CLO reset in December, a $0.01 decrease in other income, $0.03 decrease of the deferred tax benefit earned last year that is non-recurring, and a $0.03 dilution from increased shares from the ATM DRIP programs.
Moving on to the lower half of the slide, this reconciles the $0.44 NAV per share increase for the quarter. The $0.48 generated by our NII for the quarter and $0.51 net realized and unrealized gains on investments were partially offset by the $0.54 dividend declared for Q4 with a Q1 record date and a $0.01 dilutive net impact reflecting the effect of these shares issued under our DRIP program in March.
Slide 7 outlines the dry powder available to us as of quarter-end, which totals $107.1 million. This is spread between our available cash and undrawn Madison facility. We remain 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 four years plus. This level of available liquidity allows us to grow our assets by an additional 26% without the need for external financing with 62 million of it being cash and that’s fully accretive to NII when deployed.
Now, I would like to move on to Slides 8 through 10 and review the composition and yield of our investment portfolio. Slide 8 shows that our composition and weighted average current yield remained relatively consistent with the past with $409.5 million invested in 53 portfolio companies and one CLO fund, and 54% of our investments in first lien of which 9% is in first lien last our positions.
On Slide 9, you can see how they yield on our core BDC assets, excluding our CLO and syndicated loans, as well as our total assets yield has dipped slightly below 11%. It remained strong despite high levels of repayments and the continued replacement of these assets. This quarter, our overall yield decreased slightly to 10.6% with core asset yields decreasing from 10.9% to 10.8%, but our CLO increasing to 16.0%.
The core asset yields change, primarily reflects the approximately 12 basis point decrease in Q1 of LIBOR and likely not reflective of any further spread tightening. CLO yields increased as the CLO continue to outperform projections.
Turning to Slide 10, during the first fiscal quarter, we made investments of $27.4 million in three new portfolio companies and three new follow-on’s and had $26.9 million in two exits plus amortizations, resulting in a net increase in investments of $0.5 million for the quarter at our BDC. Our investments remain highly diversified by type, as well as in terms of geography and industry spread over eight distinct industries with a large focus on business, healthcare, and education services.
We are also often asked about the business services industry as this category 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 19 different companies’ services, who’s services range broadly from education to financial advisory to IT management to restaurant supply to human resources and many other services. This breakdown is provided in our featured investor presentation on our website.
Of our total investment portfolio, 9.9% consists of equity interests, which remain an important part of our overall investment strategy. We had no net realized gains during Q1. However, we have seen a realization of our Fancy Chap investment subsequent to quarter end that will continue to add to our total net realized gains in Q2. For the past seven fiscal years, including Q1, we had a combined $16.7 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.
Thanks, 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. Our highly competitive landscape remains largely unchanged since we last spoke. Deal activity is healthy, but an abundance of capital persists creating optimal issuance conditions for borrowers and a general market environment that is borrower friendly. 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 despite the continued reduction in LIBOR experience this quarter coupled with a swing in rate expectations to one of a decreasing rate environment. In the phase of this kind of market, our approach has always been to underwrite each investment working directly with management and ownership to make a thorough assessment of a long-term strength of the company and its business model.
We invest capital with the objective of finding differentiated businesses where our capital can be put to work to produce the best risk-adjusted accretive returns for our shareholders over the long-term. 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 $4 million in Q1, we are also pleased with how our overall portfolio is performing. We believe this reflects the strength of our underwriting approach and team and the quality of opportunities that exist in the market in which we operate.
Looking at leverage on Slide 12, you can see that debt multiples increased in calendar Q1 with almost 80% of multiples above five times versus two out of three deals last year. Against this backdrop, we have been able to maintain a relatively modest risk profile. Total leverage for the overall portfolio was [4.56 times], down slightly from the previous quarter.
As we frequently highlight, rather than just considering leverage, our focus remains on investing new credits with attractive risk return profiles, and exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment.
In addition, this slide illustrates our consistent ability to generate new investments over the long-term, despite difficult market dynamics. With nine originations through the second calendar quarter, including three new portfolio companies, and six follow-ons, as well as two more originations thus far in July, we have established an origination level that is on par with last year's record pace, while applying consistent investment criteria.
We 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. As you can see on this slide, 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 will become sources for new deals.
