ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related
notes and other financial information appearing elsewhere in this Quarterly Report on
Form 10-Q.
In addition to historical information, the following discussion and other parts of this Quarterly Report
contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Part I. Item 1A in our
Annual Report on Form
10-K
for the fiscal year ended February 28, 2017.
The forward-looking
statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or
factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.
The forward-looking statements contained in this Quarterly Report on
Form 10-Q
involve risks and
uncertainties, including statements as to:
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our future operating results;
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our business prospects and the prospects of our portfolio companies;
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the impact of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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the dependence of our future success on the general economy and its impact on the industries in which we invest;
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the ability of our portfolio companies to achieve their objectives;
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our expected financings and investments;
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our regulatory structure and tax treatment, including our ability to operate as a business development company (BDC), or to operate our small business investment company (SBIC) subsidiary, and to
continue to qualify to be taxed as a regulated investment company (RIC);
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the adequacy of our cash resources and working capital;
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the timing of cash flows, if any, from the operations of our portfolio companies; and
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the ability of our investment adviser to locate suitable investments for us and to monitor and effectively administer our investments.
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You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report on
Form 10-Q
relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of
this Quarterly Report on
Form 10-Q.
OVERVIEW
We are a Maryland corporation that has elected to be treated as a BDC under the Investment Company Act of 1940 (the1940 Act). Our
investment objective is to generate current income and, to a lesser extent, capital appreciation from our investments. We invest primarily in leveraged loans and mezzanine debt issued by private U.S. middle market companies, which we define as
companies having EBITDA of between $2 million and $50 million, both through direct lending and through participation in loan syndicates. We may also invest up to 30.0% of the portfolio in opportunistic investments in order to seek to
enhance returns to stockholders. Such investments may include investments in distressed debt, which may include securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and
structured finance vehicles such as collateralized loan obligation funds. Although we have no current intention to do so, to the extent we invest in private equity funds, we will limit our investments in entities that are excluded from the
definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, which includes private equity funds, to no more than 15.0% of its net assets. We have elected and qualified to be treated as a RIC under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
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Corporate History and Recent Developments
We commenced operations, at the time known as GSC Investment Corp., on March 23, 2007 and completed an initial public offering of shares
of common stock on March 28, 2007. Prior to July 30, 2010, we were externally managed and advised by GSCP (NJ), L.P., an entity affiliated with GSC Group, Inc. In connection with the consummation of a recapitalization transaction on
July 30, 2010, as described below we engaged Saratoga Investment Advisors (SIA) to replace GSCP (NJ), L.P. as our investment adviser and changed our name to Saratoga Investment Corp.
As a result of the event of default under a revolving securitized credit facility with Deutsche Bank we previously had in place, in December
2008 we engaged the investment banking firm of Stifel, Nicolaus & Company to evaluate strategic transaction opportunities and consider alternatives for us. On April 14, 2010, GSC Investment Corp. entered into a stock purchase agreement
with Saratoga Investment Advisors and certain of its affiliates and an assignment, assumption and novation agreement with Saratoga Investment Advisors, pursuant to which GSC Investment Corp. assumed certain rights and obligations of Saratoga
Investment Advisors under a debt commitment letter Saratoga Investment Advisors received from Madison Capital Funding LLC, which indicated Madison Capital Fundings willingness to provide GSC Investment Corp. with a $40.0 million senior
secured revolving credit facility, subject to the satisfaction of certain terms and conditions. In addition, GSC Investment Corp. and GSCP (NJ), L.P. entered into a termination and release agreement, to be effective as of the closing of the
transaction contemplated by the stock purchase agreement, pursuant to which GSCP (NJ), L.P., among other things, agreed to waive any and all accrued and unpaid deferred incentive management fees up to and as of the closing of the transaction
contemplated by the stock purchase agreement but continued to be entitled to receive the base management fees earned through the date of the closing of the transaction contemplated by the stock purchase agreement.
On July 30, 2010, the transactions contemplated by the stock purchase agreement with Saratoga Investment Advisors and certain of its
affiliates were completed, the private sale of 986,842 shares of our common stock for $15.0 million in aggregate purchase price to Saratoga Investment Advisors and certain of its affiliates closed, the Company entered into the Credit Facility,
and the Company began doing business as Saratoga Investment Corp.
We used the net proceeds from the private sale transaction and a
portion of the funds available to us under the Credit Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank. The revolving
securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.
On August 12, 2010, we effected a
one-for-ten
reverse
stock split of our outstanding common stock. As a result of the reverse stock split, every ten shares of our common stock were converted into one share of our common stock. Any fractional shares received as a result of the reverse stock split were
redeemed for cash. The total cash payment in lieu of shares was $230. Immediately after the reverse stock split, we had 2,680,842 shares of our common stock outstanding.
In January 2011, we registered for public resale of the 986,842 shares of our common stock issued to Saratoga Investment Advisors and certain
of its affiliates.
On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (SBIC LP),
received an SBIC license from the Small Business Administration (SBA).
In May 2013, we issued $48.3 million in aggregate
principal amount of our 7.50% unsecured notes due 2020 (the 2020 Notes) for net proceeds of $46.1 million after deducting underwriting commissions of $1.9 million and offering costs of $0.3 million. The proceeds included
the underwriters full exercise of their overallotment option. Interest on these 2020 Notes is paid quarterly in arrears on February 15, May 15, August 15 and November 15, at a rate of 7.50% per year,
beginning August 15, 2013. The 2020 Notes mature on May 31, 2020 and since May 31, 2016, may be redeemed in whole or in part at any time or from time to time at our option. The 2020 Notes were listed on the NYSE under the trading
symbol SAQ with a par value of $25.00 per share. The 2020 Notes were redeemed in full on January 13, 2017.
On
May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an
At-the-Market
(ATM) offering. As of August 31, 2017, the Company sold 539,725 bonds with a principal of $13,493,125 at an average price of $25.31 for
aggregate net proceeds of $13,385,766 (net of transaction costs).
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On December 21, 2016, we issued $74.5 million in aggregate principal amount of our
6.75% fixed-rate notes due 2023 (the 2023 Notes) for net proceeds of $72.1 million after deducting underwriting commissions of approximately $2.0 million and offering costs of approximately $0.5 million. The issuance
included the exercise of substantially all of the underwriters option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. Interest on the 2023 Notes is paid quarterly in arrears on
March 15, June 15, September 15 and December 15, at a rate of 6.75% per year, beginning March 30, 2017. The 2023 Notes mature on December 20, 2023, and commencing December 21, 2019, may be redeemed in whole or
in part at any time or from time to time at our option. The 2023 Notes are listed on the NYSE under the trading symbol SAB with a par value of $25.00 per share.
On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which we may
offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. As of August 31, 2017, the Company sold 117,354 shares for gross proceeds of $2.6 million at an average price of $22.49 for aggregate
net proceeds of $2.6 million (net of transaction costs).
Critical Accounting Policies
Basis of Presentation
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) requires
management to make certain estimates and assumptions affecting amounts reported in the Companys consolidated financial statements. We have identified investment valuation, revenue recognition and the recognition of capital gains incentive fee
expense as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Investment Valuation
The Company accounts for its investments at fair value in accordance with the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurements and Disclosures
(ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy
based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires the Company to assume that its investments are to be sold at the balance sheet date in the principal market
to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that
are independent, knowledgeable, and willing and able to transact.
Investments for which market quotations are readily available
are fair valued at such market quotations obtained from independent third party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the
value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from Saratoga Investment Advisers, the audit committee of our
board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the
nature and realizable value of any collateral, the portfolio companys ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash
flow and other relevant factors.
We undertake a multi-step valuation process each quarter when valuing investments for which market
quotations are not readily available, as described below:
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Each investment is initially valued by the responsible investment professionals of Saratoga Investment Advisors and preliminary valuation conclusions are documented and discussed with our senior management; and
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An independent valuation firm engaged by our board of directors independently reviews a selection of these preliminary valuations each quarter so that the valuation of each investment for which market quotes are not
readily available is reviewed by the independent valuation firm at least once each fiscal year.
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In addition, all our
investments are subject to the following valuation process:
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The audit committee of our board of directors reviews and approves each preliminary valuation and Saratoga Investment Advisors and an independent valuation firm (if applicable) will supplement the preliminary valuation
to reflect any comments provided by the audit committee; and
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Our board of directors discusses the valuations and approves the fair value of each investment, in good faith, based on the input of Saratoga Investment Advisors, independent valuation firm (to the extent applicable)
and the audit committee of our board of directors.
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Our investment in Saratoga Investment Corp. CLO
2013-1,
Ltd. (Saratoga CLO) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment,
re-investment
and loss assumptions
based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available,
as determined by SIA and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions
including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management
estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.
Revenue Recognition
Income Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such
amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the
respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums on investments.
Loans are generally placed on
non-accrual
status when there is reasonable doubt that principal or
interest will be collected. Accrued interest is generally reserved when a loan is placed on
non-accrual
status. Interest payments received on
non-accrual
loans may be
recognized as a reduction in principal depending upon managements judgment regarding collectability.
Non-accrual
loans are restored to accrual status when past due principal and interest is paid and, in
managements judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection.
Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC
Topic
325-40,
Investments-Other, Beneficial Interests in Securitized Financial Assets
, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or
re-investments,
credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment
to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.
Payment-in-Kind
Interest
The Company holds debt investments
in its portfolio that contain a
payment-in-kind
(PIK) interest provision. The PIK interest, which represents contractually deferred interest added to the
investment balance that is generally due at maturity, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We stop accruing PIK interest if we do not expect the issuer to be able to pay all principal
and interest when due.
Capital Gains Incentive Fee
The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser when the
unrealized gains on its investments exceed all realized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such
time. The actual incentive fee payable to the Companys investment adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains for the period.
Revenues
We
generate revenue in the form of interest income and capital gains on the debt investments that we hold and capital gains, if any, on equity interests that we may acquire. We expect our debt investments, whether in the form of leveraged loans or
mezzanine debt, to have terms of up to ten years, and to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either quarterly or semi-annually. In some cases, our debt investments may provide for a portion of
the interest to be PIK. To the extent interest is
paid-in-kind,
it will be payable through the increase of the principal amount of the obligation by the amount of
interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued
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but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing
managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. We may also invest in preferred equity securities that pay dividends
on a current basis.
