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 issued by private U.S. middle-market companies. This filing covers the quarterly period ended May 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 (Ended May 31, 2020) | Q1 2020 (Ended May 31, 2019) |
|---|---|---|
| Total Investment Income | $13.30 million | $12.75 million |
| Net Investment Income | $9.02 million | $3.68 million |
| Net Increase (Decrease) in Net Assets | $(22.66) million | $7.65 million |
| Net Asset Value (NAV) per Share | $25.11 | $27.13 |
| Weighted Average EPS (Basic & Diluted) | $(2.02) | $0.99 |
| Total Investments at Fair Value | $482.95 million | $485.63 million |
| Cash and Cash Equivalents | $25.80 million | $61.00 million |
| Total Debt Outstanding | $230.00 million | $210.00 million |
| Asset Coverage Ratio | 569.4% | 607.1% |
Material Changes vs. Prior Period
- Significant Unrealized Depreciation: The company reported a net decrease in net assets of $22.66 million, primarily driven by a net change in unrealized depreciation on investments of $(31.95) million. This contrasts with a net unrealized appreciation of $3.99 million in the prior year period. The depreciation was broad-based across non-control, affiliate, and control investments.
- Operating Expense Reduction: Total operating expenses decreased by 52.8% to $4.28 million from $9.07 million. This was largely due to a $1.86 million benefit from incentive management fees (compared to a $2.11 million expense in the prior year) and a $1.3 million decrease in interest and debt financing expenses following the redemption of the 2023 Notes.
- Debt Structure Changes: SBA debentures increased by $20 million to $170 million. The company fully redeemed its 2023 Notes during the prior fiscal year, leaving $60 million in 2025 Notes outstanding. The revolving credit facility remained undrawn.
- Cash Position: Cash and cash equivalents decreased by approximately $35.2 million, reflecting net investment purchases of $39.0 million and operating cash outflows.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Impact: Management highlighted the material uncertainty posed by the global COVID-19 pandemic. While the company valued its portfolio based on facts known as of May 31, 2020, future valuations could be lower due to the economic fallout. The pandemic has adversely affected the operations of some portfolio companies.
- Subsequent Financing: On June 24, 2020, the company issued $37.5 million of 7.25% fixed-rate notes due 2025 (Second 2025 Notes), with an additional $5.625 million issued upon full exercise of the underwriters' option on July 6, 2020. Proceeds are for general corporate purposes.
- Dividend Declaration: On July 7, 2020, the Board declared a dividend of $0.40 per share payable on August 12, 2020. No dividends were declared during the quarter ended May 31, 2020.
- Non-Accrual Status: As of May 31, 2020, investments in three portfolio companies (including My Alarm Center, Roscoe Medical, and TMAC Acquisition) were on non-accrual status with a fair value of approximately $3.9 million (0.8% of the portfolio).
- Portfolio Concentration: The company's investment in its own CLO (Saratoga CLO) and related warehouse facilities constitutes a significant portion of the portfolio and is subject to unique risks, including leverage and market volatility.
Key Facts for Investor Verification
- Valuation Sensitivity: Verify the assumptions used in the Level 3 fair value measurements, particularly the discount rates and market yields applied to the CLO and private debt investments, given the significant unrealized depreciation.
- Debt Maturity Profile: Confirm the repayment schedule for the $170 million in SBA debentures and the $60 million in 2025 Notes, noting that SBA debentures are non-recourse to the parent company but have senior claims on SBIC subsidiary assets.
- Credit Quality Trends: Monitor the "Red" and "Yellow" credit monitoring ratings (CMR) within the portfolio, which increased slightly in the quarter, and the specific performance of the non-accrual assets.
- Liquidity Position: Assess the company's ability to meet future debt service obligations and dividend requirements given the reduction in cash reserves and the suspension of dividends during the reported quarter.
- Subsequent Note Issuance: Review the terms and impact of the new 7.25% notes issued in June/July 2020 on the company's leverage ratios and interest expense going forward.