Saratoga Investment Corp. 10-Q Summary (Period Ended May 31, 2021)
Business Context and Reporting Period
Saratoga Investment Corp. (SAR) is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and taxed as 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 report covers the quarterly period ended May 31, 2021.
Key Financial Metrics
- Net Asset Value (NAV) per Share: $28.70 (up from $27.25 at Feb 28, 2021).
- Total Net Assets: $320.3 million.
- Total Investments at Fair Value: $677.8 million (211.5% of net assets).
- Net Investment Income: $2.56 million.
- Net Realized and Unrealized Gain on Investments: $18.49 million.
- Net Increase in Net Assets from Operations: $21.05 million.
- Earnings Per Share (Basic & Diluted): $1.88.
- Debt and Leverage:
- Revolving Credit Facility: $39.0 million outstanding.
- SBA Debentures: $168.0 million outstanding.
- Public Notes (6.25% 2025, 7.25% 2025, 7.75% 2025, 4.375% 2026, 6.25% 2027): $173.1 million outstanding.
- Asset Coverage Ratio: 251.0% (well above the 150% minimum requirement).
- Liquidity: Cash and cash equivalents (including reserve accounts) totaled approximately $20.0 million.
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by $123.5 million (22.3%) from $554.3 million to $677.8 million, driven by new purchases of $119.2 million.
- Profitability Reversal: The company reported a net increase in net assets of $21.05 million, a significant turnaround from the $22.66 million decrease reported in the same period of the prior year. This was primarily due to a $16.8 million unrealized appreciation on investments, compared to a $32.0 million unrealized depreciation in the prior year.
- Debt Issuance: The company issued $50.0 million in 4.375% Notes due 2026 during the quarter. Additionally, the revolving credit facility was drawn down to $39.0 million from $0.
- Expense Increase: Total operating expenses rose to $14.26 million from $4.28 million in the prior year, largely due to a $5.26 million incentive management fee expense (compared to a benefit of $1.86 million previously) and higher interest expenses.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted the successful refinancing and upsizing of the Saratoga CLO 2013-1, Ltd. to approximately $650 million in assets. The company continues to deploy capital into its portfolio, with significant new investments in education software, healthcare, and IT services.
- Dividends: A dividend of $0.43 per share was declared for the quarter. Shareholders have the option to receive cash or reinvest in stock via the DRIP.
- 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 May 31, 2021, and future volatility could impact fair values.
- Non-Accrual Status: Approximately $2.2 million (0.3% of the portfolio) was on non-accrual status as of May 31, 2021.
- LIBOR Transition: The company is monitoring the transition away from LIBOR, which affects the interest rates on many of its floating-rate investments and borrowings.
Investor Verification Checklist
- Verify the sustainability of the $16.8 million unrealized appreciation, which was the primary driver of the quarter's profitability, given the reliance on Level 3 fair value inputs.
- Review the details of the $39.0 million draw on the revolving credit facility and the associated borrowing base calculations to ensure adequate collateral coverage.
- Monitor the performance of the newly issued $50.0 million 4.375% Notes due 2026 and the impact of the increased interest expense on future net investment income.
- Assess the impact of the $5.26 million incentive fee expense on future distributions, noting that this fee is based on both realized and unrealized gains.
- Confirm the status of the $2.2 million in non-accrual investments and any potential reserve requirements.