On January 22, 2008, we entered into a collateral management agreement with Saratoga CLO, pursuant to which we
act as its collateral manager. The Saratoga CLO was initially refinanced in October 2013 and its reinvestment period ended in October 2016. On November 15, 2016, we completed the second refinancing of the Saratoga CLO. The Saratoga CLO
refinancing, among other things, extended its reinvestment period to October 2018, and extended its legal maturity date to October 2025. Following the refinancing, the Saratoga CLO portfolio remained at the same size and with a similar capital
structure of approximately $300.0 million in aggregate principal amount of predominantly senior secured first lien term loans. In addition to refinancing its liabilities, we also purchased $4.5 million in aggregate principal amount of the
Class F notes tranche of the Saratoga CLO at par, with a coupon of LIBOR plus 8.5%.
The Saratoga CLO remains effectively 100% owned
and managed by Saratoga Investment Corp. Following the refinancing, we receive a base management fee of 0.10% and a subordinated management fee of 0.40% of the fee basis amount at the beginning of the collection period, paid quarterly to the extent
of available proceeds. We are also entitled to an incentive management fee equal to 20.0% of excess cash flow to the extent the Saratoga CLO subordinated notes receive an internal rate of return paid in cash equal to or greater than 12.0%.
We recognize interest income on our investment in the subordinated notes of Saratoga CLO using the effective interest method, based on the
anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or
re-investments,
credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was
changed.
Expenses
Our primary operating expenses include the payment of investment advisory and management fees, professional fees, directors and officers
insurance, fees paid to independent directors and administrator expenses, including our allocable portion of our administrators overhead. Our investment advisory and management fees compensate our investment adviser for its work in
identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions, including those relating to:
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calculating our net asset value (including the cost and expenses of any independent valuation firm);
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expenses incurred by our investment adviser payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due
diligence on our prospective portfolio companies;
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expenses incurred by our investment adviser payable for travel and due diligence on our prospective portfolio companies;
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interest payable on debt, if any, incurred to finance our investments;
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offerings of our common stock and other securities;
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investment advisory and management fees;
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fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments;
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transfer agent and custodial fees;
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federal and state registration fees;
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all costs of registration and listing our common stock on any securities exchange;
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federal, state and local taxes;
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independent directors fees and expenses;
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costs of preparing and filing reports or other documents required by governmental bodies (including the Securities and Exchange Commission (SEC) and the SBA);
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costs of any reports, proxy statements or other notices to common stockholders including printing costs;
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our fidelity bond, directors and officers errors and omissions liability insurance, and any other insurance premiums;
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direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and
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administration fees and all other expenses incurred by us or, if applicable, the administrator in connection with administering our business (including payments under the Administration Agreement based upon our
allocable portion of the administrators overhead in performing its obligations under an administration agreement, including rent and the allocable portion of the cost of our officers and their respective staffs (including travel expenses)).
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Pursuant to the investment advisory and management agreement that we had with GSCP (NJ), L.P., our former investment
adviser and administrator, we had agreed to pay GSCP (NJ), L.P. as investment adviser a quarterly base management fee of 1.75% of the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed
funds) at the end of the two most recently completed fiscal quarters and an incentive fee.
The incentive fee had two parts:
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A fee, payable quarterly in arrears, equal to 20.0% of our
pre-incentive
fee net investment income, expressed as a rate of return on the value of the net assets at the end of the
immediately preceding quarter, that exceeded a 1.875% quarterly hurdle rate measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, our investment adviser received no incentive fee unless our
pre-incentive
fee net investment income exceeded the hurdle rate of 1.875%. Amounts received as a return of capital were not included in calculating this portion of the incentive fee. Since the hurdle rate was based
on net assets, a return of less than the hurdle rate on total assets could still have resulted in an incentive fee.
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A fee, payable at the end of each fiscal year, equal to 20.0% of our net realized capital gains, if any, computed net of all realized capital losses and unrealized capital depreciation, in each case on a cumulative
basis, less the aggregate amount of capital gains incentive fees paid to the investment adviser through such date.
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We
deferred cash payment of any incentive fee otherwise earned by our former investment adviser if, during the then most recent four full fiscal quarters ending on or prior to the date such payment was to be made, the sum of (a) our aggregate
distributions to our stockholders and (b) our change in net assets (defined as total assets less liabilities) (before taking into account any incentive fees payable during that period) was less than 7.5% of our net assets at the beginning of
such period. These calculations were appropriately
pro-rated
for the first three fiscal quarters of operation and adjusted for any share issuances or repurchases during the applicable period. Such incentive
fee would become payable on the next date on which such test had been satisfied for the most recent four full fiscal quarters or upon certain terminations of the investment advisory and management agreement. We commenced deferring cash payment of
incentive fees during the quarterly period ended August 31, 2007, and continued to defer such payments through the quarterly period ended May 31, 2010. As of July 30, 2010, the date on which GSCP (NJ), L.P. ceased to be our investment
adviser and administrator, we owed GSCP (NJ), L.P. $2.9 million in fees for services previously provided to us; of which $0.3 million has been paid by us. GSCP (NJ), L.P. agreed to waive payment by us of the remaining $2.6 million in
connection with the consummation of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates described elsewhere in this Quarterly Report.
The terms of the investment advisory and management agreement with Saratoga Investment Advisors, our current investment adviser, are
substantially similar to the terms of the investment advisory and management agreement we had entered into with GSCP (NJ), L.P., our former investment adviser, except for the following material distinctions in the fee terms:
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The capital gains portion of the incentive fee was reset with respect to gains and losses from May 31, 2010, and therefore losses and gains incurred prior to such time will not be taken into account when
calculating the capital gains fee payable to Saratoga Investment Advisors and, as a result, Saratoga Investment Advisors will be entitled to 20.0% of net gains that arise after May 31, 2010. In addition, the cost basis for computing realized
gains and losses on investments held by us as of May 31, 2010 equal the fair value of such investment as of such date. Under the investment advisory and management agreement with our former investment adviser, GSCP (NJ), L.P., the capital gains
fee was calculated from March 21, 2007, and the gains were substantially outweighed by losses.
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Under the catch up provision, 100.0% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income that exceeds 1.875% but is less than or equal to 2.344% in any fiscal quarter is payable to Saratoga Investment Advisors. This will enable Saratoga Investment Advisors
to receive 20.0% of all net investment income as such amount approaches 2.344% in any quarter, and Saratoga Investment Advisors will receive 20.0% of any additional net investment income. Under the investment advisory and management agreement with
our former investment adviser, GSCP (NJ), L.P. only received 20.0% of the excess net investment income over 1.875%.
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We will no longer have deferral rights regarding incentive fees in the event that the distributions to stockholders and change in net assets is less than 7.5% for the preceding four fiscal quarters.
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To the extent that any of our leveraged loans are denominated in a currency other than U.S.
Dollars, we may enter into currency hedging contracts to reduce our exposure to fluctuations in currency exchange rates. We may also enter into interest rate hedging agreements. Such hedging activities, which will be subject to compliance with
applicable legal requirements, may include the use of interest rate caps, futures, options and forward contracts. Costs incurred in entering into or settling such contracts will be borne by us.
New Accounting Pronouncements
In March
2017, the FASB issued Accounting Standards Update (ASU)
2017-08,
Receivables Nonrefundable Fees and Other Costs (Subtopic
310-20)
,
Premium Amortization on Purchased Callable Debt Securities
(ASU
2017-08)
which amends the amortization period for certain purchased callable debt securities held at a premium, shortening
such period to the earliest call date. ASU
2017-08
does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. ASU
2017-08
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management is currently evaluating the impact these changes will have on the
Companys consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
(ASU
2016-15),
which is intended to reduce the
existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods
therein. Early adoption is permitted. Management is currently evaluating the impact ASU
2016-15
will have on the Companys consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU
2016-02,
Amendments to the Leases
(ASU Topic
842), which will require for all operating leases the recognition of a
right-of-use
asset and a lease liability, in the statement of financial position. The lease
cost will be allocated over the lease term on a straight-line basis. This guidance is effective for annual and interim periods beginning after December 15, 2018. Management is currently evaluating the impact these changes will have on the
Companys consolidated financial statements and disclosures.
In January 2016, the FASB issued ASU
2016-01,
Financial Instruments Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU
2016-01).
ASU
2016-01
retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an
entitys accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU
2016-01
also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and
early adoption is not permitted for public business entities. Management is currently evaluating the impact the adoption of this standard has on our consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers (Topic 606)
,
which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. In May 2016, ASU
2016-12
amended ASU
2014-09
and deferred the effective
period to December 15, 2017. Management has concluded that the majority of its revenues associated with financial instruments are scoped out of ASC 606. Management is evaluating the impact of the standard on certain other income earned by the
Company.
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Portfolio and investment activity
Corporate Debt Portfolio Overview
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At August 31,
2017
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At February 28,
2017
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($ in millions)
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($ in millions)
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Number of investments(1)
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57
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52
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Number of portfolio companies(3)
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31
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28
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Average investment size(1)
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$
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5.6
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$
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5.4
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Weighted average maturity(1)
|
|
|
3.8 yrs
|
|
|
|
3.8 yrs
|
|
Number of industries(3)
|
|
|
9
|
|
|
|
9
|
|
Average investment per portfolio company(1)
|
|
$
|
10.4
|
|
|
$
|
9.7
|
|
Non-performing
or delinquent investments
|
|
$
|
8.4
|
|
|
$
|
8.4
|
|
Fixed rate debt (% of interest bearing portfolio)(2)
|
|
$
|
46.0(15.6%)
|
|
|
$
|
44.2(16.9%)
|
|
Weighted average current coupon(2)
|
|
|
11.3%
|
|
|
|
11.4%
|
|
Floating rate debt (% of interest bearing portfolio)(2)
|
|
$
|
250.0(84.4%)
|
|
|
$
|
217.6(83.1%)
|
|
Weighted average current spread over LIBOR(2)(4)
|
|
|
9.4%
|
|
|
|
9.3%
|
|
(1)
|
Excludes our investment in the subordinated notes of Saratoga CLO.
|
(2)
|
Excludes our investment in the subordinated notes of Saratoga CLO and equity interests.
|
(3)
|
Excludes our investment in the subordinated notes of Saratoga CLO and Class F notes tranche of Saratoga CLO.
|
(4)
|
Calculation uses either
1-month
or
3-month
LIBOR, depending on the contractual terms, and after factoring in any existing LIBOR floors.
|
During the three months ended August 31, 2017, we invested $36.7 million in new or existing portfolio companies
and had $37.9 million in aggregate amount of exits and repayments resulting in net repayments of $1.2 million for the period. During the three months ended August 31, 2016, we invested $55.7 million in new or existing portfolio
companies and had $50.3 million in aggregate amount of exits and repayments resulting in net investments of $5.4 million for the period.
