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, 2016
Business Model: Saratoga is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). It invests primarily in leveraged loans and mezzanine debt of private U.S. middle-market companies, as well as structured finance securities and equity interests.
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2016 | Nine Months Ended Nov 30, 2015 |
|---|---|---|
| Total Investment Income | $24.8 million | $22.3 million |
| Net Investment Income | $8.6 million | $7.6 million |
| Net Realized Gains | $12.3 million | $4.2 million |
| Net Unrealized Appreciation/(Depreciation) | ($10.7 million) | $0.2 million |
| Net Increase in Net Assets from Operations | $10.1 million | $12.0 million |
| Earnings Per Share (Basic & Diluted) | $1.77 | $2.18 |
| Net Asset Value (NAV) Per Share | $22.21 | $22.59 |
| Total Investments at Fair Value | $277.6 million | $284.0 million |
| Cash and Cash Equivalents (Total) | $23.3 million | $27.2 million |
| Total Debt Outstanding | $174.5 million | $165.5 million |
| Asset Coverage Ratio | 306.6% | 302.5% |
Material Changes vs. Prior Period
- Investment Income: Increased 11.4% year-over-year to $24.8 million, driven by a 15.2% increase in total investments and a rise in the weighted average current coupon from 11.3% to 11.9%.
- Realized Gains: Net realized gains surged to $12.3 million (from $4.2 million), primarily due to the sale of Take 5 Oil Change, L.L.C. ($6.0 million gain) and Legacy Cabinets, Inc. ($3.4 million gain).
- Unrealized Losses: The company recorded $10.7 million in net unrealized depreciation, reversing the $0.2 million appreciation from the prior year. This was largely due to the realization of gains on sales (resetting unrealized appreciation to zero) and a decline in the value of the Elyria Foundry Company investment.
- Debt Structure: SBA debentures increased from $79.0 million to $112.7 million. The weighted average interest rate on outstanding indebtedness decreased to 4.73% from 4.99% due to the lower cost of SBA debt.
- Portfolio Composition: Business Services became the largest sector at 52.7% of the portfolio, up from 37.3%.
Guidance, Outlook, and Risks
Management Commentary:
- Portfolio Quality: 88.7% of the portfolio held a "Green" credit rating, with no non-performing or delinquent investments reported.
- Capital Markets: On December 21, 2016 (subsequent to period end), the company issued $74.5 million in 6.75% notes due 2023. Proceeds were used to repay the outstanding 2020 Notes ($61.8 million).
- Dividends: The company declared a dividend of $0.45 per share on January 12, 2017, for the quarter ended November 30, 2016.
Risks and Contingencies:
- SBIC License Application: The SBA requested an update to the company's application for a second SBIC license. The existing "green light" letter will expire, creating uncertainty regarding access to an additional $150 million in SBA-guaranteed debentures.
- Legal Proceedings: A complaint filed in 2012 by GSC Acquisition Holdings, LLC alleges fraudulent transfers regarding deferred incentive fees. The company believes the claims are without merit and intends to defend vigorously.
- Market Risk: The company is exposed to credit risk and market risk inherent in leveraged loans and private equity investments. Valuations of non-marketable securities rely on management estimates and third-party valuations.
Key Facts for Investor Verification
- Debt Refinancing: Verify the impact of the December 2016 issuance of 2023 Notes on future interest expense and liquidity, as this transaction occurred after the reporting period.
- SBIC Status: Monitor the status of the second SBIC license application, as approval is critical for accessing additional low-cost leverage.
- Unrealized Losses: Review the specific drivers of the $10.7 million unrealized depreciation, particularly the valuation of the Elyria Foundry Company investment and the impact of sales on unrealized gain/loss accounts.
- Legal Exposure: Track the status of the GSC Acquisition Holdings lawsuit regarding the $2.6 million deferred incentive fee claim.
- Dividend Sustainability: Assess the ratio of net investment income to dividends declared ($8.6 million income vs. $8.5 million distributions for the nine months) to evaluate the sustainability of the dividend policy.