Saratoga(SAR) - 2023 Q4 - Annual Report

PART I Business Saratoga Investment Corp. provides customized financing to U.S. middle-market businesses, primarily via senior and unitranche leveraged loans Portfolio Overview as of February 28, 2023 | Metric | Value | | :--- | :--- | | Total Assets | $1,078.2 million | | Number of Portfolio Companies | 49 | | Weighted Average Yield on Investments | 12.1% | | Total Return (Market Value) | 10.35% | | Total Return (NAV) | 9.46% | Portfolio Composition as of February 28, 2023 | Investment Type | Percentage of Portfolio | | :--- | :--- | | First Lien Term Loans | 82.1% | | Second Lien Term Loans | 1.5% | | Unsecured Loans | 2.1% | | Structured Finance Securities | 4.3% | | Equity Interests | 10.0% | - The company operates as a BDC, which allows it to borrow funds with an asset coverage ratio of at least 150%, an increase from the previous 200% requirement, effective April 16, 2019[21] - The company has three wholly-owned SBIC subsidiaries, which collectively provide access to up to $350.0 million in long-term capital through SBA-guaranteed debentures[23] Risk Factors The company faces significant risks related to its business structure, economic environment, investment adviser, and specific investments - The use of leverage magnifies potential gains and losses. The company's asset coverage requirement was reduced from 200% to 150% effective April 16, 2019, which could increase investment risk[171][213] - The company is exposed to interest rate risk, as rising rates could increase borrowing costs and negatively impact portfolio companies' ability to service their debt. The transition from LIBOR to alternative rates like SOFR introduces uncertainty[181][185] - A majority of the company's debt investments (77% as of Feb 28, 2023) are structured as "interest-only" loans with a large balloon payment at maturity, which increases repayment risk[286] - The investment in Saratoga CLO represents a first-loss position in a leveraged portfolio of senior secured loans, subjecting the company to a higher degree of risk and volatility[292] - The company's notes are unsecured and are effectively subordinated to any existing and future secured indebtedness, including borrowings under the Encina Credit Facility and structurally subordinated to the liabilities of its subsidiaries, including SBA-guaranteed debentures[352][354] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on NYSE under 'SAR', fluctuating at a discount to NAV, with active share repurchases and consistent quarterly dividends Common Stock Price Range vs. NAV (Fiscal Year 2023) | Quarter | NAV per Share | High Closing Price | Low Closing Price | High as % of NAV | Low as % of NAV | | :--- | :--- | :--- | :--- | :--- | :--- | | Q1 | $28.69 | $28.31 | $24.98 | (1.3)% | (12.9)% | | Q2 | $28.27 | $26.95 | $22.70 | (4.7)% | (19.7)% | | Q3 | $28.25 | $27.16 | $20.36 | (3.9)% | (27.9)% | | Q4 | $29.17 | $27.77 | $25.02 | (4.8)% | (14.2)% | - The company has a share repurchase plan, which was extended to January 15, 2024, and increased to 1.7 million shares. During the fiscal year ended February 28, 2023, the company purchased 438,192 shares at an average price of $24.70 for approximately $10.8 million[383] - The company recommenced quarterly dividends in September 2014 and has a Dividend Reinvestment Plan (DRIP) in place for stockholders[390] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2023 investment income increased to $99.1 million due to portfolio growth and higher rates, despite unrealized depreciation Key Operating Results (Fiscal Year Ended Feb 28) | Metric ($ in millions) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Investment Income | $99.1 | $70.7 | $57.7 | | Net Investment Income | $35.2 | $19.9 | $23.1 | | Net Realized Gains (Losses) | $7.4 | $13.4 | ($8.7) | | Net Change in Unrealized Appreciation | ($15.2) | $17.0 | $5.0 | | Net Increase in Net Assets | $24.7 | $45.7 | $14.8 | - Investment income for FY 2023 increased by 40.1% year-over-year, primarily due to a 19.0% growth in total investments and a rise in the weighted average current yield from 7.7% to 10.7%[521] - Operating expenses for FY 2023 increased by 25.8% to $63.9 million, largely due to a 68.5% increase in interest and debt financing expenses from higher average debt balances and rising interest rates[530][531] Portfolio Growth and Composition (Fair Value) | Metric | Feb 28, 2023 | Feb 28, 2022 | | :--- | :--- | :--- | | Total Investments | $972.6 million | $817.6 million | | Number of Portfolio Companies | 49 | 45 | | First Lien Term Loans % | 82.1% | 77.3% | - As of February 28, 2023, the company had significant liquidity sources, including $65.7 million in cash, $31.1 million available under its Encina Credit Facility, and access to SBA debentures[663] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuation, impacting investment income from floating-rate assets and interest expense on borrowings - The company's principal