Business Context and Reporting Period
Saratoga Investment Corp. (SAQ) 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 leveraged loans and mezzanine debt of private U.S. middle-market companies. This summary covers the quarterly period ended August 31, 2016, and the six-month period ended on the same date.
Key Financial Metrics
| Metric | Six Months Ended Aug 31, 2016 | Six Months Ended Aug 31, 2015 |
|---|---|---|
| Total Investment Income | $16.36 million | $15.32 million |
| Net Investment Income | $5.14 million | $5.43 million |
| Net Realized Gains | $12.04 million | $3.78 million |
| Net Unrealized Depreciation | ($8.62 million) | ($0.58 million) |
| Net Increase in Net Assets from Operations | $8.56 million | $8.63 million |
| Earnings Per Share (Basic & Diluted) | $1.49 | $1.57 |
| Net Asset Value (NAV) per Share | $22.39 | $22.42 |
| Total Investments at Fair Value | $272.80 million | $284.00 million |
| Cash and Cash Equivalents | $12.71 million | $2.44 million |
| Total Debt Outstanding | $165.45 million | $140.86 million |
| Asset Coverage Ratio | 308.1% | 302.5% |
Material Changes vs. Prior Period
- Portfolio Composition: Total investments decreased by approximately $11.2 million (4.0%) compared to February 29, 2016, driven by net repayments of $15.2 million during the six-month period. The portfolio is now 56.2% first lien term loans and 31.9% second lien term loans.
- Realized Gains: Net realized gains increased significantly to $12.04 million from $3.78 million in the prior year period. This was primarily due to the sale of Take 5 Oil Change, L.L.C. (generating ~$6.0 million in gains) and Legacy Cabinets, Inc. (generating ~$3.4 million in gains).
- Unrealized Depreciation: Net unrealized depreciation increased to $8.62 million from $0.58 million in the prior year. This increase was largely driven by the realization of previously accrued unrealized appreciation on the sold assets mentioned above, which adjusted the unrealized balance to zero upon sale.
- Liquidity: Cash and cash equivalents increased substantially to $12.71 million from $2.44 million at the start of the period, reflecting strong operating cash flows and proceeds from investment sales.
- Debt Structure: The company had no outstanding borrowings under its $45.0 million revolving credit facility. Total debt consists of $103.7 million in SBA-guaranteed debentures and $61.8 million in 7.50% unsecured notes due 2020.
Guidance, Outlook, and Risks
- SBIC License Application: The company is in the process of reapplying for a second Small Business Investment Company (SBIC) license. The SBA requested updated materials, causing the previous "green light" letter to expire. Approval would allow for an additional $150.0 million in SBA-guaranteed debentures.
- Dividend Policy: The company declared a special dividend of $0.20 per share in August 2016 and a regular quarterly dividend of $0.43 per share in July 2016. A subsequent dividend of $0.44 per share was declared on October 5, 2016, payable in November 2016.
- Share Repurchase Plan: The board extended the open market share repurchase plan through October 15, 2017, increasing the authorized repurchase limit to 600,000 shares. As of August 31, 2016, 138,494 shares had been repurchased.
- Risks: The company faces credit risk from its portfolio of leveraged loans and market risk from interest rate fluctuations. A significant portion of the portfolio (Saratoga CLO) is valued using discounted cash flow models, which involve subjective assumptions regarding default and recovery rates.
Investor Verification Checklist
- Realized Gain Sustainability: Verify the impact of the one-time sales of Take 5 Oil Change and Legacy Cabinets on the current quarter's earnings and whether future quarters will maintain similar realized gain levels.
- Unrealized Depreciation Drivers: Review the specific portfolio assets contributing to the $8.62 million unrealized depreciation to assess potential credit deterioration versus accounting adjustments from sales.
- SBIC Licensing Status: Monitor the status of the second SBIC license application, as approval is critical for accessing additional low-cost leverage.
- Debt Maturity Profile: Confirm the maturity dates of the $61.8 million in unsecured notes (due 2020) and the $103.7 million in SBA debentures to assess refinancing risks.
- Asset Coverage Ratio: Ensure the company maintains the required 200% asset coverage ratio under the Investment Company Act of 1940, currently standing at 308.1%.