Business Context and Reporting Period
Saratoga Investment Corp. (Saratoga) is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The company invests primarily in leveraged loans and mezzanine debt of private U.S. middle-market companies. This Form 10-Q covers the quarterly period ended November 30, 2013.
Key Financial Metrics
| Metric | Three Months Ended Nov 30, 2013 | Nine Months Ended Nov 30, 2013 | Nov 30, 2013 Balance Sheet |
|---|---|---|---|
| Total Investment Income | $5.80 million | $17.21 million | N/A |
| Net Investment Income | $2.90 million | $7.64 million | N/A |
| Net Increase in Net Assets from Operations | $1.27 million | $5.03 million | N/A |
| Earnings Per Share (Basic & Diluted) | $0.26 | $1.05 | N/A |
| Total Assets | N/A | N/A | $210.77 million |
| Total Liabilities | N/A | N/A | $99.56 million |
| Net Assets | N/A | N/A | $111.21 million |
| Net Asset Value (NAV) Per Share | N/A | N/A | $20.67 |
| Cash and Cash Equivalents | N/A | N/A | $3.36 million |
| Total Debt Outstanding | N/A | N/A | $92.30 million |
Note: Total Debt includes $4.0 million revolving credit facility, $40.0 million SBA debentures, and $48.3 million notes payable.
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 43.8% for the three months ended Nov 30, 2013, compared to the same period in 2012, driven by a higher average portfolio size.
- Expense Increase: Total expenses rose 87.9% for the three months ended Nov 30, 2013, primarily due to increased interest and debt financing expenses ($1.61 million vs. $0.53 million) and base management fees resulting from portfolio growth and new debt issuances.
- Unrealized Losses: The company recorded a net unrealized depreciation of $1.71 million for the quarter and $3.77 million for the nine-month period. Significant contributors included a $2.17 million unrealized loss on Elyria Foundry Company (due to weakened oil/gas demand) and a $4.11 million unrealized loss on the Saratoga CLO investment (due to lower projected cash flows and higher financing costs).
- Debt Structure: In May 2013, the company issued $48.3 million in 7.50% fixed-rate notes due 2020. Concurrently, the revolving credit facility balance decreased from $24.3 million to $4.0 million.
Guidance, Outlook, and Risks
- Outlook: Management expects investment income from the Saratoga CLO to decline in future periods following its October 2013 refinancing, as proceeds from principal payments must now be used to pay down outstanding notes.
- Liquidity: The company maintains a $45.0 million senior secured revolving credit facility with a borrowing base of $48.2 million as of Nov 30, 2013. The asset coverage ratio was 312.6%, well above the 200% requirement under the 1940 Act.
- Risks:
- Valuation Risk: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs and management judgment, which may differ from realized values.
- Legal Proceedings: A complaint was filed in August 2012 by GSC Acquisition Holdings, LLC seeking approximately $2.6 million related to a prior investment advisory agreement termination. The company intends to vigorously defend against this action.
- Capital Raising: The company's ability to raise equity capital is limited because its stock has historically traded below NAV. Stockholders approved a proposal to sell shares at no less than 85% of NAV through September 2014.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the 200% asset coverage ratio and the specific collateral tests (Interest Coverage, Overcollateralization) required by the Madison Capital Funding revolving facility.
- CLO Performance: Monitor the performance of the Saratoga CLO 2013-1, Ltd. investment, specifically the impact of the refinancing on future cash flows and the $4.1 million unrealized loss recorded.
- Legal Status: Track the status of the GSC Acquisition Holdings lawsuit regarding the $2.6 million claim.
- Portfolio Quality: Review the Credit and Monitoring Rating (CMR) distribution; while 77.6% of the portfolio is rated "Green," verify the status of the "Red" rated assets ($1.27 million) and non-performing investments.
- Dividend Sustainability: Assess the ability to maintain dividend distributions given the decline in CLO income and the reliance on stock dividends to meet RIC requirements.