Saratoga(US:SAR)2022-05-04 20:00PART I Business Saratoga Investment Corp. is an externally managed BDC providing financing to U.S. middle-market businesses, with $876.2 million in assets and operating as a RIC with SBIC subsidiaries - Saratoga Investment Corp. is an externally managed BDC providing customized financing to U.S. middle-market companies with EBITDA between $2 million and $50 million21 Portfolio Overview as of February 28, 2022 | Metric | Value | | :--- | :--- | | Total Assets | $876.2 million | | Number of Portfolio Companies | 45 | | First Lien Term Loans | 77.3% of portfolio | | Second Lien Term Loans | 5.4% of portfolio | | Structured Finance Securities | 4.7% of portfolio | | Equity Interests | 10.7% of portfolio | | Weighted Average Yield on Investments | 7.7% | - The company operates as a BDC and RIC, having reduced its minimum asset coverage ratio from 200% to 150% effective April 16, 2019, allowing for increased leverage2627 - Saratoga operates two SBIC subsidiaries, providing access to up to $325.0 million in SBA-guaranteed debentures, with SEC exemptive relief to exclude this debt from BDC asset coverage requirements28154159 - The company holds a first-loss position in the Saratoga CLO through subordinated notes, with the CLO upsized to approximately $650 million in assets in February 2021246069 - In October 2021, the company co-founded Saratoga Senior Loan Fund I JV LLC (SLF JV), a joint venture for investing in broadly syndicated loans and bonds3170 Advisory and Administration Fee Structure | Fee Type | Description | | :--- | :--- | | Base Management Fee | 1.75% annually of average gross assets (excluding cash) | | Incentive Fee (Income) | 20% of pre-incentive fee net investment income over a 1.875% quarterly hurdle rate, with a catch-up provision | | Incentive Fee (Capital Gains) | 20% of cumulative realized capital gains net of cumulative realized and unrealized losses since May 31, 2010 | | Administration Fee Cap | Reimbursable expenses capped at $3.0 million, effective August 1, 2021 | Risk Factors The company faces significant risks including leverage, interest rate volatility, economic downturns, potential conflicts of interest with its external adviser, and illiquid, non-investment grade portfolio investments - The company's use of leverage magnifies potential gains and losses, with the asset coverage requirement reduced from 200% to 150% effective April 16, 2019168215 - The company is exposed to interest rate risk, with LIBOR decommissioning and transition to alternative rates like SOFR creating uncertainty for floating-rate loans and obligations178180181 - Economic recessions, market disruptions, and public health crises could impair portfolio companies' ability to repay loans, leading to financial losses and decreased revenues and net asset value248255260 - The advisory fee structure creates potential conflicts of interest, incentivizing leverage and potentially riskier investments or those with deferred interest to maximize adviser compensation187265267 - A majority of the company's debt investments are "interest-only" loans, creating significant "balloon payment" risk if borrowers cannot repay or refinance at maturity167279 - The investment in the Saratoga CLO represents a first-loss position, with all initial portfolio losses borne by the company's subordinated notes, leading to significant risk and volatility284285 - Failure to maintain RIC qualification would subject the company to corporate-level U.S. federal income tax, substantially reducing net assets and income available for distribution219224 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None357 Properties The company does not own real estate; its executive offices are leased by an affiliate of its Investment Adviser - The company does not own any real estate; its executive offices are leased by an affiliate of the Investment Adviser358 Legal Proceedings The company and its wholly-owned subsidiaries are not currently subject to any material legal proceedings - The company and its subsidiaries are not currently subject to any material legal proceedings359 Mine Safety Disclosures This item is not applicable to the company - Not applicable360 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities Saratoga Investment Corp.'s common stock trades on the NYSE, with a share repurchase plan in place and a dividend reinvestment plan to maintain RIC status Stock Price vs. NAV (FY 2022) | Quarter | NAV per Share | High Closing Price | Low Closing Price | High as % of NAV | Low as % of NAV | | :--- | :--- | :--- | :--- | :--- | :--- | | Q1 | $28.70 | $26.54 | $22.66 | (7.5)% | (21.1)% | | Q2 | $28.97 | $28.90 | $25.70 | (0.2)% | (11.3)% | | Q3 | $29.17 | $29.80 | $27.19 | 2.2% | (6.8)% | | Q4 | $29.32 | $29.51 | $25.20 | 0.6% | (14.1)% | Financial Highlights Per Share | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | NAV at beginning of period | $27.25 | $27.13 | | Net increase in net assets from operations | $3.99 | $1.32 | | Distributions declared | ($1.93) | ($1.23) | | NAV at end of period | $29.33 | $27.25 | | Total return based on market value | 28.19% | 7.63% | | Total return based on NAV | 15.88% | 7.31% | - The company has a share repurchase plan, extended through January 15, 2023, authorizing the repurchase of up to 1.3 million shares, with 99,623 shares purchased for approximately $2.5 million in FY 2022373400 - The company recommenced quarterly dividends in 2014 and has a DRIP, requiring distribution of at least 90% of taxable income to maintain RIC status, incurring excise taxes in certain years for not meeting higher thresholds378380 Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, total investment income increased by 22.7% to $70.7 million due to portfolio growth, while operating expenses rose 47.2% to $50.8 million, resulting in a $45.7 million net increase in net assets from operations Results of Operations Summary ($ in thousands) | | FYE Feb 28, 2022 | FYE Feb 28, 2021 | | :--- | :--- | :--- | | Total investment income | $70,740 | $57,650 | | Total operating expenses | $50,797 | $34,537 | | Net investment income | $19,943 | $23,113 | | Net realized/unrealized gain on investments | $30,418 | $(3,737) | | Net increase in net assets from operations | $45,735 | $14,777 | - Investment income increased by $13.1 million (22.7%) year-over-year, reflecting 47.5% portfolio growth to $817.6 million, partially offset by a decrease in weighted average yield from 9.1% to 7.7%497 - Operating expenses increased by $16.3 million (47.2%) year-over-year, driven by a $6.3 million increase in interest expenses and a $6.9 million increase in incentive management fees504506510 - In FY2022, the company invested $458.1 million and received $226.9 million from exits, resulting in net portfolio growth of $231.1 million473 Portfolio Composition by Fair Value | Investment Type | Feb 28, 2022 | Feb 28, 2021 | | :--- | :--- | :--- | | First lien term loans | 77.3% | 79.5% | | Second lien term loans | 5.4% | 4.4% | | Structured finance securities | 4.7% | 9.0% | | Equity interests | 10.7% | 6.7% | | Total | 100.0% | 100.0% | - Portfolio credit quality improved, with 84.5% of investments rated "Green" at fair value as of Feb 28, 2022, and no investments on non-accrual status at year-end, compared to $2.1 million in the prior year481482 - The company enhanced liquidity by closing a new $50.0 million Encina Credit Facility, issuing $175.0 million of 4.375% Notes due 2026 and $75.0 million of 4.35% Notes due 2027, and redeeming higher-cost 6.25% Notes due 2025438432436425 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, with a 100 basis point increase in rates projected to increase annual net interest income by approximately $2.4 million - The company's primary market risk is interest rate fluctuation, impacting the difference between income on floating-rate assets and expense on interest-bearing liabilities650651 Interest Rate Sensitivity Analysis (as of Feb 28, 2022) | Basis Point Change | Change in Interest Income ($ thousands) | Change in Interest Expense ($ thousands) | Change in Net Investment Income ($ thousands) | | :--- | :--- | :--- | :--- | | +300 | $15,326 | ($293) | $15,033 | | +200 | $8,524 | ($168) | $8,356 | | +100 | $2,459 | ($43) | $2,416 | | -100 | ($47) | $0 | ($47) | - A 1.0% increase in rates would increase annual interest income by approximately $2.5 million, while a 1.0% decrease would only reduce it by $0.03 million, indicating interest rate floors on many portfolio investments653 Consolidated Financial Statements and Supplementary Data This section references the company's consolidated financial statements and separate financial statements for Saratoga Investment Corp. CLO 2013-1, Ltd., annexed to the Annual Report - The company's consolidated financial statements are annexed to the Annual Report, beginning on page F-1659 - The financial statements for Saratoga Investment Corp. CLO 2013-1, Ltd. are annexed, beginning on page S-1659 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None660 