During the six months ended August 31, 2017, we invested $81.7 million in new or existing portfolio companies and had
$43.8 million in aggregate amount of exits and repayments resulting in net investments of $37.9 million for the period. During the six months ended August 31, 2016, we invested $55.7 million in new or existing portfolio companies
and had $70.9 million in aggregate amount of exits and repayments resulting in net investments of $15.2 million for the period.
Our portfolio composition at August 31, 2017 and February 28, 2017 at fair value was as follows:
Portfolio composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
|
|
Percentage
of Total
Portfolio
|
|
|
Weighted
Average
Current
Yield
|
|
|
Percentage
of Total
Portfolio
|
|
|
Weighted
Average
Current
Yield
|
|
Syndicated loans
|
|
|
2.7
|
%
|
|
|
5.4
|
%
|
|
|
3.4
|
%
|
|
|
5.3
|
%
|
First lien term loans
|
|
|
54.9
|
|
|
|
10.7
|
|
|
|
54.3
|
|
|
|
10.5
|
|
Second lien term loans
|
|
|
29.2
|
|
|
|
12.0
|
|
|
|
30.0
|
|
|
|
11.7
|
|
Structured finance securities
|
|
|
5.0
|
|
|
|
18.8
|
|
|
|
5.3
|
|
|
|
12.7
|
|
Equity interests
|
|
|
8.2
|
|
|
|
3.6
|
|
|
|
7.0
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
11.2
|
%
|
|
|
100.0
|
%
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investment in the subordinated notes of Saratoga CLO represents a first loss position in a portfolio that,
at August 31, 2017 and February 28, 2017 was composed of $300.1 million and $297.1 million, respectively, in aggregate principal amount of predominantly senior secured first lien term loans. This investment is subject to unique
risks. (See Risk FactorsOur investment in Saratoga CLO constitutes a leveraged investment in a portfolio of predominantly senior secured first lien term loans and is subject to additional risks and volatility in our Annual Report
on Form
10-K
for the fiscal year ended February 28, 2017). We do not consolidate the Saratoga CLO portfolio in our consolidated financial statements. Accordingly, the metrics below do not include the
42
underlying Saratoga CLO portfolio investments. However, at August 31, 2017, $289.4 million or 98.3% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as
defined below) color rating of green or yellow and there were no Saratoga CLO portfolio investments in default. At February 28, 2017, $288.5 million or 98.7% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as
defined below) color rating of green or yellow and one Saratoga CLO portfolio investment was in default with a fair value of $1.4 million.
Saratoga Investment Advisors normally grades all of our investments using a credit and monitoring rating system (CMR). The CMR
consists of a single component: a color rating. The color rating is based on several criteria, including financial and operating strength, probability of default, and restructuring risk. The color ratings are characterized as follows:
(Green)performing credit; (Yellow)underperforming credit; (Red)in payment default and/or risk of principal recovery.
The CMR distribution of our investments at August 31, 2017 and February 28, 2017 was as follows:
Portfolio CMR distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
Color Score
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
|
($ in thousands)
|
|
Green
|
|
$
|
285,721
|
|
|
|
85.8
|
%
|
|
$
|
245,678
|
|
|
|
83.9
|
%
|
Yellow
|
|
|
7,996
|
|
|
|
2.4
|
|
|
|
8,423
|
|
|
|
2.9
|
|
Red
|
|
|
6
|
|
|
|
0.0
|
|
|
|
7,069
|
|
|
|
2.4
|
|
N/A(1)
|
|
|
39,247
|
|
|
|
11.8
|
|
|
|
31,491
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
332,970
|
|
|
|
100.0
|
%
|
|
$
|
292,661
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprised of our investment in the subordinated notes of Saratoga CLO and equity interests.
|
The change in reserve from $0.2 million as of February 28, 2017 to $0.9 million as of August 31, 2017 primarily related to
the increase in reserve for the six months on the
non-performing
and delinquent investment, TM Restaurant Group L.L.C.
The CMR distribution of Saratoga CLO investments at August 31, 2017 and February 28, 2017 was as follows:
Portfolio CMR distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
Color Score
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
|
($ in thousands)
|
|
Green
|
|
$
|
265,782
|
|
|
|
90.3
|
%
|
|
$
|
266,449
|
|
|
|
91.1
|
%
|
Yellow
|
|
|
23,657
|
|
|
|
8.0
|
|
|
|
22,064
|
|
|
|
7.6
|
|
Red
|
|
|
5,086
|
|
|
|
1.7
|
|
|
|
3,925
|
|
|
|
1.3
|
|
N/A(1)
|
|
|
|
|
|
|
0.0
|
|
|
|
23
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
294,525
|
|
|
|
100.0
|
%
|
|
$
|
292,461
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprised of Saratoga CLOs equity interests.
|
43
Portfolio composition by industry grouping at fair value
The following table shows our portfolio composition by industry grouping at fair value at August 31, 2017 and February 28, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
|
($ in thousands)
|
|
Business Services
|
|
$
|
188,121
|
|
|
|
56.5
|
%
|
|
$
|
161,212
|
|
|
|
55.1
|
%
|
Healthcare Services
|
|
|
38,121
|
|
|
|
11.4
|
|
|
|
38,544
|
|
|
|
13.2
|
|
Education
|
|
|
26,768
|
|
|
|
8.0
|
|
|
|
10,928
|
|
|
|
3.7
|
|
Media
|
|
|
17,902
|
|
|
|
5.4
|
|
|
|
18,698
|
|
|
|
6.4
|
|
Consumer Services
|
|
|
17,569
|
|
|
|
5.3
|
|
|
|
20,748
|
|
|
|
7.1
|
|
Structured Finance Securities (1)
|
|
|
16,537
|
|
|
|
5.0
|
|
|
|
15,450
|
|
|
|
5.3
|
|
Building Products
|
|
|
14,850
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
Food and Beverage
|
|
|
8,350
|
|
|
|
2.5
|
|
|
|
8,423
|
|
|
|
2.9
|
|
Metals
|
|
|
3,463
|
|
|
|
1.0
|
|
|
|
851
|
|
|
|
0.3
|
|
Consumer Products
|
|
|
1,289
|
|
|
|
0.4
|
|
|
|
968
|
|
|
|
0.3
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
16,839
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
332,970
|
|
|
|
100.0
|
%
|
|
$
|
292,661
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprised of our investment in the subordinated notes and Class F Note of Saratoga CLO.
