NEW YORK, October 10, 2018 – Saratoga Investment Corp. (NYSE:SAR) (“Saratoga Investment” or “the Company”), a business development company, today announced financial results for its 2019 fiscal second quarter.
Summary Financial Information
The Company’s summarized financial information is as follows:
“Our second fiscal quarter of 2019 has been a very important one for us with many important accomplishments, including continued growth of our high quality asset base, sustained industry leadership in performance metrics and a material expansion of our long-term capital structure,” said Christian L. Oberbeck, Chairman and Chief Executive Officer of Saratoga Investment. “This quarter we successfully raised $40.0 million of new seven-year fixed rate notes under the ticker symbol “SAF”, and issued $28.75 million of new equity at a premium to NAV – this equity raise helped increase our total NAV to $172.7 million, and importantly also increased our share float by 1.15 million shares. In addition, we recently received a “green light” letter from the SBA for a second SBIC license. And last month we also increased our dividend for the sixteenth consecutive quarter, a $0.01 increase to $0.52 per share. Importantly, we continue to out-earn our dividend payments on a fully diluted basis factoring in the equity raise. In the current rising rate environment, we believe we are well-structured, with 82% of our interest earning investments having floating-rate interest rates and through their LIBOR floors, and all of our debt at quarter-end being fixed-rate.”
Michael J. Grisius, President and Chief Investment Officer, added, “This fiscal quarter has again demonstrated our long-term strategy to grow assets without sacrificing the quality of our investment portfolio, something we were able to accomplish this quarter with significant success. Our asset base grew by 14% since last quarter, while our credit quality remained strong at our highest levels. The asset growth also came not only in the form of follow-ons, but with investments in new platforms, with another four new portfolio companies added this quarter, bringing the total to seven since May this year. We remain confident that sticking to our long- term strategy of identifying and underwriting high quality credits will continue to garner positive results.”
As of August 31, 2018, Saratoga Investment increased its assets under management (“AUM”) to $392.9 million, an increase of 14.4% from $343.4 million as of May 31, 2018, and an increase of 18.0% from $333.0 million as of August 31, 2017. The increase this quarter reflects originations of $51.7 million, offset by amortizations of $1.0 million. Including realized and unrealized gains, Saratoga Investment’s portfolio has grown this quarter and credit quality remains strong, with a continued high level of investment quality in loan investments, with 99.4% of our loans this quarter at our highest internal rating. Included in this quarter’s originations are also four investments in new portfolio companies. Since Saratoga management has taken over the management of the BDC, $299.1 million of repayments and sales of investments originated by Saratoga have generated a gross unlevered IRR of 13.4%.
For the three months ended August 31, 2018, total investment income of $11.4 million increased $1.1 million, or 11.2%, compared to $10.3 million for the three months ended August 31, 2017. This increased investment income was generated from an investment base that has grown by 18.0% since last year. The weighted average current coupon on all investments dropped slightly to 10.8%, primarily due to an increase in equity positions on which there is generally no interest income to 9.1% from 8.2% last year. In addition, this quarter’s investment income was up 8.7% on a quarter-over-quarter basis from $10.5 million for the quarter ended May 31, 2018.
As compared to the three months ended August 31, 2017, in addition to the investment income increase of $1.1 million, there was also (i) decreased debt and financing expenses, as the growth in AUM last year was financed primarily by the revolving credit facility, while this year’s growth came from lower-cost SBA debentures and the recent equity raise, and (ii) decreased total expenses, excluding interest and debt financing expenses, base management fees and incentive fees, reflecting primarily the deferred income tax benefit generated by equity investments held in taxable blockers generating net operating losses. These benefits were offset by increased base management fees generated from the management of this larger pool of investments.
Net investment income on a weighted average per share basis was $0.74 for the quarter ended August 31, 2018. Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income on a weighted average per share basis was $0.69. This compares to adjusted net investment income per share of $0.64 for the quarter ended May 31, 2018 and $0.62 for the quarter ended August 31, 2017, reflecting increases of $0.05 and $0.07, respectively.
