Business Context and Reporting Period
Saratoga Investment Corp. (SAR) is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company invests primarily in senior and unitranche leveraged loans and mezzanine debt issued by private U.S. middle-market companies. This report covers the quarterly period ended November 30, 2021, and the nine months ended on that date.
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2021 | Nine Months Ended Nov 30, 2020 |
|---|---|---|
| Total Investments (Fair Value) | $661.8 million | $546.9 million |
| Net Investment Income | $14.1 million | $18.8 million |
| Net Realized Gain on Investments | $13.3 million | $22,207 |
| Net Change in Unrealized Appreciation | $14.1 million | $(9.4) million |
| Net Increase in Net Assets from Operations | $37.3 million | $5.5 million |
| Earnings Per Share (Basic & Diluted) | $3.30 | $0.49 |
| Net Asset Value (NAV) Per Share | $29.17 | $27.25 |
| Total Debt Outstanding | $457.6 million | $287.9 million (Liabilities) |
| Cash and Cash Equivalents | $144.1 million | $33.9 million |
| Asset Coverage Ratio | 236.7% | 347.1% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately $115 million (21%) compared to the prior period, driven by new originations and accretion.
- Profitability Surge: Net increase in net assets resulting from operations jumped from $5.5 million to $37.3 million. This was primarily driven by a significant net realized gain of $13.3 million (compared to negligible gains in the prior year) and a reversal of unrealized depreciation to appreciation of $14.1 million.
- Debt Restructuring: The company significantly altered its capital structure. It issued $175 million in 4.375% Notes due 2026 and used proceeds to redeem $60 million of 6.25% Notes due 2025. It also terminated its Madison Credit Facility and entered a new $50 million Encina Credit Facility, with $12.5 million drawn as of period end.
- Liquidity: Cash and cash equivalents increased substantially from $33.9 million to $144.1 million, reflecting net proceeds from equity issuances and debt refinancing.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted the successful refinancing of the Saratoga CLO 2013-1, Ltd., extending its reinvestment period to April 2024 and maturity to April 2033. The company also noted the completion of a fourth refinancing of the CLO, upsizing assets from $500 million to approximately $650 million.
- Dividends: The company declared a dividend of $0.53 per share on November 30, 2021. Total distributions for the nine months ended November 30, 2021, were $15.6 million.
- Risks and Contingencies:
- COVID-19: The filing notes that the pandemic continues to adversely affect some investments and the global economy, with long-term impacts remaining uncertain.
- LIBOR Transition: The company is monitoring the transition away from LIBOR and has agreements with portfolio companies and lenders that include alternative successor rate provisions.
- Unfunded Commitments: As of November 30, 2021, the company had $97.1 million in unfunded commitments to portfolio companies, representing off-balance sheet credit risk.
- Unusual Items: The company recorded a realized loss on the extinguishment of debt of $2.3 million for the nine-month period, primarily related to the repayment of the Madison Credit Facility and the 6.25% 2025 Notes.
Investor Verification Checklist
- Debt Maturity Profile: Verify the impact of the new 4.375% Notes due 2026 ($175 million) on future interest expense and liquidity requirements compared to the redeemed 6.25% Notes.
- Realized Gains Sustainability: Assess the sustainability of the $13.3 million realized gain, which was a primary driver of the period's earnings, and determine if it was driven by specific portfolio exits or valuation adjustments.
- Asset Coverage Ratio: Monitor the asset coverage ratio (currently 236.7%) to ensure it remains well above the 150% regulatory minimum required for BDCs, especially given the increased leverage from new debt issuances.
- Cash Position Utilization: Evaluate the plan for deploying the significant cash balance ($144.1 million) to ensure it is invested efficiently to maintain yield targets.
- Unfunded Commitments: Review the $97.1 million in unfunded commitments to understand potential future capital outflows and their impact on liquidity.