Saratoga Investment Corp. — Form 10-Q Summary
Business context and reporting period
Business development company (BDC) focused on current income and, secondarily, capital appreciation through lending to U.S. middle-market businesses. The quarter ended November 30, 2023 is fiscal Q3; comparisons are with the quarter and nine months ended November 30, 2022, and balance-sheet figures are compared with February 28, 2023.
Financial and portfolio metrics
| Metric | Period-end / current | Comparison |
|---|---|---|
| Investment income | Q3: $36.3 million; nine months: $106.5 million | Q3 +38.4%; nine months +59.4% |
| Net investment income (NII) | Q3: $14.2 million ($1.09/share); nine months: $44.1 million ($3.57/share) | Q3 +43.4%; nine months +72.5% |
| Net results from operations | Q3: loss of $4.1 million ($0.31/share); nine months: income of $3.6 million ($0.29/share) | Q3 2022 income of $6.0 million; nine months 2022 income of $5.5 million |
| Investments at fair value | $1,114.0 million | Up from $972.6 million at February 28, 2023; fair value was $33.8 million below amortized cost |
| Net asset value (NAV) | $359.6 million; $27.42/share | $346.9 million; $29.18/share at February 28, 2023 |
| Cash and reserve accounts | $47.0 million | Down from $96.1 million at February 28, 2023 |
| Debt and asset coverage | $811.4 million principal debt; 159.3% asset coverage | Coverage was 165.9% at February 28, 2023; statutory minimum is 150% |
| Cash flows, nine months | Operating activities: cash used of $136.5 million; financing activities: cash provided of $87.5 million; combined cash decreased $49.0 million | Investment purchases of $202.9 million substantially exceeded $19.2 million of sales and repayments |
Conventional operating margins are not a central reported measure for this investment company. NII was approximately 39% of investment income in Q3 and 41% for the nine-month period.
Material changes versus prior periods
- Higher interest income reflected a larger portfolio and higher yields; weighted-average current portfolio yield was 11.4%, versus 10.7% at February 28, 2023. Nearly all interest-bearing debt investments were floating-rate.
- Higher funding costs partly offset NII growth: interest and debt-financing expense rose 48% in Q3 and 58% for the nine months. Average debt was higher, and the company issued additional notes, including $20 million of 8.75% notes due 2024 and $57.5 million of 8.50% notes due 2028.
- Q3’s operating loss primarily reflected $17.9 million of net unrealized investment depreciation. Nine-month unrealized depreciation was $39.9 million, versus $25.8 million a year earlier. NAV per share declined 6.0% from fiscal year-end.
- The portfolio expanded to 137 investments across 55 portfolio companies and 43 industries, from 115 investments and 49 companies at February 28, 2023. Three portfolio companies were on non-accrual, with $29.2 million fair value, versus one company and $9.8 million at fiscal year-end.
- Declared dividends totaled $2.13 per share for the nine months, versus $1.75 in the comparable 2022 period. The board declared $0.72 per share payable December 28, 2023.
Liquidity, outlook, risks and unusual items
- Management stated it believes liquidity is adequate for near-term requirements. The Encina revolving facility was $65 million, with $35 million drawn and $30 million nominal availability, subject to borrowing-base and other conditions. Cash and reserve accounts totaled $47.0 million.
- Debt maturities include $20 million of 8.75% notes due March 31, 2024. Total contractual debt obligations were $811.4 million; $227.0 million was scheduled within one to three years. The company’s $205 million of SBA debentures are excluded from the BDC asset-coverage test under SEC exemptive relief.
- Unfunded investment commitments rose to $128.4 million from $108.8 million at February 28, 2023. The filing says these are expected to be covered by assets, cash and available facility capacity; some commitments are discretionary and others depend on portfolio-company conditions.
- Interest-rate exposure is material. Management estimated a 100-basis-point rate increase would add approximately $10 million to annual interest income on investments, before other effects. The filing also warns that borrower stress, defaults, valuation changes, inflation, rate volatility, capital-market access and transition from LIBOR to SOFR could adversely affect results.
- Fair values rely substantially on Level 3 estimates and unobservable inputs; the board approves valuations. Largest named concentrations include healthcare software, IT services, HVAC and consumer services. Pepper Palace, Netreo and Saratoga’s CLO-related holdings were significant sources of unrealized depreciation.
- Subsequent events disclosed include surrender of the fully repaid SBIC LP license on January 3, 2024, making undistributed capital accessible, and extension of the share repurchase plan through January 15, 2025. No other subsequent event requiring financial-statement adjustment was reported. No material legal proceedings were disclosed.
- No quantitative earnings or portfolio guidance was provided. Management cautioned that forward-looking results depend on portfolio-company performance, economic conditions, funding availability and other risks.
Important facts for investors to verify
- How the $20 million 2024 notes will be repaid or refinanced, and the cost and availability of replacement capital.
- Borrowing-base availability, asset-coverage headroom and compliance with Encina facility covenants as portfolio values and commitments change.
- Developments, collections and recoveries for the three non-accrual companies, particularly the approximately $29.2 million fair-value exposure.
- Valuation assumptions and potential further markdowns for Level 3 holdings, including CLO investments and the largest depreciated positions.
- Whether investment income and cash collections can sustain distributions after debt costs, fees, unfunded commitments and portfolio losses.
- Portfolio concentration, floating-rate borrower capacity to service debt, and the company’s sensitivity to changes in benchmark rates.