SARATOGA INVESTMENT CORP. quarterly report, Q4 FY2017

Business Context and Reporting Period

Saratoga Investment Corp. (Saratoga) 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 report covers the quarterly period ended November 30, 2017.

Key Financial Metrics

Metric Nine Months Ended Nov 30, 2017 Three Months Ended Nov 30, 2017
Total Investment Income $28.49 million $9.53 million
Net Investment Income $9.41 million $3.02 million
Net Increase in Net Assets from Operations $12.15 million $4.26 million
Net Asset Value (NAV) per Share $22.58 (End of Period) $22.58 (End of Period)
Weighted Average EPS (Basic & Diluted) $2.04 $0.71
Total Investments at Fair Value $338.84 million $338.84 million
Total Debt Outstanding $210.11 million $210.11 million
Cash and Cash Equivalents $8.72 million $8.72 million
Asset Coverage Ratio 284.0% 284.0%

Material Changes vs. Prior Period

  • Investment Income Growth: Total investment income for the nine months ended November 30, 2017, increased by 14.9% to $28.49 million compared to $24.80 million in the prior year period. This was driven by a 22.1% increase in total investments and a rise in the weighted average current coupon from 10.8% to 11.3%.
  • Realized Gains/Losses: The company reported a net realized loss of $5.66 million for the nine months ended November 30, 2017, contrasting with a net realized gain of $12.30 million in the prior year. The primary driver of the loss was a $7.71 million realized loss on the sale of a second lien term loan to My Alarm Center, LLC.
  • Unrealized Appreciation: Net change in unrealized appreciation on investments was $8.39 million for the nine months ended November 30, 2017, a significant improvement from a depreciation of $10.73 million in the prior year period.
  • Operating Expenses: Total operating expenses increased by 17.5% to $19.08 million for the nine-month period, primarily due to higher interest and debt financing expenses resulting from increased outstanding debt levels (SBA debentures and 2023 Notes).
  • Debt Structure: The company issued $74.5 million in 6.75% fixed-rate notes due 2023 and used proceeds to redeem the 2020 Notes. SBA debentures increased to $134.7 million from $112.7 million in the prior year.

Guidance, Outlook, and Risks

  • Portfolio Performance: The portfolio's weighted average current yield increased to 11.3%. The Credit and Monitoring Rating (CMR) distribution shows 85.7% of the portfolio rated "Green" (performing) and 2.4% rated "Yellow" (underperforming) as of November 30, 2017.
  • Liquidity and Capital Resources: The company maintains a $45.0 million senior secured revolving credit facility with $1.0 million outstanding and a borrowing base of $31.8 million. The company intends to fund growth through SBA debenture drawdowns and equity offerings, including its Dividend Reinvestment Plan (DRIP).
  • Dividends: The company declared a dividend of $0.49 per share on November 29, 2017, payable December 27, 2017. Shareholders may elect to receive dividends in cash or stock.
  • Risks:
    • Tax Legislation: New tax legislation signed into law on December 22, 2017, could negatively affect the company's ability to qualify as a Regulated Investment Company (RIC) or impact the tax consequences to investors.
    • Interest Rate Risk: A hypothetical 1.0% increase in interest rates would increase interest income by approximately $2.4 million, assuming a constant portfolio.
    • SBIC License: The company is in the process of reapplying for a second SBIC license, which was previously granted a "green light" but expired due to a request for updated materials. Approval would allow for an additional $150 million in SBA-guaranteed debentures.

Key Facts for Investor Verification

  • NAV vs. Market Price: Verify the current market price of the stock relative to the reported NAV of $22.58 per share to assess the discount/premium.
  • Realized Loss Impact: Review the specific details of the $7.71 million realized loss on My Alarm Center, LLC, to understand the impact on future income and portfolio quality.
  • Debt Maturity Profile: Confirm the maturity dates of the $74.5 million 2023 Notes and the $134.7 million SBA debentures to assess refinancing risks.
  • Non-Performing Assets: Monitor the $8.3 million in non-performing or delinquent investments, specifically the reserve increase related to TM Restaurant Group L.L.C.
  • Second SBIC License Status: Track the progress of the application for the second SBIC license, as approval is contingent on SBA review and could significantly alter capital raising capabilities.