Saratoga(US:SAR)2021-10-05 20:00PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Saratoga Investment Corp.'s unaudited consolidated financial statements for August 31, 2021, detail assets, liabilities, operations, cash flows, and investments Consolidated Statements of Assets and Liabilities Total assets $745.8 million, net assets $324.1 million, and NAV per share $28.97 as of August 31, 2021 Consolidated Balance Sheet Highlights (in millions) | Metric | August 31, 2021 | February 28, 2021 | | :--- | :--- | :--- | | Total Investments at Fair Value | $666.1 | $554.3 | | Cash and Cash Equivalents | $73.3 | $29.9 | | Total Assets | $745.8 | $592.2 | | Total Liabilities | $421.7 | $288.0 | | Total Net Assets | $324.1 | $304.2 | | NAV per Share | $28.97 | $27.25 | Consolidated Statements of Operations Total investment income $35.3 million, net investment income $8.9 million, and net assets increased by $29.0 million for the six months ended August 31, 2021 Six Months Ended August 31, 2021 vs 2020 (in millions, except per share data) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Investment Income | $35.3 | $27.2 | | Total Operating Expenses | $26.3 | $12.8 | | Net Investment Income | $8.9 | $14.4 | | Net Realized & Unrealized Gain (Loss) | $21.6 | ($15.2) | | Net Increase (Decrease) in Net Assets | $29.0 | ($0.8) | | Basic and Diluted EPS | $2.59 | ($0.08) | Consolidated Statements of Changes in Net Assets Net assets increased by $19.9 million to $324.1 million for the six months ended August 31, 2021, driven by operations and offset by distributions - Net assets grew from $304.2 million at the beginning of the period to $324.1 million at the end, an increase of $19.9 million18 - Key changes included a $29.0 million net increase from operations, offset by $9.7 million in shareholder distributions18 Consolidated Statements of Cash Flows Net cash used in operations $72.2 million, offset by $115.6 million from financing, led to a $43.4 million net cash increase for the six months ended August 31, 2021 Cash Flow Summary for the Six Months Ended August 31, 2021 (in millions) | Activity | Amount | | :--- | :--- | | Net Cash Used in Operating Activities | ($72.2) | | Net Cash Provided by Financing Activities | $115.6 | | Net Increase in Cash | $43.4 | | Cash at Beginning of Period | $29.9 | | Cash at End of Period | $73.3 | Consolidated Schedules of Investments Investment portfolio grew to $666.1 million across 43 companies as of August 31, 2021, diversified by industry and investment type Portfolio Composition by Investment Type (Fair Value, in millions) | Investment Type | August 31, 2021 | February 28, 2021 | | :--- | :--- | :--- | | Non-control/Non-affiliate | $531.4 | $476.1 | | Affiliate | $56.4 | $13.2 | | Control | $78.2 | $65.0 | | Total Investments | $666.1 | $554.3 | Portfolio Composition by Asset Class (Fair Value, in millions) | Asset Class | August 31, 2021 | February 28, 2021 | | :--- | :--- | :--- | | First lien term loans | $493.6 | $440.5 | | Second lien term loans | $44.9 | $24.9 | | Unsecured term loans | $2.7 | $2.1 | | Structured finance securities | $44.4 | $49.8 | | Equity interests | $80.5 | $37.0 | | Total | $666.1 | $554.3 | Notes to Consolidated Financial Statements Details accounting policies, BDC/RIC status, investment valuation (ASC 820), Saratoga CLO, income taxes, related party transactions, borrowings, and shareholder equity - The company is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes55 - All investments are accounted for at fair value in accordance with ASC 820. Investments without readily available market quotes are valued in good faith by the board of directors, utilizing a multi-step process involving the Manager, an audit committee, and an independent valuation firm697071 - As of August 31, 2021, all investments were classified as Level 3 in the fair value hierarchy, indicating that their valuations are based on unobservable inputs106 - The company manages a collateralized loan obligation fund, Saratoga CLO, for which it receives management fees. The CLO was refinanced and upsized to approximately $650 million in February 2021125127 - The company utilizes two licensed Small Business Investment Company (SBIC) subsidiaries, which allows it to borrow up to a combined maximum of $350 million in SBA-guaranteed debentures. As of August 31, 2021, $172.0 million was outstanding215216224 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance for the three and six months ended August 31, 2021, covering business overview, investment portfolio, operating results, liquidity, and financing activities Portfolio and Investment Activity Investment portfolio grew to $666.1 million across 43 companies, with $85.4 million net investments, 74.1% in first lien term loans, and 77.0% rated 'Green' - During the six months ended August 31, 2021, net investment activity was $85.4 million, resulting from $235.2 million in new/existing investments and $149.8 million in exits and repayments368 Portfolio CMR Distribution (Fair Value) | Color Score | August 31, 