|
44
The following table shows Saratoga CLOs portfolio composition by industry grouping at fair
value at August 31, 2017 and February 28, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
|
($ in thousands)
|
|
Services: Business
|
|
$
|
38,697
|
|
|
|
13.2
|
%
|
|
$
|
40,675
|
|
|
|
13.9
|
%
|
Healthcare & Pharmaceuticals
|
|
|
28,699
|
|
|
|
9.8
|
|
|
|
33,002
|
|
|
|
11.3
|
|
High Tech Industries
|
|
|
25,751
|
|
|
|
8.8
|
|
|
|
17,851
|
|
|
|
6.1
|
|
Banking, Finance, Insurance & Real Estate
|
|
|
20,277
|
|
|
|
6.9
|
|
|
|
14,752
|
|
|
|
5.0
|
|
Telecommunications
|
|
|
17,723
|
|
|
|
6.0
|
|
|
|
13,704
|
|
|
|
4.7
|
|
Chemicals/Plastics
|
|
|
17,273
|
|
|
|
5.9
|
|
|
|
21,492
|
|
|
|
7.4
|
|
Aerospace and Defense
|
|
|
15,152
|
|
|
|
5.2
|
|
|
|
11,643
|
|
|
|
4.0
|
|
Retailers (Except Food and Drugs)
|
|
|
15,108
|
|
|
|
5.1
|
|
|
|
14,706
|
|
|
|
5.0
|
|
Media
|
|
|
11,435
|
|
|
|
3.9
|
|
|
|
11,283
|
|
|
|
3.9
|
|
Industrial Equipment
|
|
|
9,158
|
|
|
|
3.1
|
|
|
|
9,853
|
|
|
|
3.4
|
|
Automotive
|
|
|
7,128
|
|
|
|
2.4
|
|
|
|
6,088
|
|
|
|
2.1
|
|
Leisure Goods/Activities/Movies
|
|
|
6,610
|
|
|
|
2.2
|
|
|
|
9,627
|
|
|
|
3.3
|
|
Retail
|
|
|
5,991
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Capital Equipment
|
|
|
5,966
|
|
|
|
2.0
|
|
|
|
6,026
|
|
|
|
2.1
|
|
Financial Intermediaries
|
|
|
4,718
|
|
|
|
1.6
|
|
|
|
9,476
|
|
|
|
3.2
|
|
Services: Consumer
|
|
|
4,514
|
|
|
|
1.5
|
|
|
|
788
|
|
|
|
0.3
|
|
Publishing
|
|
|
4,485
|
|
|
|
1.5
|
|
|
|
4,580
|
|
|
|
1.6
|
|
Drugs
|
|
|
4,359
|
|
|
|
1.5
|
|
|
|
5,394
|
|
|
|
1.8
|
|
Food Services
|
|
|
4,242
|
|
|
|
1.4
|
|
|
|
5,932
|
|
|
|
2.0
|
|
Beverage, Food & Tobacco
|
|
|
3,970
|
|
|
|
1.3
|
|
|
|
3,013
|
|
|
|
1.0
|
|
Transportation
|
|
|
3,933
|
|
|
|
1.3
|
|
|
|
2,731
|
|
|
|
0.9
|
|
Utilities
|
|
|
3,923
|
|
|
|
1.3
|
|
|
|
4,944
|
|
|
|
1.7
|
|
Electronics/Electric
|
|
|
3,872
|
|
|
|
1.3
|
|
|
|
8,036
|
|
|
|
2.7
|
|
Technology
|
|
|
3,457
|
|
|
|
1.2
|
|
|
|
3,935
|
|
|
|
1.3
|
|
Oil & Gas
|
|
|
3,083
|
|
|
|
1.0
|
|
|
|
3,209
|
|
|
|
1.1
|
|
Construction & Building
|
|
|
2,960
|
|
|
|
1.0
|
|
|
|
1,974
|
|
|
|
0.7
|
|
Insurance
|
|
|
2,914
|
|
|
|
1.0
|
|
|
|
3,001
|
|
|
|
1.0
|
|
Conglomerate
|
|
|
2,546
|
|
|
|
0.9
|
|
|
|
3,584
|
|
|
|
1.2
|
|
Brokers/Dealers/Investment Houses
|
|
|
2,432
|
|
|
|
0.8
|
|
|
|
2,479
|
|
|
|
0.8
|
|
Containers/Glass Products
|
|
|
2,394
|
|
|
|
0.8
|
|
|
|
2,008
|
|
|
|
0.7
|
|
Lodging and Casinos
|
|
|
2,304
|
|
|
|
0.8
|
|
|
|
4,311
|
|
|
|
1.5
|
|
Hotel, Gaming and Leisure
|
|
|
2,009
|
|
|
|
0.7
|
|
|
|
2,025
|
|
|
|
0.7
|
|
Food Products
|
|
|
2,000
|
|
|
|
0.7
|
|
|
|
3,147
|
|
|
|
1.1
|
|
Food/Drug Retailers
|
|
|
1,977
|
|
|
|
0.7
|
|
|
|
2,877
|
|
|
|
1.0
|
|
Cable and Satellite Television
|
|
|
1,605
|
|
|
|
0.5
|
|
|
|
1,617
|
|
|
|
0.6
|
|
Consumer Goods: Durable
|
|
|
503
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Consumer Goods:
Non-Durable
|
|
|
497
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Forest Products & Paper
|
|
|
493
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Broadcast Radio and Television
|
|
|
367
|
|
|
|
0.1
|
|
|
|
343
|
|
|
|
0.1
|
|
Nonferrous Metals/Minerals
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
|
|
0.4
|
|
Environmental Industries
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
0.3
|
|
Building and Development
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
294,525
|
|
|
|
100.0
|
%
|
|
$
|
292,461
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Portfolio composition by geographic location at fair value
The following table shows our portfolio composition by geographic location at fair value at August 31, 2017 and February 28, 2017.
The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
Investments
at
Fair Value
|
|
|
Percentage
of Total
Portfolio
|
|
|
|
($ in thousands)
|
|
Southeast
|
|
$
|
149,968
|
|
|
|
45.0
|
%
|
|
$
|
116,186
|
|
|
|
39.7
|
%
|
Midwest
|
|
|
83,949
|
|
|
|
25.2
|
|
|
|
75,154
|
|
|
|
25.7
|
|
Northeast
|
|
|
35,108
|
|
|
|
10.6
|
|
|
|
38,880
|
|
|
|
13.3
|
|
Southwest
|
|
|
34,183
|
|
|
|
10.3
|
|
|
|
34,060
|
|
|
|
11.6
|
|
Other (1)
|
|
|
16,537
|
|
|
|
5.0
|
|
|
|
15,450
|
|
|
|
5.3
|
|
Northwest
|
|
|
7,785
|
|
|
|
2.3
|
|
|
|
7,780
|
|
|
|
2.6
|
|
West
|
|
|
5,440
|
|
|
|
1.6
|
|
|
|
5,151
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
332,970
|
|
|
|
100.0
|
%
|
|
$
|
292,661
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprised of our investment in the subordinated notes and Class F Note of Saratoga CLO.
|
Results of
operations
Operating results for the three and six months ended August 31, 2017 and August 31, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
|
|
($ in thousands)
|
|
Total investment income
|
|
$
|
10,254
|
|
|
$
|
8,448
|
|
Total operating expenses
|
|
|
7,363
|
|
|
|
5,844
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2,891
|
|
|
|
2,604
|
|
Net realized gains (losses) from investments
|
|
|
(5,775
|
)
|
|
|
5,937
|
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
9,754
|
|
|
|
(3,269
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
6,870
|
|
|
$
|
5,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
|
|
($ in thousands)
|
|
Total investment income
|
|
$
|
18,961
|
|
|
$
|
16,356
|
|
Total operating expenses
|
|
|
12,566
|
|
|
|
11,214
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
6,395
|
|
|
|
5,142
|
|
Net realized gains (losses) from investments
|
|
|
(5,679
|
)
|
|
|
12,040
|
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
7,168
|
|
|
|
(8,623
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
7,884
|
|
|
$
|
8,559
|
|
|
|
|
|
|
|
|
|
|
46
Investment income
The composition of our investment income for the three and six months ended August 31, 2017 and August 31, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
|
|
($ in thousands)
|
|
Interest from investments
|
|
$
|
9,187
|
|
|
$
|
7,303
|
|
Management fee income
|
|
|
376
|
|
|
|
375
|
|
Incentive fee income
|
|
|
162
|
|
|
|
|
|
Interest from cash and cash equivalents and other income
|
|
|
529
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
10,254
|
|
|
$
|
8,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
|
|
($ in thousands)
|
|
Interest from investments
|
|
$
|
16,927
|
|
|
$
|
14,585
|
|
Management fee income
|
|
|
752
|
|
|
|
748
|
|
Incentive fee income
|
|
|
268
|
|
|
|
|
|
Interest from cash and cash equivalents and other income
|
|
|
1,014
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
18,961
|
|
|
$
|
16,356
|
|
|
|
|
|
|
|
|
|
|
For the three months ended August 31, 2017, total investment income of $10.3 million increased
$1.9 million, or 21.4% compared to $8.4 million for the three months ended August 31, 2016. Interest income from investments increased $1.9 million, or 25.8%, to $9.2 million for the three months ended August 31, 2017
from $7.3 million for the three months ended August 31, 2016. This reflects an increase of 22.1% in total investments to $333.0 million at August 31, 2017 from $272.8 million at August 31, 2016. The increase was offset
by the weighted average current coupon decreasing from 11.9% to 11.2%.
For the six months ended August 31, 2017, total investment
income of $19.0 million increased $2.6 million, or 15.9% compared to $16.4 million for the six months ended August 31, 2016. Interest income from investments increased $2.3 million, or 16.1%, to $16.9 million for the
six months ended August 31, 2017 from $14.6 million for the six months ended August 31, 2016. This reflects an increase of 22.1% in total investments to $333.0 million at August 31, 2017 from $272.8 million at
August 31, 2016. The increase was offset by the weighted average current coupon decreasing from 11.9% to 11.2%.
For the three months
ended August 31, 2017 and August 31, 2016, total PIK income was $0.5 million and $0.2 million, respectively. For the six months ended August 31, 2017 and August 31, 2016, total PIK income was $1.0 million and
$0.3 million, respectively.
For the three and six months ended August 31, 2017, incentive fee income of $0.2 million and
$0.3 million, respectively, was recognized related to the Saratoga CLO, reflecting the 12.0% hurdle rate that has been achieved.
47
Operating expenses
The composition of our operating expenses for the three and six months ended August 31, 2017 and August 31, 2016 was as follows:
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
|
|
($ in thousands)
|
|
Interest and debt financing expenses
|
|
$
|
2,963
|
|
|
$
|
2,370
|
|
Base management fees
|
|
|
1,482
|
|
|
|
1,203
|
|
Professional fees
|
|
|
407
|
|
|
|
302
|
|
Administrator expenses
|
|
|
396
|
|
|
|
325
|
|
Incentive management fees
|
|
|
1,710
|
|
|
|
1,208
|
|
Insurance
|
|
|
66
|
|
|
|
71
|
|
Directors fees and expenses
|
|
|
60
|
|
|
|
60
|
|
General and administrative and other expenses
|
|
|
294
|
|
|
|
305
|
|
Excise tax expense (credit)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
7,363
|
|
|
$
|
5,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
August 31,
2017
|
|
|
August 31,
2016
|
|
|
|
($ in thousands)
|
|
Interest and debt financing expenses
|
|
$
|
5,486
|
|
|
$
|
4,738
|
|
Base management fees
|
|
|
2,873
|
|
|
|
2,430
|
|
Professional fees
|
|
|
792
|
|
|
|
662
|
|
Administrator expenses
|
|
|
771
|
|
|
|
650
|
|
Incentive management fees
|
|
|
1,886
|
|
|
|
1,937
|
|
Insurance
|
|
|
132
|
|
|
|
141
|
|
Directors fees and expenses
|
|
|
111
|
|
|
|
126
|
|
General and administrative and other expenses
|
|
|
530
|
|
|
|
530
|
|
Excise tax expense (credit)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
12,566
|
|
|
$
|
11,214
|
|
|
|
|
|
|
|
|
|
|
For the three months ended August 31, 2017, total operating expenses increased $1.5 million, or
26.0% compared to the three months ended August 31, 2016. For the six months ended August 31, 2017, total operating expenses increased $1.4 million, or 12.1% compared to the six months ended August 31, 2016.
For the three and six months ended August 31, 2017 and August 31, 2016, the increase in interest and debt financing expenses is
primarily attributable to an increase in outstanding debt as compared to the prior year, with increased levels of outstanding SBA debentures, additional notes being issued and our Credit Facility having an outstanding balance this
quarter-end.
