Saratoga(SAR) - 2024 Q4 - Annual Report

PART I Item 1. Business Saratoga Investment Corp. provides customized financing to U.S. middle-market businesses, operating as an externally managed BDC and RIC - Saratoga Investment Corp. is a specialty finance company focused on providing customized financing solutions to U.S. middle-market businesses, aiming for attractive risk-adjusted returns through current income and long-term capital appreciation[20] - The company primarily invests in senior and unitranche leveraged loans, mezzanine debt, and equity of private U.S. middle-market companies (EBITDA $2M-$50M), through both direct lending and loan syndicates[20] - As of February 29, 2024, the portfolio consisted of 85.7% first lien term loans, 1.6% second lien term loans, 1.4% unsecured loans, 2.7% structured finance securities, and 8.6% equity interests[23] Portfolio Composition (Fair Value) as of February 29, 2024 | Investment Type | Percentage of Total Portfolio | Weighted Average Current Yield | | :-------------------------- | :---------------------------- | :----------------------------- | | First lien term loans | 85.7% | 12.6% | | Second lien term loans | 1.6% | 5.1% | | Unsecured loans | 1.4% | 11.1% | | Structured finance securities | 2.7% | 10.3% | | Equity interests | 8.6% | - | | Total | 100.0% | 11.4% | - The company operates as an externally managed, closed-end, non-diversified management investment company, regulated as a Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes[24][25] - Three wholly-owned subsidiaries are licensed as Small Business Investment Companies (SBICs) by the SBA, providing access to up to $350.0 million in SBA-guaranteed debentures, enhancing capital flexibility[26][155] Item 1A. Risk Factors The company faces significant risks including leverage, interest rate changes, economic uncertainties, conflicts of interest, and illiquid investments - The company employs leverage, which magnifies potential gains or losses and increases investment risk, with an asset coverage requirement reduced from 200% to 150% effective April 16, 2019[165][206] - Exposure to interest rate changes is a principal market risk, with a significant portion of the portfolio comprising floating rate investments transitioning from LIBOR to SOFR, which may not yield similar economic results[175][181] - Global economic, political, and market conditions, including inflation and market disruptions, can adversely affect the business, operating results, and financial condition of the company and its portfolio companies[163][240][244] - Potential conflicts of interest exist due to executive officers and directors serving in affiliated entities, and the incentive fee structure may encourage riskier investments or increased leverage[185][262][263] - Investments in unsecured debt, distressed/bankrupt companies, and second priority liens carry higher risks of loss and lower recovery rates in default scenarios[272][273][276] - The company's investment in Saratoga CLO, a collateralized loan obligation fund, represents a first-loss position, subjecting it to additional risks and volatility, with all losses in the underlying loan pool borne by the subordinated notes first[163][285] - Cybersecurity threats and system failures could significantly disrupt business operations, compromise confidential information, and negatively impact financial condition and stock price[196][197][202] - The market price of common stock may fluctuate significantly and trade at a discount to NAV, and the company may choose to pay dividends in stock or defer them, potentially incurring U.S. federal excise tax[164][322][324][328][337] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments from the SEC - There are no unresolved staff comments[362] Item 1C. Cybersecurity Saratoga Investment Corp. has a cybersecurity program to identify, assess, and manage material risks, overseen by the Board, with no material incidents identified - The company's cybersecurity program, implemented by Saratoga Investment Advisors, is designed to identify, assess, and manage material risks from cybersecurity threats[363] - The Board of Directors is responsible for overseeing the cybersecurity risk management, with the Chief Compliance Officer