Our number of deals source continues to grow despite a market that is competitive and frothy. Notably, 34% of term sheets issued, and two 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. Passing on a deal that is in front of you is hard, 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 Q1 again demonstrating this. As you can see on Slide 14, the gross unleveraged IRR on realized investments made by the Saratoga investment management team is 13.9% on approximately 376 million of realizations. On the repayments in Q1, the average unlevered IRR is just over 13%. On the chart on the right, you can also see the total growth on levered IRR on our 382 million of combined weighted SBIC and BDC unrealized investments is 13.4% since Saratoga took over management.
We also highlighted last quarter that our Roscoe Medical second lien investment went on non-accrual. Our total investment comprises the $4.2 million second lien that has been marked down 0.1 million or has been marked down 0.1 million to a fair value of 2.4 million this quarter, as well as in 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.
While we believe the operational issues have been largely addressed, we expect the company to continue to face headwinds in the competitive industry. We continue to work with senior lenders and sponsors to evaluate alternatives in light of the company's performance. Now, this quarter is a good example of how solid high-quality portfolio interacts as a whole. Our total unrealized appreciation for the quarter was a net positive $4 million, which included significant value increases in our Censis, Flywheel, and Ohio Medical investments among others. And more than offset notable unrealized appreciation in My Alarm Center.
Moving on to Slide 15, you can see our SBIC assets increased to 225 million as of quarter end, up from 222 million last quarter. Our current SBIC license is fully drawn and we continue to progress the formal licensing process with the SBA on our second license following the issuance of a green light letter to us last year.
Overall, we feel the operating results of the quarter demonstrates 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.
我们还在上个季度强调，我们的Roscoe Medical第二留置权投资是非应计利润。我们的总投资包括420万美元的第二留置权，该留置权已经减少了10万，或者已经减少了10万，本季度的公允价值为240万，以及之前已经记入的50万股权投资。 0.自上次报道以来，没有真正的更新。这些标志既反映了基本的削弱性能，也反映了运营问题。
This concludes my review of the market and I’d like to turn the call back over to Chris.
Great. Thank you, Mike. As outlined on Slide 16, this past quarter, we again increased our dividend by $0.01 to $0.55, a 2% increase representing the nineteenth sequential quarter of dividend increases. Slide 17 shows the 7.8% year-over-year dividend growth, easily places us near the very top of our peers in one of only seven BDCs of the grown dividends the past year. With most BDCs having either no increases or decreasing the size of the dividend payments, our continually increasing dividend has differentiated us within the marketplace. Saratoga continues to outperform the industry.
Moving on to Slide 18, our total return over the last 12 months, which includes both capital appreciation and dividends has generated total returns of 9%, beating the BDC index of 8%. Our longer-term performance is outlined on our next slide, 19. Our three and five-year return places us in the top two and four respectively of all BDCs for both time horizons. Over the past three years, our 92% return exceeded the 30% return of the index, and over the past five years our 146% return exceeded the index's 24% 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 continued to achieve high marks and outperform the industry across diverse categories, including interest yield on the portfolio, latest 12-month NII yield, latest 12 months return on equity, dividend coverage, year-over-year dividend growth, NAV per share growth and investment capacity.
Of note is, that as our assets have grown and we’re starting to achieve scale, our expense ratio is moving closer towards the industry averages. We continue to focus on the latest 12-month return on equity and NAV per share outperformance, which reflects the growing value our shareholders are receiving.
Moving on to Slide 21, all of our initiatives discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions.
These characteristics include maintaining one of the highest levels of management ownership in the industry at 20%, a strong and growing dividend that is well covered by NII, access to low-cost and long-term liquidity with which to grow our current asset base, obtaining a BBB investment grade rating, solid earnings per share and NII yield with substantial growth potential, steady 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, analyse, 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 and shareholder total return performance.
In closing, I would like to again thank all of our shareholders for their ongoing support. We’re excited for the growth and profitability that lies ahead for Saratoga Investment Corp.
I would like to now open the call for questions.
Thank you. [Operator Instructions] And our first question will come from the line of Casey Alexander with Compass Point. Your line is now open.
谢谢。 [操作员说明]我们的第一个问题将来自Casey Alexander与Compass Point的系列。 你的生产线现已开放。
Hi, good morning.
Good morning, Casey.
My first question relates to the amount of cash that you’re holding. Are you strategically holding back some cash in the event that the second SBIC license happens to come through?
Casey, no. I mean our – I think our cash levels are really more, you know, a reflection of redemptions and new investments.
