Overview

Saratoga Investment Corp. is a business development company (BDC) that invests in middle-market companies, primarily through senior and unitranche leveraged loans. As of February 29, 2024, the company had $1.14 billion invested across 55 portfolio companies, with an average investment size of $20.1 million.

The investment portfolio had exposure across 43 industries, with the largest allocations to healthcare software (10.8%), IT services (6.9%), and consumer services (5.7%). Approximately 99.5% of the interest earning portfolio was invested in floating rate debt.

Key Figures
Total Investments	$1.14 billion
Number of Portfolio Companies	55
Average Investment per Portfolio Company	$20.1 million
Investments in Floating Rate Debt	99.5%

Financial History and Recent Developments

Saratoga Investment Corp. commenced operations in March 2007 and was externally managed until July 2010, when it engaged Saratoga Investment Advisors as its current investment adviser.

The company has raised additional capital over time and expanded its borrowing capacity by forming wholly owned small business investment company (SBIC) subsidiaries. The SBIC subsidiaries have obtained low-cost, long-term leverage in the form of SBA debentures to fund portfolio growth.

Recent developments include:

• In October 2021, the company entered into a $50 million senior secured revolving credit facility with Encina Lender Finance to provide additional liquidity. This facility was expanded to $65 million in January 2023.

• In October 2021, Saratoga co-formed Saratoga Senior Loan Fund I JV LLC to invest in Saratoga Investment Corp Senior Loan Fund 2022-1 Ltd., providing exposure to a portfolio of broadly syndicated loans.

• In February 2022, Saratoga completed the fourth refinancing of its Saratoga CLO fund, increasing assets under management to $650 million. This provides ongoing management fee income.

Financial Performance

Saratoga has delivered strong growth in investment income and net investment income over the past three fiscal years:

	FY2024	FY2023	FY2022
Total Investment Income	$143.7 million	$99.1 million	$70.7 million
Net Investment Income	$56.9 million	$35.2 million	$19.9 million

This growth has been driven primarily by portfolio expansion, with total investments increasing from $817.6 million as of February 28, 2022 to $1.14 billion as of February 29, 2024.

In addition, rising interest rates have increased the weighted average current yield on Saratoga’s investments to 11.4% as of the most recent year end. This compares to weighted average yields of 10.7% and 7.7% in the prior two years.

Financial Condition and Liquidity

Saratoga has demonstrated access to diverse sources of liquidity to support portfolio growth, including:

• Cash flows from operations
• Low-cost SBA debentures ($214 million outstanding as of 2/29/2024)
  
• Unsecured notes ($461 million outstanding as of 2/29/2024)
• Revolving credit facilities ($35 million drawn as of 2/29/2024)
• Equity issuances via dividend reinvestment plan, ATM program, and follow-on offerings

The company’s regulatory debt-to-equity ratio was 161.1% as of February 29, 2024, providing room to add further leverage.

Saratoga has a strong track record of accessing capital markets and banks for attractive financing over long dated tenors. This provides the balance sheet capacity to continue growing its investment portfolio and dividend distributions.

Outlook

With the U.S. economy potentially entering a recession, Saratoga’s focus on defensive middle-market industries and floating rate loans appears positioned to withstand market volatility.

The breadth and depth of Saratoga’s funding sources provide the liquidity to capitalize on potential dislocations as banks pull back lending activities. The BDC structure also enables Saratoga to retain earnings for future investment, providing a long runway for portfolio growth.