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: August 31, 2018
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 U.S. middle-market companies, as well as structured finance securities and equity interests.
Key Financial Metrics
| Metric | Six Months Ended Aug 31, 2018 | Six Months Ended Aug 31, 2017 |
|---|---|---|
| Total Investment Income | $21.89 million | $18.96 million |
| Net Investment Income | $9.07 million | $6.40 million |
| Net Realized Gain (Loss) | $0.21 million | ($5.68 million) |
| Net Unrealized Appreciation (Depreciation) | ($1.51 million) | $7.17 million |
| Net Increase in Net Assets from Operations | $6.98 million | $7.88 million |
| Earnings Per Share (Basic & Diluted) | $1.06 | $1.33 |
| Net Asset Value (NAV) Per Share | $23.16 | $22.37 |
| Total Investments at Fair Value | $392.89 million | $342.69 million |
| Cash and Cash Equivalents | $43.25 million | $18.41 million |
| Total Debt Outstanding | $264.45 million | $212.11 million |
| Asset Coverage Ratio | 250.9% | 293.0% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 15.5% year-over-year, driven by an 18.0% increase in the total investment portfolio size to $392.9 million.
- Realized Gains vs. Losses: The company reported a net realized gain of $0.21 million for the six months ended August 31, 2018, a significant improvement from the $5.68 million net realized loss in the prior year period. The prior year loss was largely driven by a $7.7 million loss on the sale of My Alarm Center, LLC.
- Unrealized Depreciation: The portfolio experienced a net unrealized depreciation of $1.51 million, contrasting with $7.17 million of appreciation in the prior year. Notable depreciation occurred in Elyria Foundry, L.L.C. and My Alarm Center, LLC.
- Debt Issuance: On August 28, 2018, the company issued $40.0 million of 6.25% fixed-rate notes due 2025. Additionally, SBA debentures increased from $137.7 million to $150.0 million.
- Equity Issuance: The company raised approximately $27.4 million in net proceeds from a common stock offering in July 2018.
Guidance, Outlook, and Risks
- SBIC Expansion: On September 27, 2018, the SBA issued a "green light" letter inviting Saratoga to apply for a second SBIC license. If approved, this could allow the issuance of up to an additional $175.0 million in SBA-guaranteed debentures.
- Asset Coverage Ratio Change: The board approved a reduction in the minimum asset coverage ratio from 200% to 150%, effective April 16, 2019, under the Small Business Credit Availability Act.
- Accounting Changes: The company adopted ASC 606 (Revenue from Contracts with Customers) on March 1, 2018. This resulted in the delayed recognition of unrealized incentive fee income until realized, reducing reported income slightly in the current period compared to prior methods.
- Portfolio Risks: The portfolio includes $4.4 million (1.1%) in non-performing or delinquent investments. The company holds significant exposure to Business Services (62.7%) and Healthcare Services (13.1%).
- Liquidity: Cash and cash equivalents increased significantly to $43.25 million. The revolving credit facility had no outstanding borrowings as of August 31, 2018, with a borrowing base of $36.5 million.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the company's ability to maintain its quarterly dividend of approximately $0.50-$0.52 per share given the shift from unrealized appreciation to depreciation in the current period.
- Second SBIC License: Monitor the status of the second SBIC license application, as approval is not guaranteed and is critical for future leverage capacity.
- Non-Accrual Assets: Review the specific performance of the $4.4 million in non-performing assets, particularly Elyria Foundry and My Alarm Center, to assess potential future write-downs.
- Debt Maturity Profile: Note the new $40 million 2025 Notes and the $150 million SBA debentures; verify the company's refinancing strategy and interest rate exposure.
- ASC 606 Impact: Understand that reported incentive fee income may be lower than historical trends due to the new revenue recognition standard requiring realization before recognition.