Saratoga Investment Corp. 10-K Summary (Fiscal Year Ended Feb 28, 2017)
Business Context and Reporting Period
Saratoga Investment Corp. is an externally managed, closed-end, non-diversified Business Development Company (BDC) and Regulated Investment Company (RIC). The company invests primarily in leveraged loans and mezzanine debt issued by private U.S. middle-market companies. The reporting period covers the fiscal year ended February 28, 2017. The company is managed by Saratoga Investment Advisors, LLC.
Key Financial Metrics
| Metric | Value (2017) | Value (2016) |
|---|---|---|
| Total Assets | $318.7 million | $295.0 million |
| Total Investments (Fair Value) | $292.7 million | $284.0 million |
| Total Debt Outstanding | $181.5 million | $160.7 million |
| Net Assets | $127.3 million | $125.1 million |
| Net Asset Value (NAV) per Share | $21.97 | $22.06 |
| Total Investment Income | $33.2 million | $30.1 million |
| Net Investment Income | $9.7 million | $10.7 million |
| Net Increase in Net Assets from Operations | $11.4 million | $11.6 million |
| Weighted Average Yield on Debt Investments | 10.9% | 11.1% |
| Asset Coverage Ratio (1940 Act) | 271.0% | 302.5% |
Material Changes vs. Prior Period
- Debt Refinancing: On December 21, 2016, the company issued $74.5 million of 6.75% Notes due 2023. Proceeds were used to redeem $61.8 million of 7.50% Notes due 2020 on January 13, 2017. This resulted in a $1.5 million loss on extinguishment of debt.
- Portfolio Composition: The portfolio shifted toward a higher concentration in Business Services (55.1% of fair value) compared to the prior year (37.3%). Floating rate debt increased to 83.1% of the interest-bearing portfolio.
- Realized Gains: Net realized gains increased significantly to $12.4 million, driven primarily by the sale of equity stakes in Take 5 Oil Change, L.L.C. ($6.0 million gain) and Legacy Cabinets, Inc. ($3.4 million gain).
- Unrealized Depreciation: The company recorded net unrealized depreciation of $10.6 million, largely due to the realization of previously accrued gains on the aforementioned sales and a decline in the value of the Elyria Foundry Company investment.
- Expense Growth: Total operating expenses increased 13.8% to $22.0 million, driven by higher interest expenses due to increased debt levels and higher incentive management fees.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on generating current income through leveraged loans and mezzanine debt. The company maintains a dividend reinvestment plan (DRIP) and has an open market share repurchase plan authorized for up to 600,000 shares.
Key Risks and Contingencies:
- Saratoga CLO Investment: The company holds a first-loss position in Saratoga CLO (fair value $11.0 million). This investment is subject to unique risks, including the potential for total loss if the underlying loan portfolio suffers defaults.
- Leverage: The company employs leverage to enhance returns. As of period end, it had $112.7 million in SBA-guaranteed debentures and $74.5 million in 2023 Notes outstanding. No borrowings were outstanding under the $45.0 million revolving credit facility.
- Interest Rate Risk: A significant portion of the portfolio consists of floating-rate assets. A 1.0% increase in interest rates would hypothetically increase interest income by approximately $2.2 million.
- Concentration Risk: The portfolio is heavily concentrated in the Business Services industry (55.1%) and the Southeast region (39.7%).
- SBIC License: The company is in the process of reapplying for a second SBIC license, which would allow for an additional $150.0 million in SBA-guaranteed debentures if approved.
Investor Verification Checklist
- Verify the current status of the second SBIC license application with the SBA.
- Review the specific credit quality and default status of the $297.1 million portfolio underlying the Saratoga CLO investment.
- Confirm the company's ability to maintain RIC status given the mix of cash and stock dividends and the requirement to distribute 90% of taxable income.
- Monitor the concentration risk in the Business Services sector and the impact of economic downturns on this specific industry.
- Assess the impact of the 2023 Notes refinancing on the company's weighted average cost of debt and future interest coverage ratios.