凯西，没有。 我的意思是 - 我认为我们的现金水平实际上更多，反映了赎回和新投资。
So, it’s just reflective of the ups and downs of our business. As we’ve said in the past, it – you know we wish it moved up and to the right on a straight line, but it just – the nature of our business is pretty lumpy. I will add to that that we feel very good about our pipeline of deal opportunities and feel very good about our ability to deploy that capital.
所以，它只是反映了我们业务的起伏。 正如我们过去所说的那样 - 你知道我们希望它在一条直线上向右移动，但它只是 - 我们业务的本质是相当笨拙的。 我将补充说，我们对交易机会的管道感到非常满意，并且对我们部署该资金的能力感到非常满意。
Let me ask you a different question, and this is really kind of, you know, strategic for the whole team because – you know I understand that because of your SBIC debentures, your regulatory leverage ratio is well in line at, you know, 0.72 or somewhere around. The total leverage ratio is around, you know, a little better than 1.5. Is there a practical limit to the total leverage ratio that – you know that you have to keep an eye on even though it's not a part of your regulatory leverage ratio? Is there a degree to which you wouldn’t want to get past as it relates to the total leverage ratio?
让我问你一个不同的问题，这对整个团队来说真的很有道理，因为 - 你知道我明白，因为你的SBIC债券，你的监管杠杆比率很好，你知道，0.72 或者在某处。 你知道，总杠杆率大约好于1.5。 总杠杆率是否存在实际限制 - 您知道即使它不是监管杠杆率的一部分，您也必须密切关注吗？ 是否有一定程度的您不希望过去，因为它与总杠杆比率有关？
Casey, I don't think that there’s necessarily a hard and fast line there from a regulatory standpoint. I think as always, and you know, looking at our, you know, our cumulative performance over the last, you know, nine years at this time, you know, we’re much more reactive to the type and quality of the investments that are available to us. And then, with that portfolio, we are also mindful of how and how to best finance that in terms of our – you know the liabilities on our balance sheet, the mix of equity and debt.
And as you see, you know, we had some success in the last, you know, short period of time since the last quarter on our ATM issuance, so we’re able to add some equity there. We’ve actually repaid a bunch of our debt, but that debt still remains available. So, we're not really focused on some absolute leverage limit, we are more focused on what is available that fit our credit criteria. And then, we have been fortunate enough and we hope to be fortunate enough going forward to be able to put together a balance sheet that is, you know, supportive of that asset base and reasonably conservatively structured.
I think it’s important to remember the characteristics of the debt that we have outstanding, which is it's basically all fixed rate and it's all termed out with, you know, 6 to 10-year maturities from today, and no covenants, no financial covenants and no amortization. So, it's a very conservative long-term fixed rate debt package we have. We do have revolvers, you know, which we go into and out of depending on swing factors that at this point in time that's essentially zero. So, anyway – is that responsive to your question Casey?
凯西，从监管的角度来看，我认为不一定存在强硬和快速的路线。我一如既往地想，你知道，看看我们，我们，我们累计的表现，你知道，在这个时候九年，你知道，我们对投资的类型和质量更加反应我们可以使用。然后，通过该投资组合，我们也注意到如何以及如何最好地为我们提供融资 - 您知道我们的资产负债表上的负债，股权和债务的组合。
我认为重要的是要记住我们尚未兑现的债务的特征，这基本上都是固定汇率，而且，从今天起，它们都被称为6至10年期限，没有任何契约，没有财务契约和没有摊销。所以，这是一个非常保守的长期固定利率债务方案。我们确实有左轮手枪，我们进入和退出，这取决于此时基本上为零的摆动因素。所以，无论如何 - 这是对凯西问题的回应吗？
Yes, it is. Thank you. That's very responsive. Two more quick questions, I’ll ask them both at once and then you can wrap me up. First of all, what is the quarter end percentage of floating rate assets in the portfolio? And secondly, could you review the Fancy Chap transaction considering the fact that it came on the balance sheet this quarter, and according to your commentary it's coming – it's already come off in this subsequent quarter?
是的。 谢谢。 这非常敏感。 两个更快的问题，我会立刻问他们，然后你可以把我包起来。 首先，投资组合中浮动利率资产的季末比例是多少？ 其次，考虑到它本季度出现在资产负债表上的事实，你能否回顾一下Fancy Chap的交易，根据你的评论它即将到来 - 它已经在下一个季度出现了？
I’ll grab the first one, Casey, which is the variable rate, it’s pretty unchanged from the last quarter, and as of the end of this quarter it was 83% was variable rate asset.