periodically reporting on the program's state, threat landscape, and material incidents[364] - Management, in consultation with cybersecurity consultants, assesses and manages cybersecurity risks and maintains disclosure controls for timely identification and reporting of material incidents[365] - During the reporting period, no cybersecurity risks or incidents were identified that materially affected or are reasonably likely to materially affect the company's business strategy, operational results, or financial condition[366] Item 2. Properties Saratoga Investment Corp. does not own any real estate or physical properties, with executive offices leased by an affiliate of its Investment Adviser - The company does not own any real estate or physical properties important to its operations[367] - Executive offices are leased by an affiliate of the Investment Adviser at 535 Madison Avenue, New York[367] Item 3. Legal Proceedings Neither Saratoga Investment Corp. nor its subsidiaries are subject to any material legal proceedings, though ordinary course actions may occur - Neither the company nor its wholly-owned subsidiaries are currently subject to any material legal proceedings[368] - The business may be a party to legal proceedings in the ordinary course, including contract enforcement or regulatory actions[368] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to Saratoga Investment Corp - Mine Safety Disclosures are not applicable[369] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, often at a discount to NAV, with an active share repurchase plan and key financial highlights - Saratoga Investment Corp.'s common stock (SAR) is traded on the NYSE and has historically traded at a discount to its Net Asset Value (NAV) As of May 3, 2024, the closing price was $23.57, representing a 13.1% discount to the NAV of $27.12 as of February 29, 2024[372][376] Common Stock Price and NAV Performance | Fiscal Year Ended | NAV ($) | High Closing Sales Price ($) | Low Closing Sales Price ($) | High Closing Sales Price as a Premium (Discount) to NAV (%) | Low Closing Sales Price as a Premium (Discount) to NAV (%) | | :---------------- | :------ | :--------------------------- | :-------------------------- | :--------------------------------------------------------- | :-------------------------------------------------------- | | Feb 29, 2024 | 27.12 | 26.73 | 22.77 | (1.4)% | (16.0)% | | Feb 28, 2023 | 29.18 | 27.77 | 25.02 | (4.8)% | (14.3)% | Key Financial Highlights (Per Share Data) | Metric | FY2024 ($) | FY2023 ($) | FY2022 ($) | | :---------------------------------------- | :--------- | :--------- | :--------- | | Net asset value at beginning of period | 29.18 | 29.33 | 27.25 | | Net investment income | 4.49 | 2.94 | 1.74 | | Net realized and unrealized gains (losses) | (3.77) | (0.75) | 2.46 | | Net increase in net assets from operations | 0.71 | 2.06 | 3.99 | | Distributions declared | (2.82) | (2.28) | (1.93) | | Net asset value at end of period | 27.12 | 29.18 | 29.33 | | Per share market value at end of period | 23.61 | 27.55 | 27.47 | | Total return based on market value | -3.92% | 10.35% | 28.19% | | Total return based on net asset value | 4.20% | 9.46% | 15.88% | - The company has an open market share repurchase plan, extended to January 15, 2025, allowing repurchase of up to 1.7 million shares below NAV As of February 29, 2024, 1,035,203 shares were repurchased at an average price of $22.05 for approximately $22.8 million[380] Annual Estimated Expenses (as a percentage of average net assets attributable to common stock) | Expense Category | Percentage | | :-------------------------------------- | :--------- | | Base management fees | 5.4% | | Incentive fees payable | 2.3% | | Interest payments on borrowed funds | 13.8% | | Other expenses | 3.2% | | Total annual expenses | 24.7% | Item 6. [Reserved] This item is reserved and contains no information - This item is reserved and contains no information[683] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Saratoga Investment Corp.'s financial performance, including investment income, operating expenses, portfolio, and liquidity - Total investment income increased by $44.6 million (45.0%) to $143.7 million for FY2024, primarily due to a 50.0% increase