Business Context and Reporting Period
Saratoga Investment Corp. (SAR) is a Maryland corporation operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in senior and unitranche leveraged loans and mezzanine debt of private U.S. middle-market companies. This filing covers the quarterly period ended August 31, 2021, and the six-month period ended August 31, 2021, compared to the same periods in 2020.
Key Financial Metrics
| Metric | Six Months Ended Aug 31, 2021 | Six Months Ended Aug 31, 2020 |
|---|---|---|
| Total Investments (Fair Value) | $666.1 million | $508.1 million |
| Net Investment Income | $8.9 million | $14.4 million |
| Net Increase in Net Assets from Operations | $29.0 million | $(0.8) million |
| Net Asset Value (NAV) per Share | $28.97 | $26.68 |
| Weighted Average EPS (Basic & Diluted) | $2.59 | $(0.08) |
| Cash and Cash Equivalents | $73.3 million | $65.4 million |
| Total Debt Outstanding | $410.1 million | $218.0 million |
| Asset Coverage Ratio | 236.1% | 347.1% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately $158 million (31%) from the prior year period, driven by new originations and unrealized appreciation.
- Debt Restructuring: The company significantly altered its capital structure. It issued $175 million in 4.375% Notes due 2026 and redeemed $60 million of 6.25% Notes due 2025. SBA debentures increased from $158 million to $172 million.
- Profitability: Net investment income decreased by $5.4 million compared to the prior six-month period, primarily due to lower interest income from cash equivalents and changes in portfolio composition. However, net increase in net assets from operations turned positive ($29.0 million) compared to a loss of $0.8 million in the prior year, largely due to a $20.2 million net change in unrealized appreciation on investments.
- Realized Gains/Losses: The company recorded a realized loss of $1.6 million on the extinguishment of debt related to the redemption of the 6.25% Notes due 2025.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted the successful refinancing of the Saratoga CLO 2013-1, Ltd., extending its reinvestment period to April 2024 and maturity to April 2033. The company also noted the completion of a new $50 million credit facility (SIF II) in October 2021, replacing the previous Madison Capital Funding facility.
- Dividends: The company declared a dividend of $0.52 per share on August 26, 2021. Total distributions for the six months ended August 31, 2021, were $9.7 million.
- Risks and Contingencies:
- COVID-19: The filing notes that the pandemic continues to create uncertainty regarding the economic outlook and the financial condition of portfolio companies. Valuations are based on information available as of August 31, 2021, and future volatility could impact fair values.
- LIBOR Transition: The company is monitoring the transition away from LIBOR as a benchmark rate, which could impact the cost of borrowings and the valuation of floating-rate assets.
- Unfunded Commitments: As of August 31, 2021, the company had $58.7 million in unfunded commitments to portfolio companies.
Investor Verification Checklist
- Debt Maturity Profile: Verify the impact of the new $175 million 4.375% Notes due 2026 on future interest expense and liquidity, noting the redemption of the higher-coupon 6.25% Notes.
- Unrealized Appreciation: Review the $20.2 million unrealized gain, which was a primary driver of the period's profitability, and assess the sensitivity of these Level 3 valuations to market changes.
- Asset Coverage Ratio: Confirm the ratio remains above the 150% regulatory minimum (currently 236.1%) to ensure continued compliance with the Investment Company Act of 1940.
- Portfolio Concentration: Examine the top 10 portfolio companies, which represent a significant portion of the portfolio, including HemaTerra (11.1%) and Saratoga CLO (10.8%).
- Dividend Sustainability: Assess whether the current dividend payout of $0.52 per share is sustainable given the decline in net investment income compared to the prior year.