Yes. And then, obviously, you know, all of our debt is a standard practice, have flows of which we’ve, I think, more recently seen the flows moving, you know, up into sort of the 200 level.
That’s typically a negotiation where the [flows] are, but we’re mindful of, you know, the fact that we’re making these floating rate investments. We try to structure them so that we get the benefit of upside if it's a rising rate environment. We also try to, and this is a negotiated term, structure it so that we put a floor in place that’s, you know, closer where – to where the LIBOR is in the current market. And so, as the portfolio continues to build that’s something that we’re mindful of going forward.
这通常是[流动]的谈判，但我们注意到，我们正在进行这些浮动利率投资。 我们试图对它们进行构建，以便在价格上涨的情况下我们获得好处。 我们也尝试，这是一个谈判的术语，构建它，以便我们设置一个位置，你知道，更接近LIBOR在当前市场的位置。 因此，随着投资组合的不断发展，我们注意到了这一点。
In Fancy Chap.
Okay. And then, you could just reduce the Fancy Chap because obviously it’s a very successful investment but it came in and went out so fast. I just think that’s an unusual circumstance.
好的。 然后，你可以减少Fancy Chap，因为很明显这是一个非常成功的投资，但它进来并且走得太快了。 我只是认为这是一个不寻常的情况。
It’s a blessing and a curse because we always talk about how you work so hard to get assets deployed and then when they come back, you’ve got to go redeploy that capital. I guess in this case we are sort of between ourselves sort of saying, well at least it wasn't a really large debt investment. It came back and was short lived. But the good news is that, and this is with the, you know, growing sponsor relationship that we have with the owner of this business.
The good news is that we had an equity investment in this business as well. As the company was growing, they were seeking some additional debt capital, as well as some equity capital. They were not expecting to sell the business, but essentially got an offer that they couldn’t refuse. And so, it was a short-lived investment, but thankfully we had a meaningful equity investment and enjoyed a really fantastic IRR and return on capital in a matter of a couple months.
这是一种祝福和诅咒，因为我们总是谈论你如何努力工作以便部署资产，然后当他们回来时，你必须重新部署这些资本。 我想在这种情况下，我们之间有点说，至少它不是一个非常大的债务投资。 它回来了，很短暂。 但好消息是，这与我们与该业务所有者的赞助商关系日益增长有关。
好消息是我们也对这项业务进行了股权投资。 随着公司的发展，他们正在寻求一些额外的债务资本，以及一些股权资本。 他们并不期望出售这项业务，但基本上得到了他们无法拒绝的要约。 因此，这是一项短期投资，但幸运的是，我们进行了有意义的股权投资，并在几个月内享受了非常出色的内部收益率和资本回报率。
Well, that’s good. Well, congratulations on that outcome and thanks for taking my questions.
Thank you. And our next question will come from the line of Mickey Schleien with Ladenburg. Your line is now open.
谢谢。 我们的下一个问题将来自米兰施莱恩与拉登堡的合作。 你的生产线现已开放。
Yes, good morning everyone. Casey asked several questions that I was going to ask, but I do have a couple of more. There has obviously been a lot of talk about the yield curves inversion and I’m curious to understand whether you’re seeing any trends in the portfolio pointing to a sharp slowdown amongst your borrowers?
是的，大家早上好。 凯西问了几个我要问的问题，但我还有几个问题。 显然有很多关于收益率曲线反转的讨论，我很想知道你是否看到投资组合中的任何趋势指向借款人之间的急剧放缓？
We have not seen that, Mickey. I mean we certainly are always mindful of macro-economic trends, and you know, see that as well. But as we look at our portfolio, we haven't – we haven't seen a broader economic, you know, indicators that would say that the economy is pressuring these businesses in a negative way. This – it’s just not something we’ve seen in our portfolio.
我们还没有看到，米奇。 我的意思是我们当然始终关注宏观经济趋势，你知道，也看到了这一点。 但是，当我们看待我们的投资组合时，我们没有 - 我们还没有看到更广泛的经济指标，即经济正在以负面方式对这些业务施加压力。 这 - 这不是我们在投资组合中看到的东西。
And Mike, when you underwrite, you know, I don't know how long the borrowers that you’re invested in around, but do you have a sense of how much their EBITDA on average sort of would have declined in previous recessions?