Net investment income yield as a percentage of average net asset value (“Net Investment Income Yield”) was 12.9% for the quarter ended August 31, 2018. Adjusted for the incentive fee accrual related to net unrealized capital gains, the Net Investment Income Yield was 11.9%. In comparison, adjusted Net Investment Income Yield was 11.1% and 11.3% for the quarters ended May 31, 2018 and August 31, 2017, respectively.
Net Asset Value (“NAV”) was $172.7 million as of August 31, 2018, an increase of $29.0 million from $143.7 million as of February 28, 2018, and an increase of $39.2 million from $133.5 million as of August 31, 2017.
- For the six months ended August 31, 2018, $9.1 million of net investment income and $0.2 million of net realized gains were earned, partially offset by $0.8 million of deferred tax expense on net unrealized gains in Saratoga Investment’s blocker subsidiaries, $1.5 million net unrealized depreciation on investments and $6.3 million of dividends declared. In addition, $27.4 million of common stock was issued, net of offering costs, and $1.0 million of stock dividend distributions were made through the Company’s dividend reinvestment plan (“DRIP”). No shares were sold through the Company’s At- the-Market (“ATM”) equity offering during the year.
NAV per share was $23.16 as of May 31, 2018, compared to $22.96 as of February 28, 2018 and $22.37 as of August 31, 2017.
- For the six months ended August 31, 2018, NAV per share increased by $0.20 per share, primarily reflecting (i) the $0.11 accretive impact of the last six months 1,196,998 share issuances, including both the equity offering and the DRIP, and (ii) the $0.7 million, or $0.09 per share increase in net assets resulting from operations (net of the $1.01 dividend paid during the first half of FY2019).
Return on equity for the last twelve months ended August 31, 2018 was 11.6%, compared to 8.3% for the comparable period last year.
Earnings per share for the quarter ended August 31, 2018 was $0.45, compared to earnings per share of $0.61 for the quarter ended May 31, 2018 and $1.15 for the quarter ended August 31, 2017.
Investment portfolio activity for the quarter ended August 31, 2018:
- Cost of investments made during the period: $51.7 million, including investments in four new portfolio companies
- Principal repayments during the period: $1.0 million
Additional Financial Information
For the fiscal quarter ended August 31, 2018, Saratoga Investment reported net investment income of $5.1 million, or $0.74 on a weighted average per share basis, and a net realized and unrealized loss on investments of $2.0 million, or $0.29 on a weighted average per share basis, resulting in a net increase in net assets from operations of $3.1 million, or $0.45 on a weighted average per share basis. The $2.0 million net loss on investments was comprised of $2.2 million in net unrealized depreciation on investments, offset by $0.2 million of net deferred tax benefit on unrealized losses in Saratoga Investment’s blocker subsidiaries. The $2.2 million unrealized depreciation is primarily due to $0.8 million unrealized depreciation on Saratoga Investment’s My Alarm Center investment, primarily the preferred equity Class B units, $0.9 million unrealized depreciation on Saratoga Investment’s Elyria Foundry investment and $0.4 million unrealized depreciation on Saratoga Investment’s Tile Redi Holdings investment. This compared to the fiscal quarter ended August 31, 2017 with net investment income of $2.9 million, or $0.49 on a weighted average per share basis, and a net realized and unrealized gain on investments of $4.0 million, or $0.67 on a weighted average per share basis, resulting in a net increase in net assets from operations of $6.9 million, or $1.15 on a weighted average per share basis. The $4.0 million net gain on investments consisted of $9.7 million in net unrealized appreciation on investments, offset by $5.8 million in net realized loss.
Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income was $4.8 million and $3.7 million for the quarters ended August 31, 2018 and August 31, 2017, respectively – an increase of $1.1 million year-over-year, or 29.4%.
Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees, decreased from $1.2 million for the quarter ended August 31, 2017 to $0.9 million for the quarter ended August 31, 2018, decreasing from 1.4% to 0.9% of average total assets. The primary reason for the decrease was the recognition of a $0.3 million deferred income tax benefit generated by equity investments held in taxable blockers generating net operating losses.
