8-K: Saratoga Investment Corp. Reports 1.1% Adjusted NII Increase and 9.2% LTM ROE in Fiscal Q3 2025

Saratoga Investment Corp. announced a 1.1% sequential increase in adjusted net investment income (NII) per share, excluding a one-time interest reserve reversal, and a 9.2% last twelve months (LTM) return on equity (ROE).

Summary

• Saratoga Investment Corp. reported its financial results for the fiscal third quarter of 2025, ending November 30, 2024.
• The company's assets under management (AUM) decreased to $960.1 million, down from $1.114 billion year-over-year.
• Net asset value (NAV) increased to $374.9 million, up from $359.6 million year-over-year.
• NAV per share decreased slightly to $26.95 from $27.42 year-over-year.
• Total investment income was $35.9 million, a decrease from $36.3 million year-over-year.
• Adjusted NII per share increased by $0.01 to $0.90, excluding the impact of a one-time interest reserve reversal.
• The company declared a total dividend of $1.09 per share, including a special dividend of $0.35 per share.
• The last twelve months (LTM) return on equity (ROE) was 9.2%, up from 6.6% year-over-year.
• Originations totaled $84.5 million, while repayments were $160.4 million.
• The portfolio's fair value is now 0.7% below cost, while the core non-CLO portfolio is 3.0% above cost.
• The company's cash position grew to $250.2 million due to significant repayments.
• The company has $473.7 million in total undrawn borrowing capacity.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the company shows some positive metrics like increased ROE and a special dividend, there are also negative aspects such as decreased AUM and NII per share. The company's future outlook is cautiously optimistic, but the overall tone is balanced.

Positives

• The company achieved a sequential quarterly increase in adjusted NII per share, excluding the effect of a one-time interest reserve reversal.
• The LTM ROE improved to 9.2%, indicating improved profitability.
• The company experienced healthy originations in both new and existing portfolio companies.
• The company's strong reputation and market positioning continue to create attractive investment opportunities.
• The company's portfolio is well-structured for future economic conditions with 86.8% of investments in first lien debt.
• The company has a substantial cash position of $250.2 million.
• The company has a total of $473.7 million of undrawn borrowing capacity.
• The company has a share repurchase plan extended to January 15, 2026.

Negatives

• Assets under management (AUM) decreased by 13.8% year-over-year.
• Total investment income decreased by 1.3% year-over-year.
• Net investment income (NII) per share decreased from $1.09 to $0.90 year-over-year.
• The company experienced a decrease in NAV per share from $27.42 to $26.95 year-over-year.
• The portfolio's fair value is 0.7% below cost.
• The company experienced a decrease in investment income due to the impact of the non-recurring Knowland interest reserve reversal.

Risks

• The company faces risks related to changes in the markets in which it invests.
• Changes in financial, capital, and lending markets could impact the company.
• An economic downturn could affect the ability of portfolio companies to operate.
• Interest rate volatility could impact the company's business and portfolio companies.
• Supply chain constraints and labor shortages could affect portfolio companies.
• Elevated levels of inflation could impact portfolio companies and the industries in which the company invests.
• The company's portfolio is subject to market fluctuations and credit risk.

Future Outlook

The company remains confident in its management team, pipeline, leverage structure, and underwriting standards to increase portfolio size, quality, and investment performance over the long-term, despite an uncertain economic outlook.

Management Comments

• Christian L. Oberbeck, Chairman and CEO, highlighted the sequential quarterly increase of adjusted NII, improved LTM ROE, and healthy originations.
• Mr. Oberbeck noted the substantial overearning of the dividend this quarter supports the current level of dividends, increases NAV, and provides a cushion against adverse events.
• Mr. Oberbeck stated that the company is evaluating the use of calls to reduce current debt due to the significant level of available cash.
• Mr. Oberbeck mentioned the early stages of a potential increase in M&A in the lower middle market.
• Mr. Oberbeck concluded that the company remains confident in its ability to deliver exceptional risk-adjusted returns to shareholders.

Industry Context

The announcement reflects the current trends in the business development company (BDC) sector, including the impact of interest rate fluctuations, M&A activity, and the need for strong underwriting standards. The company's focus on middle-market businesses and its ability to generate attractive risk-adjusted returns are key differentiators in a competitive market.

Comparison to Industry Standards

• Saratoga's LTM ROE of 9.2% is a positive result compared to the average BDC ROE, which can vary but is often in the high single digits.
• The company's adjusted NII per share of $0.90 is within the range of other BDCs, but the 1.1% sequential increase is a positive sign.
• The company's focus on first lien debt (86.8% of the portfolio) is a common strategy among BDCs to mitigate risk.
• The company's dividend yield of 12.2% based on the stock price of $24.21 per share on January 7, 2025, is competitive with other BDCs.
• Compared to peers such as Ares Capital (ARCC) and Main Street Capital (MAIN), Saratoga's portfolio size is smaller, but its focus on the lower middle market provides a niche advantage.
• The company's gross unlevered IRR of 15.0% on repayments and sales of investments is a strong indicator of its investment performance, which is above the average for the industry.

Corporate Governance

Stakeholder Impact

• Shareholders will benefit from the special dividend of $0.35 per share.
• Shareholders may experience a slight decrease in NAV per share.
• Employees may benefit from the company's continued growth and investment performance.
• Portfolio companies may benefit from the company's continued investment and support.
• Creditors may benefit from the company's strong cash position and undrawn borrowing capacity.

Next Steps

• The company will continue to evaluate the use of calls to reduce current debt.
• The company will continue to seek new investment opportunities in the middle market.
• The company will host a conference call and webcast on January 9, 2025, to discuss the results.

Key Dates

Keywords

Business Development Company, BDC, Saratoga Investment Corp, Net Investment Income, NII, Return on Equity, ROE, Assets Under Management, AUM, Net Asset Value, NAV, Dividends, Originations, Repayments, Leveraged Loans, Mezzanine Debt, Middle Market