Saratoga Investment Corporation (NYSE:SAR) Q1 2015 Results Earnings Conference Call July 15, 2014 10:00 AM ET
Henri Steenkamp - Chief Financial Officer
Christian Oberbeck - Chief Executive Officer
Michael Grisius - President and CIO
Good morning, ladies and gentlemen, thank you for standing by. Welcome to Saratoga Investment Corp’s Fiscal First Quarter 2015 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 lines for questions.
At this time, I would like to turn the call over to Saratoga Investment Corp’s Chief Financial Officer Mr. Henri Steenkamp. Sir, please go ahead.
Thank you operator. I would like to welcome everyone to Saratoga Investment Corp's fiscal first quarter 2015 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 its projections. We do not undertake to update our forward-looking statements unless required by law.
Today, we will be referencing a presentation during our call. You can find our Q1 2015 presentation in the Events & Presentations section of our IR website. A link to our Investor Relations 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 21st. Please refer to our earnings press release for details.
I would now like to turn the call over to our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you, Henri and welcome everyone. Although it has been a relatively short period of time since we last caught up with all of you related to our fourth quarter of fiscal year 2014 we are pleased to have this opportunity to further update you on our firm and our first quarter results.
In the fiscal first quarter of 2015, we continue to make progress toward a long term strategy of strengthening our financial foundation by expanding our assets under management to $219 million from $206 million at the end of fiscal year 2014 and improving our investment quality and credit.
As you can see on slide two, the upward trend in terms of quality and quantity of our assets has continued. With $219 million under management we’ve seen a 6.3% increase in our assets under management since last quarter with over 78% of our investments holding the highest internal rating that we award. The continued increase in assets during this quarter is also reflected in some of our key performance metrics this quarter compared to the quarter ended February 28, 2014, with adjusted net income per share increasing 11% from $0.36 a share to $0.40 a share and adjusted net investment income yield increasing 50 basis points from 6.9% to 7.4%.
With that I would now like to turn the call back over to Henri to review our full financial results as well as the composition and performance of our portfolio.
Thank you, Chris. Looking at our key performance metrics on slide three, we see that for the quarter ended May 31, 2014, our net investment income was $2.1 million or $0.58 on a weighted average per share basis. Adjusted for the incentive fee accrual related to net unrealized capital gain in the second incentive fee calculation, our net investment income was $2.2 million or $0.40 per share. This represented a decrease of $0.4 million as compared to the same period last year but a $0.6 million increase compared to the quarter ended February 28, 2014.
In the first quarter of 2015, we experienced a net loss on investment of $0.3 million or $0.05 on a weighted average per share basis resulting in a total increase in net assets from operations of $1.8 million or $0.53 per share. A net realized gain of $0.1 million was offset by net unrealized depreciation of $0.4 million.
Net investment income yield as a percentage of average net asset value was 7.1% for the quarter ended May 31, 2014. Adjusted for the same incentive fee accrual, the net investment income yield was 7.4% for the same quarter. This is an increase of 50 basis points from 6.9% for the quarter ended February 28, 2014. Return on equity was 6.1% for this quarter. These are performance metrics that we feel are important indicators of how successful we are in pursuing our strategy of growing the asset base building scale and generating competitive yield while continuing to focus on the quality of our portfolio. Our total investment income for the fiscal first quarter 2015 was $6.1 million, an increase of $0.1 million or 2% compared to the same period in 2014 and an increase of $0.4 million or 8% from the quarter ended February 28, 2014.
Our investment income was comprised primarily of $5.6 million of interest income and $0.4 million of management fee income associated with our investments in the CLO. Our total operating expenses were $4.1 million for the fiscal first quarter 2015 and consisted of $1.8 million in interest and debt financing expenses, $1.4 million in base and incentive management fees $0.7 million in professional fees and administrator expenses and $0.3 million in insurance expenses, directors’ fees and general, administrative and other expenses.
For the fiscal first quarter 2015, total operating expenses decreased by $0.1 million or 3.4% as compared to the same quarter ended February 28, 2014. Total operating expenses increased approximately $0.8 million compared to the same period last year. This increase in total operating expenses was primarily attributable to higher interest and credit facility financing expenses as well as increased base management fees as our asset base continues to grow.
Net asset value was $116.7 million as of May 31, 2014, a $1.8 million increase from an NAV of $114.9 million as of February 28. NAV per share was $21.69 as of May 31, 2014 compared to $21.36 as of the same time last quarter.
Slide four outlines the dry powder available to us as of May 31, 2014. As of the end of the fiscal first quarter 2015 we had $4.7 million in borrowings under our revolving credit facility with Madison Capital Funding and $64 million in outstanding SBA debentures. Our baby bonds had a carrying amount and fair value of $48.3 million and $49 million respectively.
With the $40.3 million available on the credit facility, $86 million additional borrowing capacity at our SBIC subsidiary and $12.7 million in cash and cash equivalents we had a total of $139 million of available borrowing capacity or liquidity at our disposal as of May 31, 2014.
This available liquidity equates to approximately 64% of the value of our investments meaning we can grow our assets under management by a further 64% without any additional external financing. As a result we are pleased with our liquidity position especially taking into account the conservative composition of our balance sheet and the ability we have to substantially grow our assets without the need for external financing.
Now we'd like to move on to slide five and review the composition and performance of our investment portfolio. At the close of the quarter ended May 31, 2014 the fair value of the company's investment portfolio was $218.7 million, principally invested in 40 portfolio companies and one CLO fund.
