Saratoga Investment Corp. 10-Q Summary
Business Context and Reporting Period
Company: Saratoga Investment Corp. (SAR)
Reporting Period: Quarterly period ended August 31, 2019 (Six months ended August 31, 2019)
Business Type: Non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC).
Strategy: Generates current income and capital appreciation primarily through senior and unitranche leveraged loans and mezzanine debt issued by private U.S. middle-market companies. The company also holds a significant investment in its own collateralized loan obligation (Saratoga CLO).
Key Financial Metrics
| Metric | Six Months Ended Aug 31, 2019 | Six Months Ended Aug 31, 2018 |
|---|---|---|
| Total Investment Income | $26.64 million | $21.89 million |
| Net Investment Income | $8.64 million | $9.07 million |
| Net Realized Gain | $1.87 million | $0.21 million |
| Net Unrealized Appreciation | $5.45 million | $(1.51) million |
| Net Increase in Net Assets from Operations | $15.23 million | $6.98 million |
| Earnings Per Share (Diluted) | $1.89 | $1.06 |
| Net Asset Value (NAV) per Share | $24.47 | $23.62 (Beginning of Period) |
| Total Investments at Fair Value | $486.88 million | $402.02 million (Feb 28, 2019) |
| Total Debt Outstanding | $284.45 million | $284.45 million (Feb 28, 2019) |
| Cash and Cash Equivalents | $24.12 million | $62.09 million (Feb 28, 2019) |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $84.9 million (21.1%) from February 28, 2019, driven by net investments of $74.0 million during the six-month period.
- Income Growth: Total investment income increased 21.7% year-over-year, primarily due to a larger portfolio size, despite a slight decrease in the weighted average current yield (10.1% vs. 10.7% prior year).
- Expense Increase: Total operating expenses increased 40.4% year-over-year to $18.0 million. This was driven by higher interest and debt financing expenses ($7.73 million vs. $5.59 million) due to increased average outstanding debt and higher incentive management fees ($4.20 million vs. $1.88 million).
- Realized Gains: Net realized gains increased significantly to $1.87 million from $0.21 million in the prior year period.
- Unrealized Gains: The portfolio experienced a net unrealized appreciation of $5.45 million, a reversal from the $1.51 million depreciation recorded in the prior year period.
- Capital Activity: The company raised $35.9 million in net proceeds from the issuance of common stock during the six-month period.
Guidance, Outlook, and Risks
- SBIC Expansion: On August 14, 2019, the company's subsidiary, SBIC II LP, received an SBIC license from the SBA, providing access to up to $175.0 million in additional long-term capital via SBA debentures.
- Dividends: The company declared a dividend of $0.56 per share on August 27, 2019, payable September 26, 2019. Total dividends declared for the six months ended August 31, 2019, were $1.09 per share.
- Asset Coverage: The asset coverage ratio was 266.9% as of August 31, 2019, well above the 150.0% minimum required under the Investment Company Act.
- Non-Performing Assets: Investments on non-accrual status totaled approximately $3.9 million (0.8% of the portfolio) as of August 31, 2019, down from $5.7 million (1.4%) at the end of the prior fiscal year.
- Risks: Key risks include credit risk associated with private middle-market companies, interest rate volatility, and the specific risks associated with the company's leveraged investment in the Saratoga CLO (which constitutes 5.3% of the portfolio).
Investor Verification Checklist
- Debt Maturity Profile: Verify the maturity schedule of the $284.45 million in debt, specifically the $150 million SBA debentures and the $74.45 million 2023 Notes.
- Saratoga CLO Performance: Review the specific performance and credit ratings of the underlying assets within the Saratoga CLO, which represents a significant portion of the portfolio's risk profile.
- Incentive Fee Structure: Confirm the calculation of the $4.20 million in incentive management fees, noting the impact of the "catch-up" provision and the capital gains accrual.
- Non-Accrual Status: Investigate the specific portfolio companies on non-accrual status (Roscoe Medical, My Alarm Center, TMAC Acquisition) to assess potential future write-downs.
- Capital Deployment: Monitor the deployment of the new $175 million SBIC II LP capital capacity and the utilization of the $45 million revolving credit facility (currently $0 outstanding).