Portfolio and Investment Activity
As of August 31, 2018, the fair value of Saratoga Investment’s portfolio was $392.9 million (excluding $43.3 million in cash and cash equivalents), principally invested in 35 portfolio companies and one collateralized loan obligation fund (“CLO”). The overall portfolio composition consisted of 58.0% of first lien term loans, 25.5% of second lien term loans, 3.1% of unsecured term loans, 4.3% of subordinated notes in a CLO, and 9.1% of common equity.
For the fiscal quarter ended August 31, 2018, Saratoga Investment invested $51.7 million in new or existing portfolio companies and had $1.0 million in aggregate amount of exits and repayments, resulting in net investment of $50.7 million for the quarter.
As of August 31, 2018, the weighted average current yield on Saratoga Investment’s portfolio for the twelve months ended was 10.8%, which was comprised of a weighted average current yield of 11.0% on first lien term loans, 12.0% on second lien term loans, 9.6% on unsecured term loans, 17.6% on CLO subordinated notes, and 3.1% on equity interests.
As of August 31, 2018, 81.5% of Saratoga Investment’s interest earning portfolio is in floating rate debt, with many of these investments having floors. For all of these investments, the relevant 1-month or 3-month LIBOR rate is currently above the floors. Pursuant to the disclosure included in Item 3 of Saratoga Investment’s Form 10-Q for the quarter ended August 31, 2018, assuming that the investments as of August 31, 2018 were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate terms, a hypothetical change of 1.0% in interest rates would cause a corresponding increase of approximately $2.8 million to interest income over twelve months.
Liquidity and Capital Resources
As of August 31, 2018, Saratoga Investment had no outstanding borrowings under its $45 million senior secured revolving credit facility with Madison Capital Funding LLC. At the same time, Saratoga Investment had $150.0 million SBA debentures outstanding, $114.5 million of baby bonds (fair value of $118.2 million) issued and an aggregate of $43.3 million in cash and cash equivalents.
With $45.0 million available under the credit facility and the $43.3 million of cash and cash equivalents, Saratoga Investment has a total of $88.3 million of undrawn borrowing capacity and cash and cash equivalents available as of August 31, 2018. The proceeds from the DRIP program totaled $0.5 million of equity investments in the second fiscal quarter of 2019. Saratoga Investment also has the ability to issue additional equity or baby bonds through the existing shelf registration statement.
On July 13, 2018, Saratoga Investment issued 1,150,000 shares of its common stock priced at $25.00 per share (par value $0.001 per share) for an aggregate total of $28.75 million. The net proceeds, after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately $27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common stock, which was not exercised.
On August 28, 2018, Saratoga Investment issued $40.0 million in aggregate principal amount of 6.25% fixed-rate notes due 2025 (the “2025 Notes”) for net proceeds of $38.7 million after deducting underwriting commissions of approximately $1.25 million and offering costs of approximately $0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $5.0 million aggregate principal amount of 2025 Notes within 30 days. Interest on the 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 2025 Notes mature on August 31, 2025 and commencing August 28, 2021, may be redeemed in whole or in part at any time or from time to time at our option. The 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.
On September 27, 2018, the SBA issued a “green light” letter inviting us to file a formal license application for a second SBIC license. If approved, the additional SBIC license would provide the Company with an incremental source of long-term capital by permitting us to issue, subject to SBA approval, up to $175.0 million of additional SBA-guaranteed debentures in addition to the $150.0 million already approved under the Company’s first license. Receipt of a green light letter from the SBA does not assure an applicant that the SBA will ultimately issue an SBIC license and the Company has received no assurance or indication from the SBA that it will receive an additional SBIC license, or of the timeframe in which it would receive an additional license, should one ultimately be granted.
On March 16, 2017, Saratoga Investment entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which Saratoga may offer for sale, from time to time, up to $30.0 million of its common stock through an ATM offering. No shares were sold during the quarter under the ATM.