Yes, it’s a great question because, you know, several years ago we were – had the benefit of being able to look at how a company performed in the last downturn. We still have that benefit for a large number of our investments. But as the – as the recovery has been so long, it has been so long dated, what we end up doing for some of them if they haven't been around that long is we start to dig into the industry and look at metrics that would be good indicators of how much exposure a given business would have to a downturn if there were one, and that's something that we take very seriously and we do rigorous analysis around each of the investments we make before we do so to get a sense for whether if there were to be a downturn, we feel like the capital structure could hold up and the business could hold up.
是的，这是一个很好的问题，因为，你知道，几年前我们曾经 - 能够看到公司在上一次经济衰退中的表现。 对于我们的大量投资，我们仍然有这样的好处。 但是，由于经济复苏已经很久了，它已经过时了，我们最终为其中一些人做了什么，如果他们还没那么久，我们就会开始深入研究这个行业，并研究那些指标。 如果有一个企业将会对经济衰退产生多大的风险敞口，这将是一个很好的指标，这是我们非常认真对待的事情，我们会在我们这样做之前对每项投资进行严格的分析，以便了解 无论是否出现下滑，我们都觉得资本结构可能会持续下去，而且业务可能会持续下去。
Okay. I understand. And turning to Censis Technology, was the upswing in evaluation due to market multiples or was it operating performance? And if its performance, is there something specific to Censis that would help us understand what's going on there?
好的。 我明白。 转向Censis Technology，由于市场倍数或运营绩效，评估是否上升？ 如果它的表现，是否有特定于Censis的东西可以帮助我们理解那里发生了什么？
It’s purely operating performance. The business is performing exceptionally well. We've been in this credit for a good deal of time and thankfully have an equity co-investment in the business. The company undertook an acquisition, executed on an acquisition recently to buy the Number 2 player in its space and is a consequent. It had always been the Number 1 player in its space, and as a consequence of that acquisition it is the [clear in a way] largest, you know, participant in its business. So, it has a major market share and it's starting to benefit that much further from that. So, it's purely a reflection of exceptional operating performance.
这纯粹是经营业绩。 这项业务表现非常出色。 我们在很长一段时间里一直享有这种信誉，并且幸运的是，我们在这项业务中进行了股权共同投资。 该公司进行了一项收购，最近在一项收购中执行，以收购其所在地区的2号球员，并因此而被收购。 它一直是其领域的第一大玩家，并且由于这次收购，它是[明确的]最大的，你知道，参与其业务。 因此，它拥有主要的市场份额，而且它开始从中受益更多。 因此，它纯粹反映了卓越的操作性能。
Okay, I understand. And just a couple more questions, on Slide 15 in the deck, there's a little dotted box in the SBIC breakout, am I correct in understanding that that $21.4 million is the cash in SBIC?
Correct, Mickey, that’s currently cash sitting in the SBIC. But as you can see, the – from an asset perspective, the license is really fully funded at the moment. It allows us to still recycle as opportunities presented itself, but that's just little cash that we can either deploy in the SBIC or a very large proportion of it we can withdraw out of the SBIC if we wanted to. But with excess cash at the moment that's just resident there at the moment.
正确，米奇，这是现在坐在SBIC的现金。 但正如您所看到的那样 - 从资产角度来看，许可证目前实际上已经完全获得资金。 它允许我们在机会出现时仍然可以回收，但这只是我们可以在SBIC中部署的一小部分现金，或者如果我们愿意，我们可以退出SBIC的很大一部分现金。 但目前居住在那里的现金多余。
And it’s a good question. Let me just add to that because both you and Casey were focused on it and we recognize certainly that the cash position that we’re in is sub-optimal in the long-term. We, as I mentioned before, feel really good about our pipeline and our ability to deploy the capital over time. We mentioned that we’ve closed, you know, just in July and a couple of new deals and feel very good about our prospects for deploying that capital. One of the nice things about that is that it’s just pure math as we deploy that capital and its cash, we’re not borrowing so it – the earnings from the asset deployment fall straight to the bottom line. So, we enjoy a pretty healthy spread between our NII and what our dividend rate is. As we deploy that cash capital that spread, we would expect to grow.
这是一个很好的问题。 让我补充一点，因为你和凯西都专注于它，我们当然认识到我们所处的现金状况在长期内是次优的。 正如我之前提到的，我们对我们的管道和我们随时间部署资本的能力感到非常满意。 我们提到，我们已经在七月份关闭了一些新的交易，并对我们部署该资金的前景感到非常满意。 其中一个好处是，它只是纯粹的数学，因为我们部署了资金和现金，我们不是借来这样 - 资产部署的收益直接降到最低点。 因此，我们在NII和我们的股息率之间享有相当健康的利差。 随着我们部署现金资本的扩散，我们预计会增长。
Do you think that the cash which has been now available in the SBIC for a while is something that's holding the SBA back from granting you the second license? In the words, are the saying, well, you’ve got a liquidity in the first license, you don’t need the second license yet?
