Saratoga Investment Corp. — Form 10-Q Summary
Business context and reporting period
Saratoga Investment Corp. is an externally managed business development company (BDC) focused on current income and capital appreciation, primarily through loans to U.S. middle-market companies. This report covers the three months ended May 31, 2023, the first quarter of fiscal 2024. The company also operates SBIC subsidiaries and has elected regulated investment company tax treatment.
Key financial metrics
| Metric | Three months ended May 31, 2023 | Comparable period / prior date |
|---|---|---|
| Total investment income | $34.6 million | $18.7 million in Q1 2023 |
| Net investment income | $16.0 million; $1.35 per weighted-average share in financial highlights | $8.0 million in Q1 2023 |
| Net change in unrealized investment value | $(16.3) million | $(9.3) million in Q1 2023 |
| Net result from operations | $(0.2) million; reported earnings per share $(0.02) | $(1.5) million; $(0.12) per share in Q1 2023 |
| Investment portfolio at fair value | $1.084 billion | $972.6 million at February 28, 2023 |
| Net assets / NAV per share | $337.5 million / $28.48 | $347.0 million / $29.18 at February 28, 2023 |
| Cash and cash equivalents, including reserves | $53.2 million; $22.0 million was unrestricted cash and equivalents | $96.1 million total at February 28, 2023 |
| Debt and leverage | $808.4 million gross principal debt, including $35.0 million on the Encina facility and $202.0 million of SBA debentures; asset coverage 155.7% | Asset coverage 165.9% at February 28, 2023 |
| Operating cash flow | $(110.9) million | $(80.2) million in Q1 2023 |
| Dividend | $0.70 per share declared; payable June 29, 2023 | $0.53 per share declared in Q1 2023 |
Net investment income was 46.1% of investment income, versus 42.7% in the prior-year quarter. These are calculated ratios, not company-reported margin measures.
Material changes versus comparable periods
- Investment income rose 85.4%, reflecting a larger portfolio and higher yields: the reported weighted-average current yield was 11.4%, compared with 7.7% a year earlier and 10.7% at February 28, 2023.
- Operating expenses increased 74.5% to $18.7 million. Interest and debt financing expense rose to $11.7 million from $6.9 million; average debt was $781.0 million versus $591.3 million, and the weighted-average borrowing rate increased to 5.34% from 4.06%.
- Investment purchases were $139.8 million and sales and repayments $11.1 million, producing $128.8 million of net investment activity. The prior-year quarter had net repayments of $87.1 million. Operating cash use increased accordingly.
- The portfolio expanded to 137 investments across 56 portfolio companies and 42 industries, from 115 investments across 49 companies and 40 industries at February 28, 2023. First-lien loans were 84.7% of portfolio fair value; 99.1% of interest-earning debt was floating rate.
- Unrealized depreciation increased to $16.3 million. Management attributed notable declines to Netreo ($3.3 million, citing increased leverage and weaker performance), Saratoga CLO ($5.7 million, including defaulted-loan marks and market conditions), and the Saratoga Senior Loan Fund JV ($5.4 million, market conditions).
Outlook, risks, contingencies and unusual items
- No specific financial guidance was provided. Management said it believes available liquidity is adequate for near-term capital needs, while noting that future equity and debt financing may not be available on favorable terms, or at all.
- Asset coverage of 155.7% was only modestly above the company’s 150% minimum. The Encina facility had a $65.0 million commitment, $35.0 million drawn and $30.0 million available; its reported borrowing base was $88.3 million, subject to the facility cap and eligibility requirements.
- Debt principal obligations totaled $808.4 million, including $20.0 million of 8.75% notes due March 2024. During the quarter, Saratoga issued $20.0 million of those notes and $57.5 million of 8.50% notes due 2028; the latter’s proceeds were partly used to repay Encina borrowings.
- Unfunded portfolio commitments rose to $143.0 million from $108.8 million. The company reported $53.2 million of cash and $30.0 million of available Encina capacity and stated that it believed assets would adequately cover the commitments.
- One portfolio-company investment, Knowland Group, remained on non-accrual at a fair value of approximately $9.8 million, or 0.9% of portfolio fair value. Private-investment valuations rely substantially on unobservable inputs: $1.076 billion of investments were Level 3, in addition to a $7.7 million JV interest measured using NAV.
- Management identified interest-rate, credit, valuation, inflation, economic and funding risks. A modeled 1 percentage-point rate increase was estimated to add approximately $9.7 million of annual interest income, or $7.5 million of net investment income after incentive-fee effects, assuming portfolio and borrowing conditions remain unchanged.
- The filing’s market-risk discussion says interest-rate changes would not affect current interest expense because borrowings are fixed-rate except for an “undrawn” credit facility; elsewhere it reports $35.0 million drawn on Encina. This inconsistency warrants review.
- After quarter-end, the board renewed the management and administration agreements on July 6, 2023; the ATM program was increased from $150 million to $300 million, with sales not below NAV per share, before agent commissions. Management reported effective disclosure controls, no material legal proceedings, and no material changes to the prior annual report’s risk factors.
Important facts for investors to verify
- Confirm the Encina balance and the apparent discrepancy between the reported $35.0 million drawn and the market-risk statement describing the facility as undrawn.
- Review the sustainability of investment income and the $0.70 dividend against cash interest collections, PIK income, incentive fees, and upcoming debt maturities.
- Assess the causes and subsequent performance of the portfolio-company and CLO/JV valuation declines, including the non-accrual exposure and Level 3 valuation assumptions.
- Track asset coverage relative to the 150% regulatory minimum, remaining borrowing capacity, and the timing and terms of the $143.0 million in unfunded commitments.
- Reconcile reported per-share figures: the financial statements report a $(0.02) operating loss per share, while financial highlights show a $(0.01) net decrease per share from operations.