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, 2015
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 private U.S. middle-market companies. It also operates a wholly-owned Small Business Investment Company (SBIC) subsidiary.
Key Financial Metrics
| Metric | Six Months Ended Aug 31, 2015 | Six Months Ended Aug 31, 2014 |
|---|---|---|
| Total Investment Income | $15.32 million | $12.62 million |
| Net Investment Income | $5.43 million | $4.16 million |
| Net Realized Gains | $3.78 million | $0.44 million |
| Net Unrealized Appreciation/(Depreciation) | ($0.58 million) | $0.32 million |
| Net Increase in Net Assets from Operations | $8.63 million | $4.92 million |
| Earnings Per Share (Basic & Diluted) | $1.57 | $0.91 |
| Net Asset Value (NAV) Per Share | $22.42 | $22.00 |
| Total Investments at Fair Value | $252.18 million | $240.54 million |
| Total Debt Outstanding | $138.25 million | $136.90 million |
| Cash and Cash Equivalents | $12.59 million | $20.06 million |
Debt Composition (as of Aug 31, 2015):
- SBA Debentures: $79.0 million
- Notes Payable (7.50% due 2020): $57.2 million
- Revolving Credit Facility: $2.0 million
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 21.4% year-over-year, driven by a 6.7% increase in total investments despite a reduction in the weighted average current coupon from 13.0% to 11.7%.
- Expense Fluctuation: Total operating expenses increased 16.9% to $9.89 million. This was primarily due to higher interest and debt financing expenses ($4.11 million vs. $3.60 million) resulting from increased SBA debentures and Notes outstanding, partially offset by a decrease in the Revolving Credit Facility balance.
- Incentive Fees: Incentive management fees increased 53.1% to $1.76 million for the six-month period, driven by higher net investment income above the hurdle rate and realized gains from investment redemptions.
- Unrealized Losses: The company recorded net unrealized depreciation of $0.58 million, compared to appreciation of $0.32 million in the prior year. Significant depreciation occurred in Elyria Foundry Company, LLC (due to oil/gas market declines) and Smile Brands Group, Inc. (due to declining profitability).
- Portfolio Activity: Net investments increased by $7.3 million during the period ($42.1 million in new investments vs. $34.8 million in exits/repayments).
Guidance, Outlook, and Risks
- SBIC Expansion: On April 2, 2015, the SBA issued a "green light" letter inviting Saratoga to continue its application for a second SBIC license. Approval could allow the issuance of an additional $75 million in SBA-guaranteed debentures. No assurance of approval or timing is provided.
- Debt Issuance: The company entered an At-the-Market (ATM) offering agreement in May 2015 to sell up to $20.0 million of its 7.50% Notes. As of August 31, 2015, it had sold approximately $8.95 million of principal.
- Dividend Policy: The company declared a total of $1.60 per share in dividends during the six-month period. It utilizes a Dividend Reinvestment Plan (DRIP) and may issue stock to satisfy RIC distribution requirements.
- Legal Proceedings: A complaint filed in August 2012 by GSC Acquisition Holdings, LLC seeks to recover approximately $2.6 million related to deferred incentive fees waived by the former investment adviser. The company believes the claims are without merit and intends to defend vigorously.
- Market Risks: The portfolio is subject to credit risk, interest rate risk, and liquidity risk. The company holds $11.6 million in unfunded commitments to portfolio companies.
Investor Verification Checklist
- Asset Coverage Ratio: Verify the 311.4% asset coverage ratio remains compliant with the 200% requirement under the Investment Company Act of 1940.
- Unfunded Commitments: Review the $11.6 million in unfunded commitments and the company's liquidity position to fund them if called.
- SBIC License Status: Monitor the status of the second SBIC license application for potential capital expansion.
- Portfolio Concentration: Assess the impact of the top three industries (Business Services, Software as a Service, Consumer Services) which comprise over 58% of the portfolio.
- Legal Exposure: Track the status of the GSC Acquisition Holdings lawsuit regarding the $2.6 million claim.
- Dividend Sustainability: Confirm that distributions continue to be covered by net investment income and realized gains to maintain RIC tax status.