I don't think so. I mean I think they have their own process and they run it on by fund-by-fund basis, and, you know, clearly they have, you know, pretty – we have a pretty extensive reporting to them, so they do know everything that's in the portfolio and they have known that for a while. But as far as we know, in terms of their decision-making process, the – you know the excess liquidity or – that’s – it’s called read, it’s basically retained earnings that we’re able to take out at our discretion because we’re, you know, over collateralized in effect by that amount.
And so, you know, it’s not really permanent capital and its pretty flexible capital. So, to answer your question, yes, they are aware of it because we report extensively to them. But secondarily, we don't believe that that's a factor in their decision-making for a second license.
我不这么认为。 我的意思是我认为他们有自己的流程，并且他们是逐个基金来运行的，而且，你知道，很明显他们有，你知道，非常 - 我们有一个非常广泛的报告，所以他们知道一切 这是在投资组合中，他们已经知道了一段时间。 但就我们所知，就他们的决策过程而言， - 你知道流动性过剩或 - 这就是所谓的阅读，它基本上是我们能够自行决定保留的收益，因为我们是 ，你知道，这个金额实际上是抵押的。
所以，你知道，它不是真正的永久资本和非常灵活的资本。 所以，回答你的问题，是的，他们知道它，因为我们向他们广泛报道。 但其次，我们并不认为这是他们决定第二个许可证的因素。
Yes, and just to emphasize that's not equity that $21 million, Mickey, that’s – the license remain $75 million equity, $150 million debentures, $225 million, which they view as fully funded. That is just excess cash and distributable earnings.
是的，只是为了强调这不是2100万美元的股权，Mickey，即 - 许可仍然是7500万美元的股权，1.5亿美元的债券，2.25亿美元，他们认为这些资金是完全资金的。 这只是超额现金和可分配收益。
Understood. And my last question, just in terms of gauging risk in the portfolio, can you give us a sense of what the average EBITDA is for your borrowers in the portfolio as well?
We’d have to – I’d have to come back to you on that. You know I think what I can say is that we do operate in the lower and at the middle market. So, the vast majority of the businesses that we’re investing in, you know, have, you know, [sub $15 million] in EBITDA. The trick when we are underwriting that and I shouldn’t use the word trick, the key thing as we’re underwriting these businesses though is, we’re looking for businesses that have durability that are really strong businesses that we feel very comfortable are going to sustain their enterprise value and grow their enterprise value. Lots of people would say, gosh, that’s harder to do with the smaller end of middle market.
If you really evaluate the difference between large and why people have that opinion, the difference between large middle-market deals and smaller middle-market deals is that, you know, the larger middle-market deals sometimes have greater customer diversity; they’ve got deeper management teams; they have some elements to those businesses that can make them more stable. What we try to do when we look at some of these smaller businesses is that we look for some of those same factors, we look for a lots of customer diversity; we look for businesses that have really strong management teams with a good bench in really good markets that are producing high cash flow. So, they have a lot of the elements that you would see in larger businesses.
我们必须 - 我必须回到你身边。你知道我认为我能说的是我们在低端和中端市场运营。因此，我们投资的绝大多数业务，您知道，[实际上是在1500万美元]的EBITDA。当我们承保这个并且我不应该使用诀窍这个诀窍时，我们正在承担这些业务的关键是，我们正在寻找具有耐用性的企业，这些企业非常强大，我们觉得非常舒适能够维持企业价值并提升企业价值。很多人会说，天哪，中间市场较小的一端更难做到。
Mike, just a follow up. If I look at one of your new investments like in motion now, which was the first lean, I’m assuming you’re the debt capital provider, in other words, it's not a club deal, that would imply assuming a reasonable multiple that you’re willing to do deals with borrowers in the sort of $3 million, $4 million of EBITDA, is that correct?
迈克，只是一个跟进。 如果我现在看看你的一项新投资，比如现在的第一次投资，我假设你是债务资本提供者，换句话说，这不是俱乐部交易，这意味着假设一个合理的倍数 你是否愿意以300万美元，400万美元的EBITDA与借款人达成交易，这是正确的吗？
That’s right. If the credit profile is strong, we would be willing to support businesses in that size range for sure.