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of February 28, 2022, with no material changes reported - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period661 - Management concluded that the company's internal control over financial reporting was effective as of February 28, 2022, based on COSO framework criteria663 - No material changes in internal control over financial reporting occurred during the most recently completed fiscal year664 Other Information The company reports no other information for this item - None665 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable666 PART III Directors, Executive Officers and Corporate Governance The company's board includes two interested and three independent directors, operates under a Code of Business Conduct and Ethics, and has an audit committee with a designated financial expert - The board of directors comprises two interested directors and three independent directors670 - The company has adopted a Code of Business Conduct and Ethics applicable to all officers, directors, and employees676 - Insider trading policies prohibit short-term or speculative trading, hedging, or pledging of the company's securities by directors, officers, and employees678 - The audit committee consists of three independent directors, with Steven M. Looney serving as chairman and designated as the "audit committee financial expert"680 Executive Compensation Executive officers are compensated by the Investment Adviser, while independent directors receive an annual fee of $70,000 plus meeting fees, with additional compensation for committee chairs - The company does not directly compensate its executive officers; their services are provided by Saratoga Investment Advisors under existing agreements681 Independent Director Compensation (FY 2022) | Director | Total Compensation | | :--- | :--- | | Steven M. Looney | $114,500 | | Charles S. Whitman III | $109,500 | | G. Cabell Williams | $109,500 | - Independent directors receive a $70,000 annual fee, $3,000 per board meeting, and $1,500 per committee meeting, with the audit committee chair receiving an additional $12,500 annually682 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of May 4, 2022, directors and executive officers as a group beneficially owned 13.5% of common stock, with Christian L. Oberbeck holding 12.6% and Black Diamond Capital Management holding 8.1% Beneficial Ownership as of May 4, 2022 | Owner | Shares Beneficially Owned | Percent of Class | | :--- | :--- | :--- | | Christian L. Oberbeck (CEO) | 1,529,307 | 12.6% | | Black Diamond Capital Management, L.L.C. | 978,398 | 8.1% | | All Directors as a Group | 1,633,892 | 13.5% | Certain Relationships and Related Transactions, and Director Independence The company has related party transactions with its Investment Adviser, controlled by the CEO, which are reviewed by the Audit Committee, and three directors are deemed independent - The company has key agreements (Management, Administration, License) with its Investment Adviser, Saratoga Investment Advisors, LLC, controlled by CEO Christian L. Oberbeck692 - The Audit Committee is responsible for reviewing and approving all transactions with related persons693 - The board has determined that Messrs. Looney, Whitman, and Williams are independent directors, while Messrs. Oberbeck and Grisius are considered interested persons697 Principal Accounting Fees and Services Ernst & Young LLP serves as the independent auditor, with total fees of $557,000 in FY2022, and the audit committee pre-approves all services Auditor Fees (Ernst & Young LLP) | Fee Type | Fiscal Year 2022 | Fiscal Year 2021 | | :--- | :--- | :--- | | Audit Fees | $513,000 | $525,000 | | Tax Fees | $44,000 | $42,800 | | Total Fees | $557,000 | $567,800 | - The audit committee's policy is to pre-approve all audit and permissible non-audit services performed by the independent registered public accounting firm701 PART IV Exhibits, Consolidated Financial Statement Schedules This section lists the consolidated financial statements, separate financial statements for Saratoga CLO, and an index of all exhibits filed with the Annual Report - This section lists the consolidated financial statements of the Company and the financial statement schedules filed with the report704705 - An index of exhibits is provided, including key corporate documents, indentures for various notes, and Investment Advisory and Administration Agreements706708 Form 10-K Summary The company reports no summary for this item - None711