in interest income from investments, driven by a 17.1% growth in total investments and a higher weighted average current yield (11.4% vs. 10.7%)[470] - Total operating expenses increased by $22.9 million (35.9%) to $86.8 million for FY2024, mainly due to a 46.8% rise in interest and debt financing expenses and a 17.0% increase in base management fees[478][479][481] - Net increase in net assets resulting from operations was $8.9 million ($0.71 per share) for FY2024, a decrease from $24.7 million ($2.06 per share) in FY2023[467][538] Investment Income (in thousands) | Category | FY2024 ($) | FY2023 ($) | FY2022 ($) | | :------------------------------ | :--------- | :--------- | :--------- | | Interest from investments | 127,785 | 85,217 | 58,502 | | Interest from cash equivalents | 2,512 | 1,368 | 4 | | Management fee income | 3,270 | 3,270 | 3,263 | | Dividend Income | 6,533 | 2,720 | 1,926 | | Structuring and advisory fee income | 2,150 | 3,585 | 4,308 | | Other income | 1,470 | 2,944 | 2,739 | | Total investment income | 143,720| 99,104 | 70,740 | Operating Expenses (in thousands) | Category | FY2024 ($) | FY2023 ($) | FY2022 ($) | | :---------------------------------- | :--------- | :--------- | :--------- | | Interest and debt financing expenses | 49,180 | 33,499 | 19,881 | | Base management fees | 19,212 | 16,424 | 11,902 | | Incentive management fees | 8,025 | 5,057 | 11,794 | | Professional fees | 1,767 | 1,812 | 1,378 | | Administrator expenses | 3,873 | 3,160 | 2,906 | | Insurance | 322 | 347 | 349 | | Directors fees and expenses | 351 | 360 | 336 | | General and administrative | 2,243 | 2,329 | 1,662 | | Income tax expense (benefit) | 43 | (153) | (40) | | Excise tax expense (benefit) | 1,830 | 1,068 | 630 | | Total operating expenses | 86,846 | 63,903 | 50,797 | - The portfolio composition as of February 29, 2024, was 85.7% first lien term loans, 1.6% second lien term loans, 1.4% unsecured loans, 2.7% structured finance securities, and 8.6% equity interests Key industry concentrations include Healthcare Software (10.8%) and IT Services (6.9%)[453][462] - The company's asset coverage ratio was 161.1% as of February 29, 2024, and 165.9% as of February 28, 2023, meeting the 150% requirement for BDCs[542][560] - Unfunded commitments outstanding were $132.4 million as of February 29, 2024, an increase from $108.8 million in the prior year, with the company believing it has adequate liquidity to cover these commitments[616][1005] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuation, with a floating-rate portfolio; a 1.0% rate increase would boost net interest income - The principal market risk for Saratoga Investment Corp. is interest rate fluctuation, affecting net interest income and investment portfolio value[620][621] - Substantially all of the company's debt investments (99.5%) bear interest at a floating rate, primarily utilizing SOFR or an alternate rate, with 0% subject to interest rate floors as of February 29, 2024[622][623] Hypothetical Impact of Interest Rate Changes on Net Investment Income (in thousands) | Basis Point Change | Increase (Decrease) in Interest Income ($) | Decrease (Increase) in Interest Expense ($) | Increase (Decrease) in Net Investment Income ($) | Increase (Decrease) in Net Investment Income* ($) | Increase (Decrease) in Net Investment Income per Share ($) | | :----------------- | :----------------------------------------- | :------------------------------------------ | :----------------------------------------------- | :------------------------------------------------- | :------------------------------------------------------- | | -100 | (10,431) | 350 | (10,081) | (8,065) | (0.59) | | -550 | (5,215) | 175 | (5,040) | (4,032) | (0.30) | | -25 | (2,608) | 88 | (2,520) | (2,016) | (0.15) | | 25 | 2,608 | (88) | 2,520 | 2,016 | 0.15 | | 50 | 5,215 | (175) | 5,040 | 4,032 | 0.30 | | 100 | 10,431 | (350) | 10,081 | 8,065 | 0.59 | | 200 | 20,862 | (700) | 20,162 | 16,130 | 1.18 | | 300 | 31,448 | (1,050) | 30,398 | 24,318 | 1.78 | | 400 | 42,079 | (1,400) | 40,679 | 32,543 | 2.38 | Item 8. Consolidated Financial Statements and Supplementary Data The consolidated financial statements of Saratoga Investment Corp. and supplementary data are annexed