Saratoga Investment Corp. — Form 10-Q Summary
Business context and reporting period
Business development company (BDC) focused on current income and, to a lesser extent, capital appreciation from investments primarily in U.S. middle-market companies. The unaudited quarter and nine-month periods ended November 30, 2022; the balance-sheet comparison is February 28, 2022.
Key financial metrics
| Metric | Three months ended Nov. 30, 2022 | Nine months ended Nov. 30, 2022 | Comparison |
|---|---|---|---|
| Total investment income | $26.3 million | $66.8 million | Up 59.1% and 29.0%, respectively, year over year |
| Net investment income (NII) | $9.9 million; $0.83 per share* | $25.6 million; $2.13 per share* | Prior-year NII: $5.2 million and $14.1 million |
| Net increase in net assets from operations | $6.0 million; $0.51 per share | $5.5 million; $0.46 per share | Prior year: $8.3 million; $0.73 per share, and $37.3 million; $3.30 per share |
| Investment fair value | $982.0 million at Nov. 30, 2022 | $817.6 million at Feb. 28, 2022 | |
| Net assets / NAV per share | $335.8 million / $28.25 at Nov. 30, 2022 | $355.8 million / $29.33 at Feb. 28, 2022 | |
| Cash and reserve-account cash | $47.0 million at Nov. 30, 2022 | $52.9 million at Feb. 28, 2022 | |
| Operating cash flow | $(162.9) million for nine months | $(56.9) million in prior-year period |
*NII per share is calculated from NII and weighted-average shares; the filing’s financial highlights report $2.13 for the nine-month period. The statement of operations reports earnings per share from total operations of $0.46 for the same period.
- Investment fair value increased about 20% from fiscal year-end, while net assets fell about 5.6%. Nine-month unrealized depreciation was $25.8 million, partly offset by $7.4 million in net realized investment gains.
- Interest and debt financing expense rose 74.5% for the quarter and 61.8% for the nine-month period year over year, mainly with higher average borrowings. Nine-month expense was $23.2 million versus $14.4 million.
- Portfolio mix was 81.9% first-lien loans by fair value. The reported weighted-average current yield was 10.4%, versus 7.7% at February 28, 2022; 98% of the interest-earning portfolio was floating-rate debt.
Material changes, capital and liquidity
- Debt obligations totaled approximately $701.2 million at November 30, 2022, comprising $242.7 million of SBA debentures, $25.0 million drawn on the Encina revolving facility, and $433.5 million of notes. The filing reports a 173.2% asset-coverage ratio, above the 150% statutory minimum; SBA debentures are excluded from this ratio under SEC exemptive relief.
- The company issued $105.5 million of 6.00% notes due 2027, $46.0 million of 8.00% notes due 2027, and $12.0 million of 7.00% notes due 2025 during the period; it redeemed $43.1 million of 7.25% notes due 2025. The nine-month cash flow statement reports $163.5 million of note issuance and $43.1 million of note repayments.
- At quarter-end, the $50.0 million Encina facility had $25.0 million outstanding; the borrowing base was $69.8 million, subject to the facility cap. The company also reported $47.0 million cash and reserve cash and $77.5 million of unfunded commitments. Reserve-account cash is restricted for specified facility and subsidiary purposes.
- Financing cash flow was $157.1 million for the nine months, largely offsetting investment-related operating cash outflow and distributions/repurchases. Cash and reserve cash declined $5.8 million over the period.
Outlook, risks and unusual items
- No specific earnings or portfolio guidance is provided. Management cites access to cash, borrowings, SBA debentures and future debt or equity issuance as funding sources, but cautions that capital raising may not be available on favorable terms. Management says liquidity is adequate for near-term needs.
- One portfolio investment, Knowland Group, was on non-accrual at a fair value of approximately $9.7 million, about 1.0% of the portfolio; no investments were on non-accrual at February 28, 2022. Interest receivable includes a $1.6 million reserve.
- Private investment valuations are predominantly Level 3 and rely on significant unobservable inputs and board-approved estimates. Saratoga CLO subordinated-note fair value declined to $19.4 million from $28.7 million at fiscal year-end; the filing attributes the decline in part to higher discount rates, rate changes and market conditions.
- Unrealized depreciation included a $9.5 million year-to-date decline in Pepper Palace and depreciation in CLO and joint-venture exposures. The company also recorded a $3.7 million benefit in nine-month capital-gains incentive-fee accruals; actual capital-gains fees are determined using realized results at fiscal year-end.
- Rate sensitivity analysis estimates a 100-basis-point increase would raise annual interest income by about $8.6 million, before related expenses and other changes. Key risks include borrower defaults, valuation uncertainty, leverage, inflation, economic downturn, rising rates, LIBOR transition and market access.
- Subsequent to quarter-end, Saratoga issued $60.4 million aggregate principal of 8.125% notes due 2027, including the fully exercised option. In January 2023, the board extended the share repurchase plan through January 15, 2024 and increased its authorization to 1.7 million shares.
Most important facts for investors to verify
- Portfolio credit quality and the outlook for Knowland and other weaker-rated or impaired holdings.
- How much of the $77.5 million unfunded commitments may be drawn, and the availability and borrowing-base conditions of the Encina facility.
- Asset coverage, total debt and future financing costs, including the effect of recent and subsequent higher-coupon note issuance.
- Fair-value assumptions for Level 3 investments, Saratoga CLO and the SLF joint venture, and the potential effect on NAV.
- Whether investment income and cash collections can sustain distributions as expenses, borrowing costs and portfolio credit risks change.