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: November 30, 2018
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 U.S. middle-market companies, as well as structured finance securities (including a wholly-owned CLO).
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2018 | Nine Months Ended Nov 30, 2017 |
|---|---|---|
| Total Investment Income | $34.72 million | $28.49 million |
| Net Investment Income | $14.21 million | $9.41 million |
| Net Increase in Net Assets from Operations | $10.65 million | $12.15 million |
| Net Realized Gain (Loss) | $0.15 million | ($5.66 million) |
| Net Unrealized Appreciation (Depreciation) | ($2.54 million) | $8.39 million |
| Earnings Per Share (Basic & Diluted) | $1.55 | $2.04 |
| Net Asset Value (NAV) Per Share | $23.13 | $22.58 |
| Total Assets | $454.04 million | $360.34 million |
| Total Liabilities | $280.78 million | $216.64 million |
| Total Net Assets | $173.27 million | $143.69 million |
| Asset Coverage Ratio | 237.3% | 293.0% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased to $443.8 million from $342.7 million, driven by net investments of $99.8 million during the nine-month period.
- Income Growth: Net investment income increased 51% year-over-year, primarily due to a larger portfolio size, despite a slight reduction in weighted average current yield.
- Realized Gains/Losses: The Company recorded a net realized gain of $0.15 million, a significant improvement from the $5.66 million net realized loss in the prior year period. The prior year loss was largely driven by the sale of My Alarm Center, LLC.
- Unrealized Depreciation: The Company recorded $2.54 million in net unrealized depreciation, contrasting with $8.39 million in appreciation in the prior year. Significant depreciation occurred in Elyria Foundry, L.L.C. and My Alarm Center, LLC.
- Debt Issuance: In August 2018, the Company issued $40.0 million of 6.25% fixed-rate notes due 2025. SBA debentures outstanding increased to $150.0 million from $137.7 million.
Guidance, Outlook, and Risks
- Subsequent Event (CLO Refinancing): On December 3, 2018, the Company completed the third refinancing of its Saratoga CLO. The CLO was upsized from $300 million to approximately $500 million, with the reinvestment period extended to January 2021 and legal maturity to January 2030. The Company invested an additional $13.8 million in subordinated notes.
- Dividend Policy: The Company declared a dividend of $0.53 per share on November 27, 2018, payable January 2, 2019. Total dividends declared for the nine months ended November 30, 2018, were $1.53 per share.
- SBIC Expansion: The SBA issued a "green light" letter inviting the Company to apply for a second SBIC license, which could allow for up to $175.0 million in additional SBA-guaranteed debentures if approved.
- Non-Accrual Status: As of November 30, 2018, investments with a fair value of approximately $4.1 million (0.9% of the portfolio) were on non-accrual status, down from $9.5 million (2.8%) at the prior year-end.
- Regulatory Changes: The Company adopted ASC 606 (Revenue from Contracts with Customers) effective March 1, 2018, which delayed the recognition of unrealized incentive fee income until realized.
Investor Verification Checklist
- CLO Performance: Verify the impact of the December 2018 CLO refinancing and upsizing on future cash flows and the valuation of the subordinated notes.
- Non-Accrual Assets: Review the specific portfolio companies on non-accrual status (including TM Restaurant Group and Education Management II) and the adequacy of reserves.
- Debt Maturity Profile: Confirm the repayment schedule for the $40.0 million 2025 Notes and the $74.5 million 2023 Notes, and assess refinancing risks.
- SBIC License Approval: Monitor the status of the second SBIC license application and the potential for additional leverage.
- Unrealized Depreciation Drivers: Investigate the specific operational issues at Elyria Foundry and My Alarm Center that drove the $2.54 million unrealized depreciation.