Our SBA debentures increased from $103.7 million at August 31, 2016 to $134.7 million at August 31, 2017, while the 2020 Notes were repaid and the 2023 Notes issued, increasing the
notes payable from $61.8 million outstanding to $74.5 million outstanding for these same periods. For the three months ended August 31, 2017, the weighted average interest rate on our outstanding indebtedness was 4.52% compared to
4.80% for the three months ended August 31, 2016. For the six months ended August 31, 2017, the weighted average interest rate on our outstanding indebtedness was 4.55% compared to 4.77% for the six months ended August 31, 2016. For
both periods, the decrease was primarily driven by an increase in SBA debentures that carry a lower interest rate as well as the notes payable interest rate decreasing from 7.50% to 6.75% following the refinancing of the 2020 Notes. SBA debentures
decreased from 62.7% of overall debt as of August 31, 2016 to 61.5% as of August 31, 2017, primarily due to the increase in notes issued and the $10.0 million outstanding on the Credit Facility.
48
For the three months ended August 31, 2017, base management fees increased
$0.3 million, or 23.2% compared to the three months ended August 31, 2016. For the six months ended August 31, 2017, base management fees increased $0.4 million, or 18.2% compared to the six months ended August 31, 2016. The
increase in base management fees results from the 23.2% increase in the average value of our total assets, less cash and cash equivalents, from $272.7 million as of August 31, 2016 to $335.9 million as of August 31, 2017.
For the three and six months ended August 31, 2017, professional fees increased $0.1 million, or 34.8%, and increased
$0.1 million, or 19.7%, respectively, compared to the three and six months ended August 31, 2016.
For the three months ended
August 31, 2017, incentive management fees increased $0.5 million, or 41.5%, compared to the three months ended August 31, 2016. The first part of the incentive management fees increased this year from $0.76 million to
$0.92 million as higher average total assets of 23.2% has led to increased net investment income above the hurdle rate pursuant to the investment advisory and management agreement. In addition, the incentive management fees related to capital
gains increased from incentive fees of $0.4 million for the three months ended August 31, 2016 to $0.8 million for the quarter ended August 31, 2017, reflecting the $4.0 million net gain on investments for the three months
ended August 31, 2017.
For the six months ended August 31, 2017, incentive management fees decreased $0.1 million, or
2.6%, compared to the six months ended August 31, 2016. The first part of the incentive management fees increased this year from $1.4 million to $1.7 million as higher average total assets of 23.2% has led to increased net investment
income above the hurdle rate pursuant to the investment advisory and management agreement. However, for the six months ended August 31, 2017, incentive management fees in total decreased $0.1 million as the incentive management fees
related to capital gains decreased from incentive fees of $0.5 million for the six months ended August 31, 2016 to $0.2 million, reflecting the lower $1.5 million net gain on investments for the six months ended August 31,
2017 as compared to the $3.4 million net gain on investments for the six months ended August 31, 2016.
As discussed above, the
increase in interest and debt financing expenses for the three and six months ended August 31, 2017 as compared to the three and six months ended August 31, 2016 is primarily attributable to an increase in the amount of outstanding debt.
As of August 31, 2017, there was $10.0 million of outstanding borrowings under the Credit Facility, whereas there were no outstanding borrowings under the Credit Facility as of August 31, 2016. For the three months ended
August 31, 2017 and August 31, 2016, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.06% and 3.19%, respectively. For the six months ended August 31, 2017 and August 31, 2016, the
weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.11% and 3.14%, respectively.
Net realized
gains (losses) on sales of investments
For the three months ended August 31, 2017, the Company had $37.9 million of
sales, repayments, exits or restructurings resulting in $5.8 million of net realized losses. For the six months ended August 31, 2017, the Company had $43.8 million of sales, repayments, exits or restructurings resulting in
$5.7 million of net realized losses. The most significant realized gains (losses) during the six months ended August 31, 2017 were as follows (dollars in thousands):
Six Months ended August 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Asset Type
|
|
Gross
Proceeds
|
|
|
Cost
|
|
|
Net
Realized
Gain (Loss)
|
|
My Alarm Center, LLC
|
|
Second Lien Term Loan
|
|
$
|
2,617
|
|
|
$
|
10,330
|
|
|
$
|
(7,713
|
)
|
Mercury Funding, LLC
|
|
Common Stock
|
|
|
2,631
|
|
|
|
858
|
|
|
|
1,773
|
|
49
The $7.7 million of realized loss on our investment in My Alarm Center, LLC, was due to the
completion of a sales transaction, following increasing leverage levels combined with declining market conditions in the sector.
The
$1.8 million of realized gain on our investment in Mercury Funding, LLC, was driven by the completion of a sales transaction with a strategic acquirer.
For the three months ended August 31, 2016, the Company had $50.3 million of sales, repayments, exits or restructurings resulting in
$5.9 million of net realized gains. For the six months ended August 31, 2016, the Company had $70.9 million of sales, repayments, exits or restructurings resulting in $12.0 million of net realized gains. The most significant
realized gains during the six months ended August 31, 2016 were as follows (dollars in thousands):
Six Months ended
August 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Asset Type
|
|
Gross
Proceeds
|
|
|
Cost
|
|
|
Net
Realized
Gain
|
|
Take 5 Oil Change, L.L.C
|
|
Common Stock
|
|
$
|
6,457
|
|
|
$
|
481
|
|
|
$
|
5,976
|
|
Legacy Cabinets, Inc.
|
|
Common Stock Voting A-1
|
|
|
2,320
|
|
|
|
221
|
|
|
|
2,099
|
|
Legacy Cabinets, Inc.
|
|
Common Stock Voting
B-1
|
|
|
1,464
|
|
|
|
139
|
|
|
|
1,325
|
|
The $6.0 million of realized gain on our investment in Take 5 Oil Change, L.L.C. was due to the
completion of a sales transaction with a strategic acquirer.
The $3.4 million of realized gains on our investments in Legacy
Cabinets, Inc. were due to a period of steadily improving performance, leading up to our sale of shares in Legacy Cabinets, Inc.
Net change in unrealized appreciation (depreciation) on investments
For the three months ended August 31, 2017, our investments had net unrealized appreciation of $9.8 million versus net unrealized
depreciation of $3.3 million for the three months ended August 31, 2016. For the six months ended August 31, 2017, our investments had net unrealized appreciation of $7.2 million versus net unrealized depreciation of
$8.6 million for the six months ended August 31, 2016. The most significant cumulative changes in unrealized appreciation and depreciation for the six months ended August 31, 2017, were the following (dollars in thousands):
Six Months ended August 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Asset Type
|
|
Cost
|
|
|
Fair
Value
|
|
|
Total
Unrealized
Appreciation
(Depreciation)
|
|
|
YTD Change
in Unrealized
Appreciation
(Depreciation)
|
|
My Alarm Center, LLC
|
|
Second Lien Term Loan
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,298
|
|
Easy Ice, LLC
|
|
Preferred Equity
|
|
|
8,124
|
|
|
|
10,212
|
|
|
|
2,088
|
|
|
|
2,088
|
|
Saratoga Investment Corp. CLO
2013-1
Ltd.
|
|
Structured Finance Securities
|
|
|
9,322
|
|
|
|
12,038
|
|
|
|
2,716
|
|
|
|
2,085
|
|
Elyria Foundry Company, L.L.C.
|
|
Common Stock
|
|
|
9,685
|
|
|
|
2,672
|
|
|
|
(7,013
|
)
|
|
|
1,791
|
|
Mercury Funding, LLC
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(653
|
)
|
50
The $2.3 million of change in unrealized appreciation in our investment in My Alarm Center,
LLC was driven by the completion of a sales transaction. In recognizing this loss as a result of the sale, unrealized depreciation was adjusted to zero, which resulted in a $2.3 million change in unrealized appreciation for the six months.
The $2.1 million of change in unrealized appreciation in our investment in Easy Ice, LLC was driven by the completion of a strategic
acquisition that increased the scale and earnings of the business.
The $2.1 million of change in unrealized appreciation in our
investment in Saratoga Investment Corp. CLO
2013-1
Ltd. was driven by continued improved performance of the Saratoga CLO.
The $1.8 million of change in unrealized appreciation in our investment in Elyria Foundry Company, L.L.C. was driven by an increase in
oil and gas markets since
year-end,
positively impacting the companys performance.
The most
significant cumulative changes in unrealized appreciation and depreciation for the six months ended August 31, 2016, were the following (dollars in thousands):
Six Months ended August 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
Asset Type
|
|
Cost
|
|
|
Fair
Value
|
|
|
Total
Unrealized
Appreciation
(Depreciation)
|
|
|
YTD Change
in Unrealized
Appreciation
(Depreciation)
|
|
Take 5 Oil Change, L.L.C
|
|
Common Stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5,755
|
)
|
Legacy Cabinets, Inc.
|
|
Common Stock Voting A-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,456
|
)
|
Legacy Cabinets, Inc.
|
|
Common Stock Voting
B-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,550
|
)
|
Elyria Foundry Company, L.L.C.
|
|
Common Stock
|
|
|
9,217
|
|
|
|
314
|
|
|
|
(8,903
|
)
|
|
|
(1,712
|
)
|
The $5.8 million of change in unrealized depreciation in our investment in Take 5 Oil Change, L.L.C. was
driven by the completion of a sales transaction with a strategic acquirer. In realizing this gain as a result of the sale, unrealized appreciation was adjusted to zero, which resulted in a $5.8 million change in unrealized depreciation for the
quarter.
The $4.0 million of change in unrealized depreciation in our investments in Legacy Cabinets, Inc. were driven by the
completion of a sales transaction. In realizing these gains as a result of the sale, unrealized appreciation was adjusted to zero, which resulted in a $4.0 million change in unrealized depreciation for the period.
The $1.7 million of change in unrealized depreciation in our investment in Elyria Foundry Company, L.L.C. was driven by a continued
decline in oil and gas end markets since
year-end,
negatively impacting the companys performance.
Changes in net assets resulting from operations
For the three months ended August 31, 2017 and August 31, 2016, we recorded a net increase in net assets resulting from operations of
$6.9 million and $5.3 million, respectively. Based on 5,955,251 weighted average common shares outstanding as of August 31, 2017, our per share net increase in net assets resulting from operations was $1.15 for the three months ended
August 31, 2017. This compares to a per share net increase in net assets resulting from operations of $0.92 for the three months ended August 31, 2016 based on 5,740,816 weighted average common shares outstanding as of August 31,
2016.
