Saratoga Investment Corp. — Form 10-Q Summary
Reporting period: Quarter ended May 31, 2024. Saratoga is a business development company (BDC) focused mainly on lending to U.S. middle-market companies and seeks current income and, to a lesser extent, capital appreciation. Comparisons below are with the quarter ended May 31, 2023 unless otherwise noted.
Key financial results and position
- Investment income: $38.7 million, up 11.7% from $34.6 million. Investment interest income rose 16.1% to $34.3 million; total investment income also included $1.5 million of dividends, $0.8 million of management fees and $1.0 million of other income.
- Net investment income (NII): $14.3 million, down 10.2% from $16.0 million. NII was $1.05 per weighted-average share versus $1.35. NII as a proportion of investment income was approximately 37.1%, compared with 46.1%; this is a simple calculated ratio, not a company-reported margin.
- Net results: Net increase in assets from operations was $6.6 million, or $0.48 per share, versus a $0.2 million decrease and a reported loss of $0.02 per share. A $21.2 million realized investment loss was partly offset by $13.9 million of net unrealized appreciation and deferred tax effects.
- Cash flow and liquidity: Operating cash flow was $52.1 million, versus $110.9 million used in the prior-year quarter; investment sales and repayments of $75.7 million exceeded purchases of $39.3 million. Cash and reserve-account balances totaled $93.3 million at May 31, up from $40.5 million at February 29, 2024. The filing reports $32.2 million cash and available borrowings of $32.5 million under Encina and $37.0 million under Live Oak.
- Portfolio and NAV: Investments had fair value of $1.096 billion, down from $1.139 billion at February 29, 2024. NAV was $367.9 million, or $26.85 per share, versus $370.2 million and $27.12 per share. First-lien loans represented 86.3% of portfolio fair value; 99.4% of interest-earning portfolio debt was floating-rate.
- Debt and coverage: Contractual debt principal totaled approximately $830.9 million, including $214.0 million of SBA debentures, $45.5 million drawn on revolving facilities and $571.4 million of notes. Asset coverage was 159.6%, down from 161.1%, above the company’s 150% regulatory minimum but with limited headroom.
- Distributions: The company declared $0.74 per share for payment June 27, 2024, compared with $0.70 per share declared for the comparable prior-year quarter. Quarterly shareholder distributions recorded were $10.0 million.
Material changes and notable items
- Investment income increased, but NII declined as operating expenses rose 30.4% to $24.3 million. Interest and debt-financing expense increased 10.9% to $13.0 million; incentive management-fee expense rose to $3.6 million from $0.1 million, largely reflecting the prior-period capital-gains-fee benefit.
- Realized losses included $15.1 million from restructuring Zollege and $6.1 million from selling the Netreo equity position. Unrealized appreciation partly reflected reversals of prior unrealized depreciation following those events. Saratoga CLO’s fair value also declined, including from distributions and reductions in values of certain defaulted loans.
- Three portfolio-company investments were on non-accrual at May 31, with fair value of approximately $16.7 million, or 1.5% of portfolio fair value, down from $18.9 million, or 1.7%, at February 29. Pepper Palace and Knowland are identified as non-accrual investments; the filing excerpt does not clearly identify the third company in this period.
- The company began drawing under a new $50 million Live Oak revolving facility in March; $13.0 million was outstanding at quarter-end. On June 14, 2024, after quarter-end, the commitment was amended to $75 million, subject to borrowing-base requirements.
Outlook, risks and other disclosures
- The filing provides no specific earnings or portfolio guidance. Management says it believes current liquidity is adequate for near-term needs but cautions that capital-raising plans may not succeed or be available on favorable terms.
- Management highlights credit and valuation risk, elevated interest rates, inflation, portfolio-company performance, market volatility, liquidity and access to capital, and the possibility that illiquid investments may realize less than recorded fair value. Most private investments are Level 3 and rely on significant unobservable valuation inputs.
- Interest-rate sensitivity analysis estimates that a 100-basis-point increase in rates would raise annualized NII by about $0.55 per share, assuming investments and borrowings remain unchanged. This is a sensitivity estimate, not guidance.
- Unfunded portfolio commitments were $132.0 million. The filing says available cash and facility capacity are expected to support them, but funding remains subject to company discretion or specified conditions, and credit facilities include borrowing-base and covenant requirements.
- The company reported compliance with facility requirements, effective disclosure controls, no material legal proceedings, and no material change to the risk factors in its latest Form 10-K. Its board renewed the management and administration agreements for one year on July 8, 2024.
Most important facts for investors to verify
- Whether recurring NII can sustain distributions: NII per share was $1.05 while the declared dividend was $0.74, but NII fell year over year and expenses increased.
- The outlook for Zollege and other stressed/non-accrual exposures, and whether additional realized losses or valuation changes may follow.
- The assumptions supporting Level 3 fair values, especially Saratoga CLO and concentrated portfolio-company positions.
- Debt maturities, refinancing needs and asset-coverage headroom, including the 159.6% coverage ratio against the 150% minimum.
- Actual borrowing capacity and liquidity after borrowing-base tests, unfunded commitments and the June Live Oak amendment.