Business Context and Reporting Period
Saratoga Investment Corp. (the "Company") is an externally managed, closed-end, non-diversified 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, mezzanine debt, and equity issued by private U.S. middle-market companies. It also holds a significant investment in a collateralized loan obligation (CLO) fund, Saratoga CLO. The reporting period covers the fiscal year ended February 28, 2019.
Key Financial Metrics
| Metric | Value (Fiscal Year 2019) |
|---|---|
| Total Assets | $470.7 million |
| Investment Assets (Fair Value) | $402.0 million |
| Total Debt Outstanding | $277.2 million (net of discount/costs) |
| Net Assets | $180.9 million |
| Net Asset Value (NAV) per Share | $23.62 |
| Net Investment Income | $18.3 million |
| Net Increase in Net Assets from Operations | $18.5 million |
| Earnings Per Share (Basic & Diluted) | $2.63 |
| Dividends Declared per Share | $2.06 |
| Weighted Average Yield on Investments | 10.7% |
| Asset Coverage Ratio | 234.5% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 23.5% to $47.7 million from $38.6 million in the prior year, driven by a 17.3% increase in total investments to $402.0 million.
- Operating Expenses: Total operating expenses rose 13.6% to $29.4 million. Interest and debt financing expenses increased due to higher average outstanding debt ($249.3 million vs. $212.1 million). Base management fees increased 17.7% due to higher average gross assets.
- Realized Gains: The Company recorded net realized gains of $4.9 million, a significant improvement from net realized losses of $5.9 million in the prior year. This was largely due to a refinancing transaction involving HMN Holdco, LLC.
- Unrealized Depreciation: The portfolio experienced a net change in unrealized depreciation of $2.9 million, contrasting with $10.8 million of unrealized appreciation in the prior year. Notable depreciation occurred in Elyria Foundry, L.L.C. and Roscoe Medical, Inc.
- Debt Issuance: The Company issued $60.0 million in aggregate principal amount of 6.25% Notes due 2025 (including a re-opening in February 2019) and maintained $150.0 million in SBA-guaranteed debentures.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Changes: Effective April 16, 2019, the Company's minimum asset coverage ratio requirement decreased from 200% to 150% under the Small Business Credit Availability Act, allowing for increased leverage capacity.
- Saratoga CLO Refinancing: In December 2018, the Company completed a third refinancing and upsize of its Saratoga CLO investment, extending the reinvestment period to January 2021 and the legal maturity to January 2030. The portfolio was upsized from approximately $300 million to $500 million. The Company is no longer entitled to an incentive management fee on the CLO following this refinancing.
- Dividend Policy: The Company declared a quarterly dividend of $0.54 per share on February 26, 2019. Distributions are paid in cash or stock via a Dividend Reinvestment Plan (DRIP) to maintain Regulated Investment Company (RIC) status.
- Risk Factors: Key risks include the illiquidity of private investments, concentration in the Business Services industry (62.8% of portfolio), exposure to interest rate volatility (83.7% of debt investments have variable rates), and the "first loss" risk associated with the subordinated notes in Saratoga CLO.
- Unusual Items: The Company recognized a $1.0 million income tax benefit related to net deferred federal and state income tax benefits with respect to operating losses and income derived from equity investments held in taxable blockers.
Investor Verification Checklist
- Debt Maturity Profile: Verify the repayment schedule for the $284.5 million in long-term debt obligations, noting that $114.5 million is due within 3-5 years and $170.0 million is due after 5 years.
- Saratoga CLO Exposure: Confirm the valuation methodology and risk profile of the $35.4 million investment in Saratoga CLO (subordinated notes and tranches), which represents a first-loss position.
- Asset Coverage Compliance: Monitor the Company's ability to maintain the new 150% asset coverage ratio effective April 2019 to ensure continued compliance with the 1940 Act.
- Portfolio Concentration: Assess the impact of the 62.8% concentration in the Business Services industry on portfolio stability.
- Interest Rate Sensitivity: Evaluate the impact of rising interest rates on net investment income, given that 83.7% of the debt portfolio is floating rate, while a portion of the debt (2023 and 2025 Notes) is fixed rate.