to this Annual Report - Consolidated financial statements of Saratoga Investment Corp. are annexed to this Annual Report, starting on page F-1[629] - Financial Statements of Saratoga Investment Corp. CLO 2013-1, Ltd. are also annexed, starting on page S-1[629] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure for Saratoga Investment Corp - There have been no changes in or disagreements with accountants on accounting and financial disclosure[630] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of February 29, 2024, with no material changes - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of February 29, 2024, providing reasonable assurance of achieving control objectives[631] - The company's internal control over financial reporting was evaluated based on the COSO framework and deemed effective as of February 29, 2024[633] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect the company's internal control during the most recently completed fiscal year[634] Item 9B. Other Information Saratoga Investment Corp. has adopted insider trading policies, and no directors or officers entered into Rule 10b5-1 trading arrangements during the fiscal quarter - The company has adopted insider trading policies and procedures to promote compliance with insider trading laws, rules, and regulations[635] - No director or officer entered into Rule 10b5-1 trading arrangements or other non-Rule 10b5-1 trading arrangements during the fiscal quarter ended February 29, 2024[637] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Disclosure regarding foreign jurisdictions that prevent inspections is not applicable to Saratoga Investment Corp - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[636] PART III Item 10. Directors, Executive Officers and Corporate Governance This section details the Board of Directors and executive officers, their experience, and corporate governance policies Directors and Executive Officers | Name | Age | Position | Director Since | Term Expires | | :-------------------- | :-- | :------------------------------------------------------ | :------------- | :----------- | | Christian L. Oberbeck | 64 | Chairman of the Board, Chief Executive Officer and President | 2010 | 2024 | | Henri J. Steenkamp | 48 | Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary | 2020 | 2026 | | Steven M. Looney | 74 | Director | 2007 | 2025 | | Charles S. Whitman III| 82 | Director | 2007 | 2025 | | G. Cabell Williams | 70 | Director | 2007 | 2026 | - Christian L. Oberbeck, with 37 years in leveraged finance, serves as Chairman, CEO, and President, also being the Founder and Managing Member of Saratoga Investment Advisors[640] - Henri J. Steenkamp serves as CFO, CCO, Treasurer, and Secretary, bringing 25 years of experience in financial services and leveraged finance[32][644] - The company has adopted a Code of Business Conduct and Ethics applicable to all executive officers, directors, and employees, available on its website[646] - Insider trading policy generally prohibits short-term trading, short sales, speculative transactions, hedging, and pledging of company securities, with limited exceptions[650] - All Section 16(a) filing requirements were met during the year ended February 29, 2024, with one inadvertent late filing by Christian L. Oberbeck[649] Item 11. Executive Compensation Executive officers are compensated by Saratoga Investment Advisors, while independent directors receive annual and meeting fees, with an option for stock compensation - Executive officers are not compensated by Saratoga Investment Corp.; their services are provided by Saratoga Investment Advisors[655] - Independent directors receive an annual fee of $70,000, plus $3,000 for each board meeting and $1,500 for each committee meeting, along with reimbursement for out-of-pocket expenses[656] - The Audit Committee chairman receives an additional $12,500 annually, and other committee chairmen receive $6,000 Independent directors can opt to receive fees in common stock[656] Director Compensation for Fiscal Year Ended February 29, 2024 | Director Name | Fees Earned or Paid in Cash ($) | Total ($) | | :-------------------- | :------------------------------ | :-------- | | Christian L. Oberbeck | - | - | | Henri