For the six months ended August 31, 2017 and August 31, 2016, we recorded a net increase in net assets resulting from
operations of $7.9 million and $8.6 million, respectively. Based on 5,908,453 weighted average common shares outstanding as of August 31, 2017, our per share net increase in net assets resulting from operations was $1.33 for the six
months ended August 31, 2017. This compares to a per share net increase in net assets resulting from operations of $1.49 for the six months ended August 31, 2016 based on 5,739,157 weighted average common shares outstanding as of
August 31, 2016.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We intend to continue to generate cash primarily from cash flows from operations, including interest earned from our investments in debt in
middle market companies, interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities.
51
Although we expect to fund the growth of our investment portfolio through the net proceeds from
SBA debenture drawdowns and future equity offerings, including our dividend reinvestment plan (DRIP), and issuances of senior securities or future borrowings, to the extent permitted by the 1940 Act, we cannot assure you that our plans
to raise capital will be successful. In this regard, because our common stock has historically traded at a price below our current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value
per share, we have been and may continue to be limited in our ability to raise equity capital.
In addition, we intend to distribute to
our stockholders substantially all of our taxable income in order to satisfy the distribution requirement applicable to RICs under the Code. In satisfying this distribution requirement, we have in the past relied on Internal Revenue Service
(IRS) issued private letter rulings concluding that a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or
stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders, which limitation must be at least 20.0% of the aggregate declared distribution. We may rely on these IRS private letter rulings in future
periods to satisfy our RIC distribution requirement.
Also, as a BDC, we generally are required to meet a coverage ratio of total assets,
less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200.0%. This requirement limits the amount that we may borrow.
Our asset coverage ratio, as defined in the 1940 Act, was 258.0% as of August 31, 2017 and 271.0% as of February 28, 2017. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from
various sources, including the equity markets and other debt-related markets, which may or may not be available on favorable terms, if at all.
Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to
fund our unfunded commitments to portfolio companies or to repay borrowings. Also, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we
may realize significantly less than their recorded value.
Madison revolving credit facility
Below is a summary of the terms of the senior secured revolving credit facility we entered into with Madison Capital Funding LLC (the
Credit Facility) on June 30, 2010, which was most recently amended on May 18, 2017.
Availability.
The
Company can draw up to the lesser of (i) $40.0 million (the Facility Amount) and (ii) the product of the applicable advance rate (which varies from 50.0% to 75.0% depending on the type of loan asset) and the value,
determined in accordance with the Credit Facility (the Adjusted Borrowing Value), of certain eligible loan assets pledged as security for the loan (the Borrowing Base), in each case less (a) the amount of any
undrawn funding commitments the Company has under any loan asset and which are not covered by amounts in the Unfunded Exposure Account referred to below (the Unfunded Exposure Amount) and outstanding borrowings. Each loan asset held by
the Company as of the date on which the Credit Facility was closed was valued as of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest)
and the purchase price paid for such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor, acceleration of
the loan asset, and certain modifications to the terms of the loan asset.
The Credit Facility contains limitations on the type of
loan assets that are eligible to be included in the Borrowing Base and as to the concentration level of certain categories of loan assets in the Borrowing Base such as restrictions on geographic and industry concentrations, asset size
and quality, payment frequency, status and terms, average life, and collateral interests. In addition, if an asset is to remain an eligible loan asset, the Company may not make changes to the payment, amortization, collateral and certain
other terms of the loan assets without the consent of the administrative agent that will either result in subordination of the loan asset or be materially adverse to the lenders.
Collateral.
The Credit Facility is secured by substantially all of the assets of the Company (other than assets held by our SBIC
subsidiary) and includes the subordinated notes (CLO Notes) issued by Saratoga CLO and the Companys rights under the CLO Management Agreement (as defined below).
Interest Rate and Fees.
Under the Credit Facility, funds are borrowed from or through certain lenders at the greater of the
prevailing LIBOR rate and 1.00%, plus an applicable margin of 4.75%. At the Companys option, funds may be borrowed based on an alternative base rate, which in no event will be less than 2.00%, and the applicable margin over such
alternative base rate is 3.75%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment
fees are payable monthly. The Company was also obligated to pay certain other fees to the lenders in connection with the closing of the Credit Facility.
52
Revolving Period and Maturity Date.
The Company may make and repay borrowings under the
Credit Facility for a period of three years following the closing of the Credit Facility (the Revolving Period). The Revolving Period may be terminated at an earlier time by the Company or, upon the occurrence of an event of default, by
action of the lenders or automatically. All borrowings and other amounts payable under the Credit Facility are due and payable in full five years after the end of the Revolving Period.
Collateral Tests.
It is a condition precedent to any borrowing under the Credit Facility that the principal amount outstanding under
the Credit Facility, after giving effect to the proposed borrowings, not exceed the lesser of the Borrowing Base or the Facility Amount (the Borrowing Base Test). In addition to satisfying the Borrowing Base Test, the following tests
must also be satisfied (together with Borrowing Base Test, the Collateral Tests):
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|
|
Interest Coverage Ratio.
The ratio (expressed as a percentage) of interest collections with respect to pledged loan assets, less certain fees and expenses relating to the Credit Facility, to accrued interest and
commitment fees and any breakage costs payable to the lenders under the Credit Facility for the last 6 payment periods must equal at least 175.0%.
|
|
|
|
Overcollateralization Ratio.
The ratio (expressed as a percentage) of the aggregate Adjusted Borrowing Value of eligible pledged loan assets plus the fair value of certain ineligible pledged loan
assets and the CLO Notes (in each case, subject to certain adjustments) to outstanding borrowings under the Credit Facility plus the Unfunded Exposure Amount must equal at least 200.0%.
|
|
|
|
Weighted Average FMV Test.
The aggregate adjusted or weighted value of eligible pledged loan assets as a percentage of the aggregate outstanding principal balance of eligible pledged loan
assets must be equal to or greater than 72.0% and 80.0% during the
one-year
periods prior to the first and second anniversary of the closing date, respectively, and 85.0% at all times thereafter.
|
The Credit Facility also requires payment of outstanding borrowings or replacement of pledged loan assets upon the
Companys breach of its representation and warranty that pledged loan assets included in the Borrowing Base are eligible loan assets. Such payments or replacements must equal the lower of the amount by which the Borrowing Base is
overstated as a result of such breach or any deficiency under the Collateral Tests at the time of repayment or replacement. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.
Priority of Payments.
During the Revolving Period, the priority of payments provisions of the Credit Facility require, after
payment of specified fees and expenses and any necessary funding of the Unfunded Exposure Account, that collections of principal from the loan assets and, to the extent that these are insufficient, collections of interest from the loan assets, be
applied on each payment date to payment of outstanding borrowings if the Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage Ratio would not otherwise be met. Similarly, following termination of the Revolving Period,
collections of interest are required to be applied, after payment of certain fees and expenses, to cure any deficiencies in the Borrowing Base Test, the Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant payment date.
Reserve Account.
The Credit Facility requires the Company to set aside an amount equal to the sum of accrued interest,
commitment fees and administrative agent fees due and payable on the next succeeding three payment dates (or corresponding to three payment periods). If for any monthly period during which fees and other payments accrue, the aggregate Adjusted
Borrowing Value of eligible pledged loan assets which do not pay cash interest at least quarterly exceeds 15.0% of the aggregate Adjusted Borrowing Value of eligible pledged loan assets, the Company is required to set aside
such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs
payable to the lenders.
Unfunded Exposure Account.
With respect to revolver or delayed draw loan assets, the Company is
required to set aside in a designated account (the Unfunded Exposure Account) 100.0% of its outstanding and undrawn funding commitments with respect to such loan assets. The Unfunded Exposure Account is funded at the time the Company
acquires a revolver or delayed draw loan asset and requests a related borrowing under the Credit Facility. The Unfunded Exposure Account is funded through a combination of proceeds of the requested borrowing and other Company funds, and if for any
reason such amounts are insufficient, through application of the priority of payment provisions described above.
Operating
Expenses.
The priority of payments provision of the Credit Facility provides for the payment of certain operating expenses of the Company out of collections on principal and interest during the Revolving Period and out of collections on interest
following the termination of the Revolving Period in accordance with the priority established in such provision. The operating expenses payable pursuant to the priority of payment provisions is limited to $350,000 for each monthly payment date or
$2.5 million for the immediately preceding period of twelve consecutive monthly payment dates. This ceiling can be increased by the lesser of
53
5.0% or the percentage increase in the fair market value of all the Companys assets only on the first monthly payment date to occur after each
one-year
anniversary following the closing of the Credit Facility. Upon the occurrence of a Manager Event (described below), the consent of the administrative agent is required in order to pay operating
expenses through the priority of payments provision.
Events of Default.
The Credit Facility contains certain negative
covenants, customary representations and warranties and affirmative covenants and events of default. The Credit Facility does not contain grace periods for breach by the Company of certain covenants, including, without limitation, preservation of
existence, negative pledge, change of name or jurisdiction and separate legal entity status of the Company covenants and certain other customary covenants. Other events of default under the Credit Facility include, among other things, the
following:
|
|
|
an Interest Coverage Ratio of less than 150.0%;
|
|
|
|
an Overcollateralization Ratio of less than 175.0%;
|
|
|
|
the filing of certain ERISA or tax liens;
|
|
|
|
the occurrence of certain Manager Events such as:
|
|
|
|
failure by Saratoga Investment Advisors and its affiliates to maintain collectively, directly or indirectly, a cash equity investment in the Company in an amount equal to at least $5.0 million at any time prior to
the third anniversary of the closing date;
|
|
|
|
failure of the Management Agreement between Saratoga Investment Advisors and the Company to be in full force and effect;
|
|
|
|
indictment or conviction of Saratoga Investment Advisors or any key person for a felony offense, or any fraud, embezzlement or misappropriation of funds by Saratoga Investment Advisors or any key
person and, in the case of key persons, without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed to replace such key person within 30 days;
|
|
|
|
resignation, termination, disability or death of a key person or failure of any key person to provide active participation in Saratoga Investment Advisors daily activities, all without a
reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed within 30 days; or
|
|
|
|
occurrence of any event constituting cause under the Collateral Management Agreement between the Company and Saratoga CLO (the CLO Management Agreement), delivery of a notice under
Section 12(c) of the CLO Management Agreement with respect to the removal of the Company as collateral manager or the Company ceases to act as collateral manager under the CLO Management Agreement.
|
Conditions to Acquisitions and Pledges of Loan Assets.
