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 of private U.S. middle-market companies. This summary covers the quarterly period ended May 31, 2019.
Key Financial Metrics
| Metric | Q2 2019 (Ended May 31) | Q2 2018 (Ended May 31) |
|---|---|---|
| Net Asset Value (NAV) per Share | $24.06 | $23.06 |
| Net Investment Income | $3.68 million | $3.93 million |
| Net Increase in Net Assets from Operations | $7.65 million | $3.84 million |
| Earnings Per Share (Basic & Diluted) | $0.99 | $0.61 |
| Total Investments at Fair Value | $409.45 million | $343.4 million (approx.) |
| Cash and Cash Equivalents | $61.0 million | $13.7 million |
| Total Debt Outstanding | $284.45 million | $212.1 million (avg) |
| Asset Coverage Ratio | 238.9% | 294.6% (per unit) |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 21.6% to $12.75 million, driven by a 19.3% increase in total investments. Interest income from investments rose to $11.60 million.
- Unrealized Gains: The company recorded a net change in unrealized appreciation of $3.99 million, compared to $0.64 million in the prior year. Significant contributors included Censis Technologies, Inc. (+$1.63 million) and the Saratoga CLO (+$1.25 million).
- Expense Increases: Total operating expenses rose 38.3% to $9.07 million. This was primarily due to a 42% increase in interest and debt financing expenses (driven by higher average debt levels and the issuance of 2025 Notes) and a 97% increase in incentive management fees.
- Debt Structure: The company increased its leverage, with average outstanding debt rising from $212.1 million to $284.5 million. The weighted average interest rate on indebtedness increased to 4.80% from 4.44%.
Guidance, Outlook, and Risks
- Capital Raising: The company continues to utilize an At-The-Market (ATM) equity distribution agreement, recently increased to $70.0 million. As of May 31, 2019, $13.0 million in gross proceeds had been raised under this facility.
- SBIC Expansion: The company received a "green light" letter from the SBA to apply for a second SBIC license, which could allow for an additional $175.0 million in SBA-guaranteed debentures if approved.
- Dividend Policy: A dividend of $0.54 per share was declared for the quarter. A subsequent dividend of $0.55 per share was declared on May 28, 2019, payable in June 2019.
- Risks and Contingencies:
- Non-Accrual Status: Approximately $4.9 million (1.2% of the portfolio) was on non-accrual status as of May 31, 2019.
- Concentration: The portfolio is heavily concentrated in Business Services (60.8%) and Healthcare Services (16.3%).
- CLO Exposure: The company holds a significant investment in its own collateralized loan obligation (Saratoga CLO), which constitutes a first-loss position and is subject to unique risks.
Investor Verification Checklist
- Debt Servicing: Verify the sustainability of the increased interest expense ($3.86 million) against net investment income ($3.68 million) and the impact of the higher weighted average interest rate (4.80%).
- Unrealized Gains Quality: Assess the durability of the $3.99 million unrealized appreciation, particularly the valuation of Level 3 assets which rely on significant unobservable inputs.
- Non-Accrual Trends: Monitor the $4.9 million in non-accrual assets and the specific performance of portfolio companies like Roscoe Medical, Inc. and TMAC Acquisition Co., LLC.
- Asset Coverage: Confirm the company maintains the required 150% asset coverage ratio (currently 238.9%) to ensure continued access to leverage.
- SBIC License Status: Track the progress of the second SBIC license application as a potential source of low-cost capital.