market risk is interest rate volatility, which impacts net interest income[665][666] Hypothetical Annual Impact of Interest Rate Changes on Net Investment Income (as of Feb 28, 2023) | Basis Point Change | Increase/(Decrease) in Net Investment Income ($ in thousands) | Increase/(Decrease) in Net Investment Income per Share | | :--- | :--- | :--- | | +300 | $19,654 | $1.64 | | +100 | $6,551 | $0.55 | | -100 | ($6,551) | ($0.55) | - As of February 28, 2023, approximately 99% of the company's debt investments bore interest at a floating rate, making its income sensitive to rate changes[668] Consolidated Financial Statements and Supplementary Data This section presents audited consolidated financial statements for Saratoga Investment Corp. and its subsidiaries, including the auditor's report - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects in conformity with U.S. GAAP[739] - A critical audit matter identified was the valuation of Level 3 investments, which totaled $959.5 million and required significant management judgment and estimation[745] - The filing includes the full consolidated financial statements, schedules of investments, and notes to the financial statements for Saratoga Investment Corp[721] - Separate audited financial statements for the portfolio company Saratoga Investment Corp. CLO 2013-1, Ltd. are also included, as required by SEC rules[1074] PART III Directors, Executive Officers and Corporate Governance Details board composition, executive officers, and corporate governance practices, including the Code of Business Conduct and Ethics - The Board of Directors is comprised of five members: Christian L. Oberbeck (Chairman, CEO), Henri J. Steenkamp (CFO), Steven M. Looney, Charles S. Whitman III, and G. Cabell Williams[687] - The board has determined that Messrs. Looney, Whitman, and Williams are independent directors. Mr. Looney serves as the chairman of the audit committee and is designated as an "audit committee financial expert"[700][715] - The company's insider trading policy generally prohibits directors, officers, and employees from engaging in short-term trading, short sales, hedging, or pledging of the company's securities[698] Executive Compensation Executive officers are compensated by the investment adviser, while independent directors receive direct annual and meeting fees - The company has no employees and does not directly compensate its executive officers. Their services are provided by Saratoga Investment Advisors[701] Independent Director Compensation for FY 2023 | Director | Fees Earned or Paid in Cash | | :--- | :--- | | Steven M. Looney | $143,000 | | Charles S. Whitman III | $135,000 | | G. Cabell Williams | $135,000 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of May 1, 2023, directors and executive officers collectively owned 13.8% of common stock, with the CEO holding the largest insider stake Security Ownership as of May 1, 2023 | Beneficial Owner | Percentage of Class | | :--- | :--- | | Christian L. Oberbeck | 12.8% | | All Directors as a Group | 13.8% | | Black Diamond Capital Management, L.L.C. | 8.0% | - The ownership percentage is based on 12,124,175 shares of common stock outstanding as of May 1, 2023[707] Certain Relationships and Related Transactions, and Director Independence Key related party transactions exist with the investment adviser, controlled by the CEO, with Audit Committee oversight for approvals - The company has entered into a Management Agreement, Administration Agreement, and a trademark license agreement with its investment adviser, Saratoga Investment Advisors, LLC[710] - The Audit Committee is responsible for reviewing and approving all transactions with related persons[711] - The board of directors has determined that three of its members are independent, as they are not "interested persons" of the Company as defined in Section 2(a)(19) of the 1940 Act[714][715] Principal Accounting Fees and Services FY2023 fees to Ernst & Young LLP totaled $630,700 for audit and tax services, all pre-approved by the audit committee Fees Paid to Ernst & Young LLP | Fee Type | Fiscal Year 2023 | Fiscal Year 2022 | | :--- | :--- | :--- | | Audit Fees | $584,500 | $513,000 | | Tax Fees | $46,200 | $43,650 | | Total Fees | $630,700 | $556,650 | - The audit committee's policy is to pre-approve all audit, review, or attest engagements and permissible non-audit services performed by the independent registered public accounting firm[719] PART IV Exhibits, Consolidated Financial Statement Schedules Lists all documents filed as part of the Annual Report, including consolidated financials, separate portfolio company financials, and an exhibit index - The filing includes the full consolidated financial statements for Saratoga Investment Corp[721] - An index of exhibits is provided, referencing key corporate documents, material agreements (including the Investment Advisory and Administration Agreements), and indentures for various note offerings[725]