Saratoga Investment Corp. 10-Q Summary
Business Context and Reporting Period
Company: Saratoga Investment Corp. (Saratoga)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2011
Business Model: Saratoga is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). Its objective is to generate current income and capital appreciation primarily through investments in leveraged loans (first and second lien term loans), mezzanine debt, and equity securities of middle-market companies. The portfolio also includes a significant investment in a collateralized loan obligation (CLO) fund managed by the company.
Key Financial Metrics
| Metric | Nov 30, 2011 | Feb 28, 2011 |
|---|---|---|
| Total Assets | $99.77 million | $98.77 million |
| Total Investments (Fair Value) | $85.38 million | $80.02 million |
| Cash and Cash Equivalents | $7.94 million | $10.74 million |
| Total Liabilities | $5.47 million | $12.70 million |
| Net Assets | $94.30 million | $86.07 million |
| Net Asset Value (NAV) per Share | $24.32 | $26.26 |
| Revolving Credit Facility Outstanding | $0 | $4.5 million |
Results of Operations (Nine Months Ended Nov 30, 2011)
- Total Investment Income: $10.06 million (Decreased 8.6% vs. prior year due to one-time interest reversals in the prior period, partially offset by higher income from the CLO investment).
- Total Expenses (Net of Waivers): $5.94 million (Decreased 37.4% vs. prior year, primarily due to reduced professional fees and interest expenses following debt repayment).
- Net Investment Income: $4.12 million.
- Net Realized Losses: $5.84 million (Driven by write-downs on specific investments including Grant U.S. Holdings LLP).
- Net Unrealized Appreciation: $11.93 million (Significant appreciation in the Saratoga CLO investment offset by depreciation in other portfolio companies).
- Net Increase in Net Assets from Operations: $10.19 million.
- Earnings Per Share (Basic & Diluted): $3.10.
Material Changes and Portfolio Activity
- Debt Reduction: The company fully repaid its $4.5 million outstanding balance on the revolving credit facility during the period. As of November 30, 2011, there was no outstanding debt.
- Portfolio Composition: Investments in "Structured Finance Securities" (primarily the Saratoga CLO) increased to 29.7% of the total portfolio. First lien term loans increased to 42.0% of the portfolio.
- Credit Quality: The portfolio's Credit and Monitoring Rating (CMR) distribution improved, with "Red" rated investments dropping from 30.8% of the portfolio at Feb 28, 2011, to 6.7% at Nov 30, 2011.
- Dividends: A dividend of $3.00 per share was declared on November 15, 2011, payable December 30, 2011. Due to shareholder elections exceeding the cash limit, the dividend was paid as a combination of cash ($2.0 million) and stock (599,584 shares).
Outlook, Risks, and Management Commentary
- Liquidity Strategy: Management is pursuing a Small Business Investment Company (SBIC) license from the SBA to access lower-cost, SBA-guaranteed debentures. The company received a "green light" to proceed with the application but noted no assurance of approval or timing.
- Capital Raising: Stockholders approved a proposal allowing the company to sell shares below net asset value (NAV) for one year to facilitate capital raising, subject to a floor of 85% of NAV.
- Risk Factors: Risks include the potential dilution from selling shares below NAV, the impact of the U.S. credit rating downgrade and European economic crisis on liquidity and asset values, and the illiquidity of the portfolio investments.
- Valuation: Fair values for investments without readily available market quotes are determined in good faith by the Board of Directors, utilizing third-party valuations and discounted cash flow models (specifically for the CLO investment).
Investor Verification Checklist
- CLO Valuation Sensitivity: Verify the assumptions (default rates, recovery rates, discount rates) used to value the $25.4 million investment in Saratoga CLO, which represents nearly 30% of the portfolio.
- SBIC License Status: Monitor the progress of the SBIC application with the SBA, as success is critical for future low-cost leverage.
- Dividend Sustainability: Assess whether the $3.00 per share dividend is sustainable given the net investment income of $4.12 million for the nine-month period and the reliance on capital gains to fund distributions.
- Concentration Risk: Review the concentration of assets in the top 10 portfolio companies and the specific performance of the "Red" rated assets remaining in the portfolio.
- Below-NAV Issuance: Track any future equity offerings executed under the new shareholder authorization to sell below NAV and their impact on per-share value.