The Credit Facility imposes certain additional conditions to the acquisition and
pledge of additional loan assets. Among other things, the Company may not acquire additional loan assets without the prior written consent of the administrative agent until such time that the administrative agent indicates in writing its
satisfaction with Saratoga Investment Advisors policies, personnel and processes relating to the loan assets.
Fees and
Expenses.
The Company paid certain fees and reimbursed Madison Capital Funding LLC for the aggregate amount of all documented,
out-of-pocket
costs and expenses,
including the reasonable fees and expenses of lawyers, incurred by Madison Capital Funding LLC in connection with the Credit Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing of the stock
purchase transaction with Saratoga Investment Advisors and certain of its affiliates. These amounts totaled $2.0 million.
On
February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:
|
|
|
expand the borrowing capacity under the Credit Facility from $40.0 million to $45.0 million;
|
|
|
|
extend the period during which we may make and repay borrowings under the Credit Facility from July 30, 2013 to February 24, 2015 (the Revolving Period). The Revolving Period may, upon the
occurrence of an event of default, by action of the lenders or automatically, be terminated. All borrowings and other amounts payable under the Credit Facility are due and payable five years after the end of the Revolving Period; and
|
|
|
|
remove the condition that we may not acquire additional loan assets without the prior written consent of the administrative agent.
|
54
On September 17, 2014, we entered into a second amendment to the Revolving Facility with
Madison Capital Funding LLC to, among other things:
|
|
|
extend the commitment termination date from February 24, 2015 to September 17, 2017;
|
|
|
|
extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);
|
|
|
|
reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and
|
|
|
|
reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.
|
On May 18, 2017, we entered into a third amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:
|
|
|
extend the commitment termination date from September 17, 2017 to September 17, 2020;
|
|
|
|
extend the final maturity date of the Credit Facility from September 17, 2022 to September 17, 2025;
|
|
|
|
reduce the floor on base rate borrowings from 2.25% to 2.0%;
|
|
|
|
reduce the floor on LIBOR borrowings from 1.25% to 1.00%; and
|
|
|
|
reduce the commitment fee rate from 0.75% to 0.50% for any period during which the ratio of advances outstanding to aggregate commitments, expressed as a percentage, is greater than or equal to 50%.
|
As of August 31, 2017, we had $10.0 million of outstanding borrowings under the Credit Facility and $134.7 million of
SBA-guaranteed
debentures outstanding (which are discussed below). As of February 28, 2017, we had no outstanding borrowings under the Credit Facility and $112.7 million
SBA-guaranteed
debentures outstanding. Our borrowing base under the Credit Facility at August 31, 2017 and February 28, 2017 was $34.0 million and $24.7 million, respectively.
Our asset coverage ratio, as defined in the 1940 Act, was 258.0% as of August 31, 2017 and 271.0% as of February 28, 2017.
SBA-guaranteed
debentures
In addition, we, through a wholly-owned subsidiary, sought and obtained a license from the SBA to operate an SBIC. In this regard, on
March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP, received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. SBICs are designated to stimulate the
flow of private equity capital to eligible small businesses. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses.
The SBIC license allows our SBIC subsidiary to obtain leverage by issuing
SBA-guaranteed
debentures.
SBA-guaranteed
debentures are
non-recourse,
interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of
SBA-guaranteed
debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of
SBA-guaranteed
debentures is fixed
on a semi-annual basis at a market-driven spread over U.S. Treasury Notes with
10-year
maturities.
SBA regulations currently limit the amount that our SBIC subsidiary may borrow to a maximum of $150.0 million when it has at least
$75.0 million in regulatory capital, receives a capital commitment from the SBA and has been through an examination by the SBA subsequent to licensing. As of August 31, 2017, our SBIC subsidiary had $75.0 million in regulatory capital
and $134.7 million
SBA-guaranteed
debentures outstanding.
We received exemptive relief from
the SEC to permit us to exclude the debt of our SBIC subsidiary guaranteed by the SBA from the definition of senior securities in the 200.0% asset coverage test under the 1940 Act. This allows us increased flexibility under the 200.0% asset coverage
test by permitting us to borrow up to $150.0 million more than we would otherwise be able to absent the receipt of this exemptive relief.
On April 2, 2015, the SBA issued a green light letter inviting the Company to continue our application process to obtain a
license to form and operate its second SBIC subsidiary. On September 27, 2016, the SBA informed us that as part of their continued review of our application for a second license, and in order to ensure that they were reviewing the most current
information available, we would need to update all previously submitted materials and invited us to reapply. As a result of this request, with which we are in the process of complying, the existing green light letter that the SBA issued
to us has expired. If approved in the future, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150.0 million of additional
SBA-guaranteed
debentures in addition to the $150.0 million already approved under the first license.
55
Unsecured notes
In May 2013, we issued $48.3 million in aggregate principal amount of our 2020 Notes for net proceeds of $46.1 million after
deducting underwriting commissions of $1.9 million and offering costs of $0.3 million. The proceeds included the underwriters full exercise of their overallotment option. Interest on these 2020 Notes is paid quarterly in arrears on
February 15, May 15, August 15 and November 15, at a rate of 7.50% per year, beginning August 15, 2013. The 2020 Notes mature on May 31, 2020 and since May 31, 2016, may be redeemed in whole or in
part at any time or from time to time at our option. In connection with the issuance of the 2020 Notes, we agreed to the following covenants for the period of time during which the 2020 Notes are outstanding:
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|
|
we will not violate (whether or not we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us
by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act,
equals at least 200.0% after such borrowings.
|
|
|
|
we will not violate (regardless of whether we are subject to) Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to (i) any exemptive relief
granted to us by the SEC and
(ii) no-action
relief granted by the SEC to another BDC (or to the Company if it determines to seek such similar
no-action
or other
relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a) (1)(B) as modified by Section 61(a)(1) of the 1940 Act in order to maintain the BDCs status as a
RIC under the Code. Currently these provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is
below 200.0% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.
|
The 2020 Notes were redeemed in full on January 13, 2017 and are no longer listed on the NYSE.
On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which we may offer for
sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an ATM offering. As of August 31, 2017, the Company sold 539,725 bonds with a principal of $13,493,125 at an average price of $25.31 for
aggregate net proceeds of $13,385,766 (net of transaction costs).
On December 21, 2016, we issued $74.5 million in aggregate
principal amount of our 2023 Notes for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance included the exercise of
substantially all of the underwriters option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. Interest on the 2023 Notes is paid quarterly in arrears on March 15, June 15,
September 15 and December 15, at a rate of 6.75% per year, beginning March 30, 2017. The 2023 Notes mature on December 30, 2023, and commencing December 21, 2019, may be redeemed in whole or in part at any time or from
time to time at our option. The net proceeds from the offering were used to repay all of the outstanding indebtedness under the 2020 Notes on January 13, 2017, which amounts to $61.8 million, and for general corporate purposes in
accordance with our investment objective and strategies. The 2020 Notes were redeemed in full on January 13, 2017. The 2023 Notes are listed on the NYSE under the trading symbol SAB with a par value of $25.00 per share. In
connection with the issuance of the 2023 Notes, we agreed to the following covenants for the period of time during which the notes are outstanding:
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|
|
we will not violate (whether or not we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us
by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act,
equals at least 200% after such borrowings.
|
|
|
|
if, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, to file any periodic reports with the SEC, we agree to furnish to
holders of the 2023 Notes and the Trustee, for the period of time during which the 2023 Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial
statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting
principles.
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56
At August 31, 2017 and February 28, 2017, the fair value of investments, cash and cash
equivalents and cash and cash equivalents, reserve accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2017
|
|
|
At February 28, 2017
|
|
|
|
Fair Value
|
|
|
Percentage
of
Total
|
|
|
Fair Value
|
|
|
Percentage
of
Total
|
|
|
|
($ in thousands)
|
|
Cash and cash equivalents
|
|
$
|
1,595
|
|
|
|
0.5
|
%
|
|
$
|
9,307
|
|
|
|
3.0
|
%
|
Cash and cash equivalents, reserve accounts
|
|
|
16,816
|
|
|
|
4.8
|
|
|
|
12,781
|
|
|
|
4.1
|
|
Syndicated loans
|
|
|
8,980
|
|
|
|
2.6
|
|
|
|
9,823
|
|
|
|
3.1
|
|
First lien term loans
|
|
|
182,781
|
|
|
|
52.0
|
|
|
|
159,097
|
|
|
|
50.5
|
|
Second lien term loans
|
|
|
97,462
|
|
|
|
27.7
|
|
|
|
87,750
|
|
|
|
27.9
|
|
Structured finance securities
|
|
|
16,537
|
|
|
|
4.7
|
|
|
|
15,450
|
|
|
|
4.9
|
|
Equity interests
|
|
|
27,210
|
|
|
|
7.7
|
|
|
|
20,541
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
351,381
|
|
|
|
100.0
|
%
|
|
$
|
314,749
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 16, 2017, we entered into an equity distribution agreement with Ladenburg Thalmann &
Co. Inc., through which we may offer for sale, from time to time, up to $30.0 million of our common stock through an ATM offering. As of August 31, 2017, the Company sold 117,354 shares for gross proceeds of $2.6 million at an average
price of $22.49 for aggregate net proceeds of $2.6 million (net of transaction costs).
On September 24, 2014, we announced the
approval of an open market share repurchase plan that allows it to repurchase up to 200,000 shares of our common stock at prices below our NAV as reported in its then most recently published consolidated financial statements, which was subsequently
increased to 400,000 shares of our common stock. On October 5, 2016, our board of directors extended the open market share repurchase plan for another year to October 15, 2017 and increased the number of shares we are permitted to
repurchase at prices below our NAV, as reported in its then most recently published consolidated financial statements, to 600,000 shares of our common stock. On October 10, 2017, the Companys board of directors extended the open market
share repurchase plan for another year to October 15, 2018, leaving the number of shares unchanged at 600,000 shares of its common stock. As of August 31, 2017, we purchased 218,491 shares of common stock, at the average price of $16.87
for approximately $3.7 million pursuant to this repurchase plan.
