Business Context and Reporting Period
Saratoga Investment Corp. (Saratoga) is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company's investment objective is to generate current income and, to a lesser extent, capital appreciation primarily through leveraged loans and mezzanine debt issued by private U.S. middle-market companies. This report covers the quarterly period ended November 30, 2017.
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2017 | Three Months Ended Nov 30, 2017 |
|---|---|---|
| Total Investment Income | $28.49 million | $9.53 million |
| Net Investment Income | $9.41 million | $3.02 million |
| Net Increase in Net Assets from Operations | $12.15 million | $4.26 million |
| Net Asset Value (NAV) per Share | $22.58 (End of Period) | $22.58 (End of Period) |
| Weighted Average EPS (Basic & Diluted) | $2.04 | $0.71 |
| Total Investments at Fair Value | $338.84 million | $338.84 million |
| Total Debt Outstanding | $210.11 million | $210.11 million |
| Cash and Cash Equivalents | $8.72 million | $8.72 million |
| Asset Coverage Ratio | 284.0% | 284.0% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income for the nine months ended November 30, 2017, increased by 14.9% to $28.49 million compared to $24.80 million in the prior year period. This was driven by a 22.1% increase in total investments and a rise in the weighted average current coupon from 10.8% to 11.3%.
- Realized Gains/Losses: The company reported a net realized loss of $5.66 million for the nine months ended November 30, 2017, contrasting with a net realized gain of $12.30 million in the prior year. The primary driver of the loss was a $7.71 million realized loss on the sale of a second lien term loan to My Alarm Center, LLC.
- Unrealized Appreciation: Net change in unrealized appreciation on investments was $8.39 million for the nine months ended November 30, 2017, a significant improvement from a depreciation of $10.73 million in the prior year period.
- Operating Expenses: Total operating expenses increased by 17.5% to $19.08 million for the nine-month period, primarily due to higher interest and debt financing expenses resulting from increased outstanding debt levels (SBA debentures and 2023 Notes).
- Debt Structure: The company issued $74.5 million in 6.75% fixed-rate notes due 2023 and used proceeds to redeem the 2020 Notes. SBA debentures increased to $134.7 million from $112.7 million in the prior year.
Guidance, Outlook, and Risks
- Portfolio Performance: The portfolio's weighted average current yield increased to 11.3%. The Credit and Monitoring Rating (CMR) distribution shows 85.7% of the portfolio rated "Green" (performing) and 2.4% rated "Yellow" (underperforming) as of November 30, 2017.
- Liquidity and Capital Resources: The company maintains a $45.0 million senior secured revolving credit facility with $1.0 million outstanding and a borrowing base of $31.8 million. The company intends to fund growth through SBA debenture drawdowns and equity offerings, including its Dividend Reinvestment Plan (DRIP).
- Dividends: The company declared a dividend of $0.49 per share on November 29, 2017, payable December 27, 2017. Shareholders may elect to receive dividends in cash or stock.
- Risks:
- Tax Legislation: New tax legislation signed into law on December 22, 2017, could negatively affect the company's ability to qualify as a Regulated Investment Company (RIC) or impact the tax consequences to investors.
- Interest Rate Risk: A hypothetical 1.0% increase in interest rates would increase interest income by approximately $2.4 million, assuming a constant portfolio.
- SBIC License: The company is in the process of reapplying for a second SBIC license, which was previously granted a "green light" but expired due to a request for updated materials. Approval would allow for an additional $150 million in SBA-guaranteed debentures.
Key Facts for Investor Verification
- NAV vs. Market Price: Verify the current market price of the stock relative to the reported NAV of $22.58 per share to assess the discount/premium.
- Realized Loss Impact: Review the specific details of the $7.71 million realized loss on My Alarm Center, LLC, to understand the impact on future income and portfolio quality.
- Debt Maturity Profile: Confirm the maturity dates of the $74.5 million 2023 Notes and the $134.7 million SBA debentures to assess refinancing risks.
- Non-Performing Assets: Monitor the $8.3 million in non-performing or delinquent investments, specifically the reserve increase related to TM Restaurant Group L.L.C.
- Second SBIC License Status: Track the progress of the application for the second SBIC license, as approval is contingent on SBA review and could significantly alter capital raising capabilities.