Okay, terrific. That’s it for me. You’ve been very helpful. I thank you for your time.
好的，太棒了。 这对我来说。 你一直非常乐于助人。 我感谢你的时间。
Thank you. [Operator Instructions] Our next question will come from Tim Hayes of B. Riley FBR. Your line is open.
谢谢。 [操作员说明]我们的下一个问题将来自B. Riley FBR的Tim Hayes。 你的线是开放的。
Hi, good morning everyone. Thanks for taking my questions. My first one, Mike, you noted in your remarks that you closed two investments in July. And then, you guys also highlighted the Fancy Chap exit. Can you just confirm that that’s the only portfolio activity that’s occurred so far this quarter? And then, if you’re willing to maybe touch on repayment activity so far in the quarter as well?
大家好，大家早上好。 谢谢你回答我的问题。 我的第一个，迈克，你在发言中指出你在七月关闭了两笔投资。 然后，你们也突出了Fancy Chap出口。 您能否确认这是本季度迄今为止发生的唯一投资组合活动？ 那么，如果你愿意在本季度到目前为止也可能涉及到还款活动呢？
Hi, Tim. Its Henri here. You know we don't generally comment, you know, to a significant level on our portfolio originations and repayments post quarter end, but obviously cognizant that as of quarter-end, we had some cash outstanding. You know we felt it notable just to mention that we have had a couple of closings since quarter end, the ones that Mike alluded to actually in July itself. And so, we have had multiple originations since quarter end. But, you know, I think either than that we just don't comment I think in more detail on that as it, you know, continues to change on a daily basis.
嗨，蒂姆。 它的亨利在这里。 您知道，我们通常不会在季度末对我们的投资组合来源和还款进行重要评论，但显然认识到截至季末，我们还有一些未偿还的现金。 你知道我们觉得值得注意的是，自从季度结束以来我们已经有几次关闭，这是Mike自己在七月提到的那些。 因此，自季度结束以来，我们有多个来源。 但是，你知道，我认为，或许我们只是不评论我会更详细地考虑，因为它，你知道，它每天都在不断变化。
Okay, fair enough. And then, you know, I know you highlighted the Fancy Chap exit in the press release, but, you know, obviously didn't know what type of gain you expect and we can see where it’s kind of held out in the schedule investments. But just wondering if you expect a gain that’s materially higher than, you know, what would be implied in [SOI]?
好的，公平的。 然后，你知道，我知道你在新闻稿中强调了Fancy Chap退出，但是，你知道，显然你不知道你期望获得什么类型的收益，我们可以看到它在计划投资中的位置。 但只是想知道你是否期望获得的收益远远超过[SOI]隐含的收益？
No, the – you know when you do your fair value at the end of the quarter, you do consider and assess, you know, certain conditions that existed post quarter end. And so, we obviously factored in the realization that had occurred since off the quarter end. And so, the gain that you see in Q1 is a significant – is primarily the amount that we recognized.
不， - 你知道当你在季度末做公允价值时，你会考虑并评估季后结束时存在的某些条件。 因此，我们显然考虑到自季末以来发生的事实。 因此，您在第一季度看到的收益是重要的 - 主要是我们认可的数额。
Okay, understood. And then, you know, you talked about the pipeline, but if you had to describe it, you know, in a word or two, how would you describe it? Is it kind of in line with where it’s been? Is it very strong? And then, are any of the characteristics of the deals you're seeing any different in any way whether it be industry or loan size or a sponsor versus non-sponsor etcetera?
好的，明白了。 然后，你知道，你谈到了管道，但如果你不得不描述它，你知道，一两句话，你会如何描述它？ 它是否与它的位置一致？ 它非常强大吗？ 然后，无论是行业还是贷款规模，还是赞助商与非赞助商等，您所看到的交易的任何特征是否有任何不同？
I would characterize it as healthy and consistent with last year with the addition, and this is what we get excited about, with the addition of opportunities from new relationships that we didn't have a year ago. So, when we think about growing our business, it certainly is a matter of growing assets, but the way you get those assets is building relationships that are going to repeat customers if you will, and our business development efforts this year are starting to bear fruit in that respect. So, it's something that we’re pretty excited about.