2021 (%) | February 28, 2021 (%) | | :--- | :--- | :--- | | Green | 77.0% | 81.8% | | Yellow | 5.6% | 5.9% | | Red | 0.0% | 0.0% | | N/A (CLO/Equity) | 17.4% | 12.3% | - As of August 31, 2021, there were no investments on non-accrual status, an improvement from $2.1 million on non-accrual status at February 28, 2021365377 Results of Operations Total investment income rose 33.1% to $18.4 million, operating expenses increased, resulting in $6.4 million net investment income and a $7.9 million net asset increase for the three months ended August 31, 2021 Operating Results for the Three Months Ended August 31 (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Investment Income | $18.4 | $13.9 | | Total Operating Expenses | $12.0 | $8.5 | | Net Investment Income | $6.4 | $5.3 | | Net Realized & Unrealized Gain | $3.1 | $16.5 | | Net Increase in Net Assets | $7.9 | $21.8 | - The increase in investment income was primarily due to a 31.1% year-over-year increase in total investments, partially offset by a reduction in LIBOR and a higher allocation to non-interest-bearing equity388 - The rise in operating expenses was driven by a $1.9 million increase in interest and debt financing expenses due to higher average debt outstanding, and a $0.8 million increase in base management fees from a larger asset base396400 Financial Condition, Liquidity and Capital Resources Total long-term debt $410.1 million, asset coverage ratio 236.1%, with liquidity from operations, borrowings, and equity, and $58.7 million in unfunded commitments as of August 31, 2021 - The company's asset coverage ratio was 236.1% as of August 31, 2021, exceeding the 150% regulatory minimum427450 Long-Term Debt Obligations as of August 31, 2021 (in millions) | Debt Instrument | Amount Outstanding | | :--- | :--- | | SBA debentures | $172.0 | | 7.25% 2025 Notes | $43.1 | | 7.75% 2025 Notes | $5.0 | | 4.375% 2026 Notes | $175.0 | | 6.25% 2027 Notes | $15.0 | | Total | $410.1 | - The company had $58.7 million in unfunded commitments to portfolio companies as of August 31, 2021515 - Subsequent to the quarter-end, on October 4, 2021, the company entered into a new $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC and terminated its existing facility with Madison Capital519 Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuation, impacting floating-rate investment income; a 100 basis point rate increase would raise annual interest income by $0.4 million, with ongoing LIBOR transition monitoring - The company's principal market risk is interest rate volatility, as a large portion of its investment portfolio consists of floating-rate loans indexed to LIBOR521522523 Interest Rate Sensitivity Analysis (Annualized, as of Aug 31, 2021) | Basis Point Change | Change in Interest Income (in thousands) | Change in Net Investment Income per Share | | :--- | :--- | :--- | | +300 | $8,775 | $0.79 | | +200 | $3,728 | $0.33 | | +100 | $409 | $0.04 | | -100 | ($11) | ($0.00) | - The company is actively monitoring the planned discontinuation of LIBOR after 2021 and is working with portfolio companies and lenders to manage the transition to alternative reference rates like SOFR537538539 Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of August 31, 2021, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report530 - No material changes in internal control over financial reporting occurred during the quarter ended August 31, 2021530 PART II. OTHER INFORMATION Item 1. Legal Proceedings Neither Saratoga Investment Corp. nor its subsidiaries are currently subject to any material legal proceedings - As of the reporting date, neither Saratoga Investment Corp. nor its subsidiaries were involved in any material legal proceedings532 Item 1A. Risk Factors No material changes to risk factors, except for expanded discussion on LIBOR discontinuation risks and the potential impact of transitioning to alternative reference rates like SOFR - The company highlights the risk associated with the planned cessation of LIBOR after 2021, which is used as a reference rate for a significant portion of its floating-rate debt investments and credit facilities534537 - The transition to an alternative rate like the Secured Overnight Financing Rate (SOFR) could impact the value of LIBOR-linked securities and may require renegotiating credit agreements, potentially affecting financial results538 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable540 Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period - Not applicable541 Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - Not applicable542 Item 5. Other Information No other information was reported under this item for the period Item 6. Exhibits Lists all exhibits filed, including articles of incorporation, bylaws, indentures, key agreements, and CEO/CFO certifications - Key exhibits filed with this report include the Investment Advisory and Management Agreement (10.1), Administration Agreement (10.3), various credit and indenture agreements, and CEO/CFO certifications (31.1, 31.2, 32.1, 32.2)545548549