J. Steenkamp | - | - | | Steven M. Looney | 102,500 | 102,500 | | Charles S. Whitman III| 96,000 | 96,000 | | G. Cabell Williams | 96,000 | 96,000 | - No compensation is paid to directors who are 'interested persons' of the company[656] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common stock by directors, executive officers, and significant shareholders - As of May 3, 2024, there were 13,698,966 shares of common stock outstanding[660] Beneficial Ownership of Common Stock as of May 3, 2024 | Name of Beneficial Owners | Number of Shares of Common Stock Beneficially Owned | Percent of Class | | :-------------------------------- | :-------------------------------------------------- | :--------------- | | Christian L. Oberbeck | 1,520,712 | 11.1% | | Henri J. Steenkamp | 28,459 | * | | Steven M. Looney | 4,258 | * | | Charles S. Whitman III | 4,518 | * | | G. Cabell Williams | 88,773 | * | | All Directors as a Group | 1,646,720 | 12.0% | | Elizabeth Oberbeck | 549,183 | 4.0% | | Thomas V. Inglesby | 352,236 | 2.6% | | Michael J. Grisius | 167,216 | 1.2% | - Christian L. Oberbeck's beneficial ownership includes shares directly held by him, an entity he wholly owns (CLO Partners LLC), and shares held by his children and wife for which he retains voting rights[662] - Mr. Oberbeck, Mr. Grisius, and Mr. Inglesby, as affiliates, collectively make up 17.2% of the company's ownership[661] Item 13. Certain Relationships and Related Transactions, and Director Independence The company has significant related party transactions with its investment adviser; most directors are independent - The company has a Management Agreement, Administration Agreement, and a trademark license agreement with Saratoga Investment Advisors, LLC, which is controlled by Mr. Oberbeck, the company's CEO[663] - The Audit Committee of the board is responsible for reviewing and approving any transactions with related persons[664] - The board of directors annually determines director independence based on the 1940 Act's definition of 'interested person'[665][667] - All directors are considered independent, except for Messrs. Oberbeck and Grisius, who are 'interested persons' due to their executive positions with the company and its Investment Adviser[668] Item 14. Principal Accounting Fees and Services Saratoga Investment Corp. incurred $692,650 in fees for Ernst & Young LLP services in FY2024, primarily for audit and tax Principal Accounting Fees and Services (in thousands) | Category | FY2024 ($) | FY2023 ($) | | :----------- | :--------- | :--------- | | Audit Fees | 642,300 | 584,500 | | Tax Fees | 50,350 | 46,200 | | Total Fees | 692,650| 630,700| Subsidiary Accounting Fees (in thousands) | Category | FY2024 ($) | FY2023 ($) | | :--------------------------- | :--------- | :--------- | | CLO Audit Fees | — | — | | Tax Services for Subsidiaries| — | — | | All Other Fees | 84,925 | 97,750 | | Total Fees | 84,925 | 97,750 | - Audit fees cover statutory and regulatory filings, annual consolidated financial statements, internal control audits, and quarterly reviews[670] - Tax fees are for the preparation of the company's tax return[671] - The audit committee pre-approves all audit, review, attest engagements, and permissible non-audit services by the independent registered public accounting firm[672] PART IV Item 15. Exhibits, Consolidated Financial Statement Schedules This section lists all consolidated financial statements, supplementary data, and a comprehensive exhibit index filed as part of the Annual Report - The consolidated financial statements of Saratoga Investment Corp. are filed as part of this Annual Report, including Statements of Assets and Liabilities, Operations, Changes in Net Assets, Cash Flows, and Schedules of Investments[675] - Financial Statements of Saratoga Investment Corp. CLO 2013-1, Ltd. are also included as supplementary data[676] - A comprehensive exhibit index lists various corporate documents, indentures, agreements (e.g., Investment Advisory and Management Agreement, Administration Agreement, Equity Distribution Agreement), and certifications[678][679][680][681][682] Item 16. Form 10-K Summary This item is reserved and contains no information - This item is reserved and contains no information[683]