Saratoga Investment Corp. 10-Q Summary
Business Context and Reporting Period
Company: Saratoga Investment Corp. (Saratoga)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2017
Business Model: Saratoga is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). It invests primarily in leveraged loans and mezzanine debt of private U.S. middle-market companies, with up to 30% allocated to opportunistic investments including distressed debt and structured finance vehicles.
Key Financial Metrics
| Metric | Q2 2017 (Three Months Ended May 31) | Q2 2016 (Three Months Ended May 31) |
|---|---|---|
| Total Investment Income | $8.71 million | $7.91 million |
| Net Investment Income | $3.50 million | $2.54 million |
| Net Increase in Net Assets from Operations | $1.01 million | $3.29 million |
| Net Realized Gain | $0.096 million | $6.10 million |
| Net Unrealized Depreciation | ($2.59 million) | ($5.35 million) |
| Earnings Per Share (Basic & Diluted) | $0.17 | $0.57 |
| Net Asset Value (NAV) Per Share | $21.69 | $22.11 |
| Total Investments at Fair Value | $329.69 million | $264.43 million (May 31, 2016) |
| Total Debt Outstanding | $233.61 million | $165.5 million (May 31, 2016) |
| Cash and Cash Equivalents (Total) | $27.77 million | $27.47 million (May 31, 2016) |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately 24.7% to $329.7 million, driven by $45.0 million in new investments and $5.9 million in exits/repayments.
- Debt Structure: Total debt increased significantly due to the issuance of $74.5 million in 6.75% Notes due 2023 (replacing the 2020 Notes) and an increase in SBA debentures to $134.7 million. Additionally, $24.5 million was drawn on the revolving credit facility during the quarter.
- Realized Gains: Net realized gains dropped sharply from $6.1 million in the prior year to $0.1 million, primarily because the prior year included a $6.0 million gain from the sale of Take 5 Oil Change, L.L.C.
- Unrealized Depreciation: Net unrealized depreciation improved (decreased) from $5.35 million to $2.59 million, though significant depreciation occurred in specific positions such as My Alarm Center, LLC ($5.3 million change).
- Expense Reduction: Total operating expenses decreased by 3.1% to $5.20 million, largely due to a $0.6 million decrease in incentive management fees related to capital gains.
Guidance, Outlook, and Risks
Management Commentary:
- Investment Activity: The Company continues to deploy capital, with a weighted average current coupon of 11.9% and a weighted average spread over LIBOR of 9.3%.
- Credit Quality: 86.3% of the portfolio is rated "Green" (performing), 2.5% "Yellow" (underperforming), and 0.8% "Red" (in default). Non-performing investments totaled $11.3 million.
- Dividends: A dividend of $0.47 per share was declared on May 30, 2017, payable June 27, 2017. The Company utilizes a Dividend Reinvestment Plan (DRIP) and stock distributions to meet RIC requirements.
Risks and Contingencies:
- SBIC License Application: The Company's application for a second SBIC license is pending. The SBA requested updated materials, causing the previous "green light" letter to expire. Approval would allow an additional $150 million in SBA-guaranteed debentures.
- Concentration Risk: The portfolio is concentrated in Business Services (56.8%) and Healthcare Services (11.5%).
- Unfunded Commitments: The Company has $7.0 million in unfunded commitments to portfolio companies (up from $2.0 million).
- Asset Coverage: The asset coverage ratio was 229.0% as of May 31, 2017, well above the 200% minimum required by the 1940 Act.
Investor Verification Checklist
- Debt Maturity Profile: Verify the impact of the new 2023 Notes ($74.5 million) and the draw on the revolving credit facility ($24.5 million) on future interest expense and liquidity.
- Non-Performing Assets: Review the specific status and recovery prospects of the $11.3 million in non-performing investments, particularly the significant unrealized depreciation in My Alarm Center, LLC.
- SBIC Status: Monitor the status of the second SBIC license application, as approval is critical for accessing additional low-cost leverage.
- Dividend Sustainability: Assess the ratio of Net Investment Income ($3.50 million) to dividends declared ($2.67 million) to confirm the sustainability of the current distribution rate without eroding capital.
- Portfolio Valuation: Note that 100% of the portfolio is classified as Level 3 (unobservable inputs), requiring reliance on management's fair value estimates.