我将它描述为与去年一样健康且与之相符，并且这是我们感到兴奋的事情，增加了我们一年前没有的新关系的机会。 因此，当我们考虑发展我们的业务时，它肯定是一个增长资产的问题，但你获得这些资产的方式是建立将重复客户的关系，如果你愿意，我们今年的业务发展努力开始承受 在这方面的成果。 所以，这是我们非常兴奋的事情。
Okay, got it. Thanks for those comments, Mike. And then, you know, Mike, you’d also touched on this a bit with – on Fancy Chap, but repayments have been a bit elevated over the past six months as, I believe you mentioned, and would you say this is just a timing thing or more broadly reflects strong credit performance and company is executing on their business plans in being able to repay their loans? And if, you know, if it is whether it’s the latter or not, you know, roughly what percentage of repayments over the last six months would you say were kind of refi driven?
好，知道了。 谢谢你的评论，迈克。 然后，你知道，迈克，你也曾在Fancy Chap上谈过这个问题，但过去六个月的还款有点提升，我相信你提到了，你会说这只是一个 时机还是更广泛地反映了强大的信贷业绩，公司正在执行其业务计划以偿还贷款？ 如果，你知道，不管是不是后者，你知道吗，你认为过去六个月中你所说的大部分还款额是否都是由后者驱动的？
I’d have to look at the numbers, but I think more of them are just excess change of control driven than otherwise. We’re not seeing any – I think just stepping back and thinking about repayments, we would expect our repayment activity to be normal for a portfolio company of our size. You know you can get surprises occasionally for sure, but we would expect this year’s repayment activity to be normal for a company of our size, and reflective of what we’ve had historically.
我必须看看这些数字，但我认为更多的是控制驱动的过度变化。 我们没有看到任何 - 我认为只是退回并考虑还款，我们预计我们的还款活动对于我们规模的投资组合公司来说是正常的。 你知道你偶尔可以获得惊喜，但我们预计今年的还款活动对于我们这样规模的公司来说是正常的，并且反映了我们历史上曾经拥有的东西。
And one more, just a broader comment, I think that the repayment activity on the one hand, you know, we think is reflective of the quality of our portfolio and the quality as you say, but the company is hitting their plans and ultimately reaching exits, but we’re also on the origination side seeing a lot of activity as well. So, we think there is still a pretty robust activity in the marketplace that we’re serving.
还有一个，只是一个更广泛的评论，我认为，一方面，我们认为，还款活动反映了我们的投资组合的质量和您所说的质量，但该公司正在实施他们的计划并最终达成 退出，但我们也在起源方面看到了很多活动。 因此，我们认为市场上仍有一个非常强劲的活动供我们服务。
Right, right. Okay. Thanks for that. and then, my last one here, the portfolio yield dropped a bit this quarter and the portfolio mix, obviously shifted a bit more first lean as you pointed out and yields on new portfolio investment seem to be a bit lower as well. Just wondering if those trends, if you believe it reflects competition in the space and you needing to give up a little bit yield to win deals.
是的是的。 好的。 感谢那。 然后，我的最后一个，本季度投资组合收益率略有下降，投资组合组合明显偏移了一点，如你所指出的那样，新投资组合的收益率似乎也略低。 只是想知道这些趋势，如果你认为它反映了空间的竞争，你需要放弃一点收益来赢得交易。
We aren't seeing that so much. I think the way we've typically deployed assets as we look at what the opportunity set is, what the business is and where we want to be on the balance sheet. And when we find a first lien senior secured investment, on average the yield on that opportunity is going to be a little less than something that's more junior in the capital structure. We happen to be finding some good deal opportunities that are top of the capital stack, which we think is a very good thing. But the change in yield is more reflective of that.
我们没有看到那么多。 我认为，当我们查看机会设置是什么，业务是什么以及我们希望在资产负债表上的位置时，我们通常会部署资产的方式。 当我们找到第一个留置权高级担保投资时，平均而言，这个机会的收益率将略低于资本结构中较低级的收益率。 我们碰巧找到了一些顶级资本堆栈的优惠机会，我们认为这是一件非常好的事情。 但产量的变化更能反映出这一点。
Okay. I appreciate you taking my questions this morning.
Alright, thanks Tim.
Thank you. And that concludes our question-and-answer session for today. It is now my pleasure to hand the conference back over to Mr. Christian Oberbeck for any closing comments or remarks.
谢谢。 这就是我们今天的问答环节。 现在我很高兴将会议交回Christian Oberbeck先生的任何结束评论或评论。
Well, we’d like to thank everyone for joining us today. We look forward to speaking with you next quarter.
Thank you everyone for joining us today. We look forward to speaking with you next quarter.
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