Business Context and Reporting Period
Saratoga Investment Corp. (the "Company") 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's investment objective is to generate current income and, to a lesser extent, capital appreciation, primarily through leveraged loans and mezzanine debt issued by private U.S. middle-market companies. This Form 10-Q covers the quarterly period ended November 30, 2015, and the nine-month period ended on that date.
Key Financial Metrics
| Metric | Nine Months Ended Nov 30, 2015 | Nine Months Ended Nov 30, 2014 |
|---|---|---|
| Total Investment Income | $22,255,408 | $19,924,370 |
| Net Investment Income | $7,578,534 | $6,785,383 |
| Net Realized Gain | $4,231,006 | $3,203,399 |
| Net Unrealized Appreciation | $239,354 | $(1,686,263) |
| Net Increase in Net Assets from Operations | $12,048,894 | $8,302,519 |
| Earnings Per Share (Basic & Diluted) | $2.18 | $1.54 |
| Net Asset Value (NAV) Per Share | $22.59 | $22.45 |
| Total Investments at Fair Value | $241,037,799 | $240,537,735 |
| Cash and Cash Equivalents | $6,019,448 | $1,888,158 |
| Total Debt Outstanding | $140,374,525 | $136,900,000 |
| Asset Coverage Ratio | 307.4% | 311.7% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 11.7% to $22.3 million for the nine months ended November 30, 2015, compared to $19.9 million in the prior year period. This was primarily driven by higher average assets and increased interest income from investments.
- Expense Increases: Total operating expenses rose 11.7% to $14.7 million. Interest and debt financing expenses increased due to a higher weighted average interest rate (5.01% vs. 4.91%) and an increase in outstanding notes ($61.4 million vs. $48.3 million), partially offset by the paydown of the revolving credit facility.
- Portfolio Activity: The Company made $57.4 million in new investments and had $62.7 million in exits/repayments, resulting in net repayments of $5.3 million. The portfolio composition shifted slightly, with Business Services and Consumer Services representing the largest industry allocations.
- Unrealized Gains: The Company recorded net unrealized appreciation of $0.2 million, a significant improvement from the $1.7 million unrealized depreciation recorded in the prior year period. Notable unrealized depreciation occurred in Elyria Foundry Company, LLC and Targus Group International, Inc., while the Saratoga CLO investment saw unrealized appreciation.
Guidance, Outlook, and Risks
- Capital Resources: The Company maintains a $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC, which had no outstanding borrowings as of November 30, 2015. The borrowing base was $35.3 million. The Company also holds $79.0 million in SBA-guaranteed debentures.
- SBIC Expansion: On April 2, 2015, the SBA issued a "green light" letter inviting the Company to continue its application for a second SBIC license. Approval could allow the issuance of an additional $75 million in SBA-guaranteed debentures, though no assurance of approval is given.
- Dividends: The Company declared a dividend of $0.40 per share on January 12, 2016, payable February 29, 2016. Shareholders may elect to receive dividends in cash or stock via the Dividend Reinvestment Plan (DRIP).
- Risks: Key risks include the illiquidity of portfolio investments, credit risk associated with high-yield and unrated loans, and the potential for portfolio companies to default. The Company's investment in Saratoga CLO 2013-1, Ltd. is subject to unique risks as a first-loss position in a leveraged portfolio.
- Legal Proceedings: A complaint filed in August 2012 by GSC Acquisition Holdings, LLC alleges fraudulent transfers regarding deferred incentive fees. The Company believes the claims are without merit and intends to defend vigorously.
Investor Verification Checklist
- Debt Structure: Verify the terms and interest rates of the $61.4 million in 7.50% unsecured notes due 2020 and the $79.0 million in SBA debentures.
- Asset Coverage: Confirm the 307.4% asset coverage ratio remains compliant with the 200% requirement under the 1940 Act.
- Portfolio Quality: Review the Credit and Monitoring Rating (CMR) distribution, noting that 82.2% of the portfolio is rated "Green" and 2.3% is "Yellow."
- Unfunded Commitments: Note the $3.1 million in unfunded commitments to portfolio companies as of November 30, 2015.
- Valuation Methodology: Understand that investments without readily available market quotes are valued by the Board of Directors using Level 3 inputs, which involves significant management judgment.