Business Context and Reporting Period
Saratoga Investment Corp. (SAR), a Business Development Company (BDC) incorporated in Maryland, filed this Form 8-K on December 13, 2022. The filing reports the entry into a material definitive agreement and the creation of a direct financial obligation related to a new debt offering.
Key Financial Metrics and Transaction Details
- Debt Issuance: $52,500,000 aggregate principal amount of 8.125% Notes due 2027.
- Net Proceeds: Approximately $50,759,375.
- Offering Costs: Underwriting discounts and commissions of $1,640,625 and estimated offering expenses of approximately $100,000.
- Interest Rate: 8.125% per annum.
- Maturity Date: December 31, 2027.
- Interest Payment Dates: February 28, May 31, August 31, and November 30, commencing February 28, 2023.
- Redemption: Callable in whole or in part on or after December 13, 2024, at par plus accrued interest.
Material Changes and Capital Structure
The Company has increased its unsecured indebtedness by $52.5 million. The Notes are direct unsecured obligations ranking pari passu with existing unsubordinated unsecured indebtedness. They are effectively subordinated to all existing and future secured indebtedness (including borrowings under the senior secured revolving credit facility) and structurally subordinated to all obligations of the Company's subsidiaries.
Use of Proceeds, Covenants, and Risks
Use of Proceeds: Net proceeds will be used for investments in middle-market companies (including through Saratoga Investment Corp. SBIC III LP) and for general corporate purposes.
Covenants: The Indenture includes covenants requiring compliance with Section 18(a)(1)(A) of the Investment Company Act of 1940. The Company is restricted from declaring cash dividends, making other distributions, or purchasing capital stock unless it maintains an asset coverage ratio of at least the threshold specified in Section 18(a)(1)(B) of the 1940 Act (as modified by Section 61(a)(2)), after deducting the amount of such dividend, distribution, or purchase price.
Risks: The filing does not provide specific quantitative risk factors beyond the standard subordination of the Notes to secured debt and the structural subordination to subsidiary debt. The ability to pay dividends is contingent on maintaining specific asset coverage ratios.
Investor Verification Checklist
- Verify the current asset coverage ratio to assess the Company's ability to declare future cash dividends under the new indenture covenants.
- Review the full text of the Thirteenth Supplemental Indenture (Exhibit 4.2) for specific limitations and exceptions to the covenants.
- Confirm the impact of the new $52.5 million debt on the Company's overall leverage and liquidity position relative to its existing revolving credit facility.
- Check subsequent filings for the actual deployment of the $50.76 million in net proceeds into middle-market investments.