SARATOGA INVESTMENT CORP. annual report, Q1 FY2017

Saratoga Investment Corp. 10-K Summary (Fiscal Year Ended Feb 28, 2017)

Business Context and Reporting Period

Saratoga Investment Corp. is an externally managed, closed-end, non-diversified Business Development Company (BDC) and Regulated Investment Company (RIC). The company invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies. The reporting period covers the fiscal year ended February 28, 2017. The company is managed by Saratoga Investment Advisors, LLC.

Key Financial Metrics

Metric Value (2017) Value (2016)
Total Assets $318.7 million $295.0 million
Total Investments (Fair Value) $292.7 million $284.0 million
Total Debt Outstanding $181.5 million $160.7 million
Net Assets $127.3 million $125.1 million
Net Asset Value (NAV) per Share $21.97 $22.06
Total Investment Income $33.2 million $30.1 million
Net Investment Income $9.7 million $10.7 million
Net Increase in Net Assets from Operations $11.4 million $11.6 million
Weighted Average Yield on Debt Investments 10.9% 11.1%
Asset Coverage Ratio (1940 Act) 271.0% 302.5%

Material Changes vs. Prior Period

  • Debt Refinancing: On December 21, 2016, the company issued $74.5 million of 6.75% Notes due 2023. Proceeds were used to redeem $61.8 million of 7.50% Notes due 2020 on January 13, 2017. This resulted in a $1.5 million loss on extinguishment of debt.
  • Portfolio Composition: The portfolio shifted toward a higher concentration in Business Services (55.1% of fair value) compared to the prior year (37.3%). Floating rate debt increased to 83.1% of the interest-bearing portfolio.
  • Realized Gains: Net realized gains increased significantly to $12.4 million, driven primarily by the sale of equity stakes in Take 5 Oil Change, L.L.C. ($6.0 million gain) and Legacy Cabinets, Inc. ($3.4 million gain).
  • Unrealized Depreciation: The company recorded net unrealized depreciation of $10.6 million, largely due to the realization of previously accrued gains on the aforementioned sales and a decline in the value of the Elyria Foundry Company investment.
  • Expense Growth: Total operating expenses increased 13.8% to $22.0 million, driven by higher interest expenses due to increased debt levels and higher incentive management fees.

Guidance, Outlook, and Risks

Management Commentary: Management continues to focus on generating current income through leveraged loans and mezzanine debt. The company maintains a dividend reinvestment plan (DRIP) and has an open market share repurchase plan authorized for up to 600,000 shares.

Key Risks and Contingencies:

  • Saratoga CLO Investment: The company holds a first-loss position in Saratoga CLO (fair value $11.0 million). This investment is subject to unique risks, including the potential for total loss if the underlying loan portfolio suffers defaults.
  • Leverage: The company employs leverage to enhance returns. As of period end, it had $112.7 million in SBA-guaranteed debentures and $74.5 million in 2023 Notes outstanding. No borrowings were outstanding under the $45.0 million revolving credit facility.
  • Interest Rate Risk: A significant portion of the portfolio consists of floating-rate assets. A 1.0% increase in interest rates would hypothetically increase interest income by approximately $2.2 million.
  • Concentration Risk: The portfolio is heavily concentrated in the Business Services industry (55.1%) and the Southeast region (39.7%).
  • SBIC License: The company is in the process of reapplying for a second SBIC license, which would allow for an additional $150.0 million in SBA-guaranteed debentures if approved.

Investor Verification Checklist

  • Verify the current status of the second SBIC license application with the SBA.
  • Review the specific credit quality and default status of the $297.1 million portfolio underlying the Saratoga CLO investment.
  • Confirm the company's ability to maintain RIC status given the mix of cash and stock dividends and the requirement to distribute 90% of taxable income.
  • Monitor the concentration risk in the Business Services sector and the impact of economic downturns on this specific industry.
  • Assess the impact of the 2023 Notes refinancing on the company's weighted average cost of debt and future interest coverage ratios.