Saratoga Investment's portfolio was composed of 14.7% of middle-market loan, 40.1% of first lien term loans, 15% of second lien term loans, 13.4% of senior secured notes, 2.5% of unsecured notes, 9.2% of subordinated notes of the Saratoga CLO and 5.1% of common equity.
As of May 31, 2014, the weighted average current yield on Saratoga Investment's portfolio for the three months was 11.9%, which was comprised of a weighted average current yield of 11.1% on first and second lien term loans, 14.1% on senior secured notes, 15.1% on unsecured notes, 22% on our CLO subordinated notes and 6.3% on middle-market loans. We continue to experience downward pressure on yields as competition remains high in the markets we service.
Slide five demonstrates how the yield on our core BDC assets excluding our CLO and middle-market loan has remained stable in the mid 11% range, even increasing slightly this quarter to 11.8%. At the same time, a decrease in our CLO assets under management and higher refinancing costs over the past year have both contributed to the CLOs yield decline as compared to prior years, although this quarter was strong. We also invested in certain middle market loans while looking for high yielding opportunities in the market.
Moving on to slide six, during this fiscal first quarter 2015 we invested $21.6 million in new and existing portfolio companies and had $8.7 million in aggregate amount of exits and repayments resulting in net investments of $12.9 million for the quarter at our BDC.
As you can see on the slide, our investments are highly diversified by type as well as in terms of geography and industry with the big focus on business services, health care and consumer services and investments across 18 distinct industries. Of our total investment portfolio approximately 5% consists of equity interest; successful equity investments are and will continue to be an important part of our overall strategy.
This next slide, slide seven demonstrates how realized gains from the sale of equity investments combined with other investments help enhance shareholders’ capital. For the past two years we’ve had a combined $1.9 million of net realized gains from the sale of equity interest, all sale or early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality.
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’d like to take a couple of minutes to update everybody on the current market as we see it. With only six weeks having passed since we last spoke current market conditions remained extremely competitive as there is an abundance of capital chasing a historically low volume of new investment opportunities. This dynamic is particularly evident at the larger end of the middle market.
As you can see on slide eight, middle market leverage now equals pre-crisis levels. At the same time, pricing has continued to contract considerably. We are still seeing a consistent flow of investment opportunities where in our view the debt providers are underpricing and taking on too much risk. In this environment, we believe our shareholders will benefit from our experienced investment perspective and our disciplined approach to deploying capital.
We continue to reside on the lower end of the middle market and believe this is the place to be on a relative basis with the best risk adjusted returns. There are also substantial opportunities found here as banks and other capital providers are less focused on this end of the market.
Moving onto slide nine, you will see on the left side of this slide that middle market volume albeit steady, remains well below pre-crisis levels. Institutional investors continue their move back into the middle market loans as institutional volume remains the main driver of the recent increase in total loan volume. Similar to trends for large corporate borrowers, pro rata loans continued to lose ground to institutional deals.
On the right side of slide nine, you can see that as a result of the favorable lending environment, average senior debt multiples for new middle market loans increased to approximately 4.9 times, an increase from 2013’s average senior debt multiple of 4.5 times. This largely reflects the proliferation of unitranche product in the middle market.
Now our objective is to maximize our risk adjusted returns in the manner that utilizes the low cost of capital and 2:1 leverage advantage we (inaudible) through our SBIC license. By focusing on the smaller less competitive end of the market, we are able to reduce the risk profile of our portfolio, while delivering highly accretive returns to our investors.
As you can see on slide 10, as of May 31, 2014, over 73% of our SBIC investments are in senior debt securities and the leverage profile of these investments is low, especially when compared to market leverage shown previously on slide eight. Because of the leverage and cost of money [advantages] [ph] inherent in the SBIC program, we can achieve strong returns for our shareholders without moving far out on the risk spectrum. Therefore we intend to grow our net investment income by continuing to dedicate the majority of our effort and resources to growing that portion of our portfolio.
Moving on to slide 11, you can see how we have grown our SBIC assets to $98.8 million as of May 31, 2014. As a percentage of our portfolio, SBIC assets have grown from 0% at fiscal year- end 2012 to 45% at the end of Q1 2015.
It is important to note that as of our quarter ended May 31, 2014, we had 129 million total untapped SBIC investment capacity of which 86 million is leveraged capacity within our current SBIC license. If we were to obtain a second license, our leverage capacity would increase by another $75 million.
Now in our view, our origination platform is among the very best at our end of the market. We are seeing a steady flow of SBIC eligible investments and we are very optimistic about our ability to grow that portfolio at a healthy rate while remaining extremely diligent in our underwriting of due diligence procedures.
This concludes my review of the market; I would like to turn it back to our CEO, Chris.
Thank you, Mike. Moving on to slide 10, our final slide, our objectives remain consistent with what we have previously discussed with you all last quarter. We have achieved much and continue the execution of our long-term strategy 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. Our primary focus remains on maximizing the potential 20% plus returns on the equity invested in our SBIC and utilizing the 2:1 leverage that provides. This is the optimal means to increase our assets under management and net investment income yield, enabling us to increase returns to shareholders and achieving growth in our net asset and stock values.
Along with our objectives of increasing our net assets and total returns to shareholders, our actions to increase assets under management are geared towards best positioning ourselves to begin paying regular quarterly cash dividends.
In closing, I would again like to thank all of our shareholders for their ongoing support. We are excited for the growth and profitability that lies ahead for Saratoga Investment Corp. And I would now like to open the call for questions.
Thank you. (Operator Instructions). And sir, I'm not showing any questions at this time; I would like to turn the call back over to you.
Seeing as there are no questions, we want to thank everyone for joining us today. We will look forward to speaking with you all next quarter. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.
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