On August 28, 2018, Saratoga Investment announced a dividend of $0.52 per share for the fiscal quarter ended August 31, 2018, payable on September 27, 2018, to all stockholders of record at the close of business on September 17, 2018. Since the end of fiscal year 2018, Saratoga Investment has paid two dividends, $0.51 per share for the quarter ended May 31, 2018 and $0.50 per share for the quarter ended February 28, 2018.
During fiscal year 2018, Saratoga Investment declared and paid dividends of $1.90 per share, composed of $0.46 for the quarter ended February 28, 2017, $0.47 per share for the quarter ended May 31, 2017, $0.48 per share for the quarter ended August 31, 2017, and $0.49 per share for the quarter ended November 30, 2017.
Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP.
2019 Fiscal Second Quarter Conference Call/Webcast Information
When: Thursday, October 11, 2018, 10:00 a.m. Eastern Time (ET)
Call: Interested parties may participate by dialing (877) 312-9208 (U.S. and Canada) or (678) 224-7872 (outside U.S. and Canada).
A replay of the call will be available from 1:00 p.m. ET on Thursday, October 11, 2018 through 1:00 p.m. ET on Thursday, October 18, 2018 by dialing (855) 859-2056 (U.S. and Canada) or (404) 537-3406 (outside U.S. and Canada), passcode for both replay numbers: 4889246.
Webcast: Interested parties may access a simultaneous webcast of the call and find the Q2 2019 presentation by going to the “Events & Presentations” section of Saratoga Investment Corp.’s investor relations website, http://www.saratogainvestmentcorp.com/investor.html
About Saratoga Investment Corp.
Saratoga Investment Corp. is a specialty finance company that provides customized financing solutions to U.S. middle-market businesses. The Company invests primarily in senior and unitranche leveraged loans, mezzanine debt, and, to a lesser extent, equity to provide financing for change of ownership transactions, strategic acquisitions, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors. Saratoga Investment Corp.’s objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from its debt and equity investments. Saratoga Investment Corp. has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 and is externally-managed by Saratoga Investment Advisors, LLC, an SEC-registered investment advisor focusing on credit- driven strategies. Saratoga Investment Corp. owns an SBIC-licensed subsidiary and manages a $300 million Collateralized Loan Obligation (CLO) fund. It also owns 100% of the subordinated notes of the CLO. These diverse funding sources, combined with a permanent capital base, enable Saratoga Investment Corp. to provide a broad range of financing solutions.
Forward Looking Statements
This press release contains certain forward-looking statements.These forward-looking statements are subject to risks and uncertainties and other factors enumerated in this press release and the filings Saratoga Investment Corp. makes with the SEC. Saratoga Investment ￼ Corp. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Supplemental Information Regarding Adjusted Net Investment Income, Adjusted Net Investment Income Yield and Adjusted Net Investment Income per share
On a supplemental basis, Saratoga Investment provides information relating to adjusted net investment income, adjusted net investment income yield and adjusted net investment income per share, which are non-GAAP measures. These measures are provided in addition to, but not as a substitute for, net investment income, net investment income yield and net investment income per share. Adjusted net investment income represents net investment income excluding any capital gains incentive fee expense or reversal attributable to unrealized gains. The management agreement with our advisor provides that a capital gains incentive fee is determined and paid annually with respect to cumulative realized capital gains (but not unrealized capital gains) to the extent such realized capital gains exceed realized and unrealized losses for such year. In addition, Saratoga Investment accrues, but do not pay, a capital gains incentive fee in connection with any unrealized capital appreciation, as appropriate. As such, Saratoga Investment believes that adjusted net investment income, adjusted net investment income yield and adjusted net investment income per share is a useful indicator of operations exclusive of any capital gains incentive fee expense or reversal attributable to unrealized gains. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. The following table provides a reconciliation of net investment income to adjusted net investment income, net investment income yield to adjusted net investment income yield and net investment income per share to adjusted net investment income per share for the three and six months ended August 31, 2018 and August 31, 2017.
(1) Adjusted net investment income yield is calculated as adjusted net investment income divided by average net asset value.
(2) Adjusted net investment income per share is calculated as adjusted net investment income divided by weighted average common shares outstanding.