On August 28, 2017, our board of directors declared a dividend
of $0.48 per share payable on September 26, 2017, to common stockholders of record on September 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP.
Based on shareholder elections, the dividend consisted of approximately $2.2 million in cash and 33,551 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common
stock comprising the stock portion was calculated based on a price of $20.19 per share, which equaled the volume weighted average trading price per share of the common stock on September 13, 14, 15, 18, 19, 20, 21, 22, 25 and 26, 2017.
On May 30, 2017, our board of directors declared a dividend of $0.47 per share which was paid on June 27, 2017, to common
stockholders of record on June 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately
$2.3 million in cash and 26,222 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$20.04 per share, which equaled the volume weighted average trading price per share of the common stock on June 14, 15, 16, 19, 20, 21, 22, 23, 26 and 27, 2017.
On February 28, 2017, our board of directors declared a dividend of $0.46 per share, which was paid on March 28, 2017, to common
stockholders of record as of March 15, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$2.0 million in cash and 29,096 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$21.38 per share, which equaled the volume weighted average trading price per share of the common stock on March 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2017.
On January 12, 2017, our board of directors declared a dividend of $0.45 per share, which was paid on February 9, 2017, to common
stockholders of record as of January 31, 2017. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
57
$1.6 million in cash and 50,453 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising
the stock portion was calculated based on a price of $20.25 per share, which equaled the volume weighted average trading price per share of the common stock on January 27, 30, 31 and February 1, 2, 3, 6, 7, 8 and 9, 2017.
On October 5, 2016, our board of directors declared a dividend of $0.44 per share, which was paid on November 9, 2016, to common
stockholders of record as of October 31, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$1.5 million in cash and 58,548 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$17.12 per share, which equaled the volume weighted average trading price per share of the common stock on October 27, 28, 31 and November 1, 2, 3, 4, 7, 8 and 9, 2016.
On August 8, 2016, our board of directors declared a special dividend of $0.20 per share, which was paid on September 5, 2016, to
common stockholders of record as of August 24, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of
approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on
a price of $17.06 per share, which equaled the volume weighted average trading price per share of the common stock on August 22, 23, 24, 25, 26, 29, 30, 31 and September 1 and 2, 2016.
On July 7, 2016, our board of directors declared a dividend of $0.43 per share, which was paid on August 9, 2016, to common
stockholders of record as of July 29, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$16.32 per share, which equaled the volume weighted average trading price per share of the common stock on July 27, 28, 29 and August 1, 2, 3, 4, 5, 8 and 9, 2016.
On March 31, 2016, our board of directors declared a dividend of $0.41 per share, which was paid on April 27, 2016, to common
stockholders of record as of April 15, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$15.43 per share, which equaled the volume weighted average trading price per share of the common stock on April 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2016.
On January 12, 2016, our board of directors declared a dividend of $0.40 per share, which was paid on February 29, 2016, to common
stockholders of record as of February 1, 2016. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$1.4 million in cash and 66,765 newly issued shares of common stock, or 1.2% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$13.11 per share, which equaled the volume weighted average trading price per share of the common stock on February 16, 17, 18, 19, 22, 23, 24, 25, 26 and 29, 2016.
On October 7, 2015, our board of directors declared a dividend of $0.36 per share, which was paid on November 30, 2015, to common
stockholders of record as of November 2, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$1.1 million in cash and 61,029 newly issued shares of common stock, or 1.1% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$14.53 per share, which equaled the volume weighted average trading price per share of the common stock on November 16, 17, 18, 19, 20, 23, 24, 25, 27 and 30, 2015.
On July 8, 2015, our board of directors declared a dividend of $0.33 per share, which was paid on August 31, 2015, to common
stockholders of record as of August 3, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$1.1 million in cash and 47,861 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$15.28 per share, which equaled the volume weighted average trading price per share of the common stock on August 18, 19, 20, 21, 24, 25, 26, 27, 28 and 31, 2015.
58
On May 14, 2015, our board of directors declared a special dividend of $1.00 per share,
which was paid on June 5, 2015, to common stockholders of record on as of May 26, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder
elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock, or 2.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the
stock portion was calculated based on a price of $16.47 per share, which equaled the volume weighted average trading price per share of the common stock on May 22, 26, 27, 28, 29 and June 1, 2, 3, 4, and 5, 2015.
On April 9, 2015, our board of directors declared a dividend of $0.27 per share, which was paid on May 29, 2015, to common
stockholders of record as of May 4, 2015. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately
$0.9 million in cash and 33,766 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of
$16.78 per share, which equaled the volume weighted average trading price per share of the common stock on May 15, 18, 19, 20, 21, 22, 26, 27, 28 and 29, 2015.
On September 24, 2014, our board of directors declared a dividend of $0.22 per share, which was paid on February 27, 2015.
Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued
shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.97 per share, which equaled the volume weighted
average trading price per share of the common stock on February 13, 17, 18, 19, 20, 23, 24, 25, 26 and 27, 2015.
Also on
September 24, 2014, our board of directors declared a dividend of $0.18 per share, which was paid on November 28, 2014. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock pursuant to
our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares
of common stock comprising the stock portion was calculated based on a price of $14.37 per share, which equaled the volume weighted average trading price per share of the common stock on November 14, 17, 18, 19, 20, 21, 24, 25, 26 and 28, 2014.
On October 30, 2013, our board of directors declared a dividend of $2.65 per share, which was paid on December 27, 2013, to
common stockholders of record as of November 13, 2013. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable
to all shareholders was limited to approximately $2.5 million or $0.53 per share. This dividend was declared in reliance on certain private letter rulings issued by the IRS concluding that a RIC may treat a distribution of its own stock as
fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on the aggregate amount of cash to be distributed to all stockholders,
which limitation must be at least 20.0% of the aggregate declared distribution.
Based on shareholder elections, the dividend consisted of
approximately $2.5 million in cash and 649,500 shares of common stock, or 13.7% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate
dividend amount, thus resulting in the payment of a combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.439 per share,
which equaled the volume weighted average trading price per share of the common stock on December 11, 13, and 16, 2013.
On
November 9, 2012, our board of directors declared a dividend of $4.25 per share, which was paid on December 31, 2012, to common stockholders of record as of November 20, 2012. Shareholders had the option to receive payment of the
dividend in cash, shares of common stock, or a combination of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to approximately $3.3 million or $0.85 per share.
Based on shareholder elections, the dividend consisted of $3.3 million in cash and 853,455 shares of common stock, or 22.0% of our
outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to
shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.444 per share, which equaled the volume weighted average trading price per share of the common stock
on December 14, 17 and 19, 2012.
On November 15, 2011, our board of directors declared a dividend of $3.00 per share, which was
paid on December 30, 2011, to common stockholders of record as of November 25, 2011. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination of cash and shares of common stock,
provided that the aggregate cash payable to all shareholders was limited to $2.0 million or $0.60 per share.
59
Based on shareholder elections, the dividend consisted of $2.0 million in cash and 599,584
shares of common stock, or 18.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 20.0% of the aggregate dividend amount, thus resulting in the payment of a
combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.117067 per share, which equaled the volume weighted average trading
price per share of the common stock on December 20, 21 and 22, 2011.
On November 12, 2010, our board of directors declared a
dividend of $4.40 per share to shareholders payable in cash or shares of our common stock, in accordance with the provisions of the IRS Revenue Procedure
2010-12,
which allows a publicly-traded regulated
investment company to satisfy its distribution requirements with a distribution paid partly in common stock provided that at least 10.0% of the distribution is payable in cash. The dividend was paid on December 29, 2010 to common shareholders
of record on November 19, 2010.
Based on shareholder elections, the dividend consisted of $1.2 million in cash and 596,235
shares of common stock, or 22.0% of our outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 10.0% of the aggregate dividend amount, thus resulting in the payment of a
combination of cash and stock to shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.8049 per share, which equaled the volume weighted average trading
price per share of the common stock on December 20, 21 and 22, 2010.
On November 13, 2009, our board of directors declared a
dividend of $18.25 per share, which was paid on December 31, 2009, to common stockholders of record as of November 25, 2009. Shareholders had the option to receive payment of the dividend in cash, shares of common stock, or a combination
of cash and shares of common stock, provided that the aggregate cash payable to all shareholders was limited to $2.1 million or $0.25 per share.
Based on shareholder elections, the dividend consisted of $2.1 million in cash and 864,872.5 shares of common stock, or 104.0% of our
outstanding common stock prior to the dividend payment. The amount of cash elected to be received was greater than the cash limit of 13.7% of the aggregate dividend amount, thus resulting in the payment of a combination of cash and stock to
shareholders who elected to receive cash. The number of shares of common stock comprising the stock portion was calculated based on a price of $1.5099 per share, which equaled the volume weighted average trading price per share of the common stock
on December 24 and 28, 2009.
We cannot provide any assurance that these measures will provide sufficient sources of liquidity to
support our operations and growth.
Contractual obligations
The following table shows our payment obligations for repayment of debt and other contractual obligations at August 31, 2017:
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Payment Due by Period
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Total
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Less Than
1 Year
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1 - 3
Years
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3 - 5
Years
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More Than
5 Years
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($ in thousands)
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Long-Term Debt Obligations
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$
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219,111
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$
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$
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$
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$
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219,111
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Off-balance
sheet arrangements
The Companys
off-balance
sheet arrangements consisted of $5.0 million and $2.0 million
of unfunded commitments to provide debt financing to its portfolio companies or to fund limited partnership interests as of August 31, 2017 and February 28, 2017, respectively. Such commitments are generally up to the Companys
discretion to approve, or the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Companys consolidated statements of assets and
liabilities and are not reflected in the Companys consolidated statements of assets and liabilities.
60
A summary of the composition of the unfunded commitments as of August 31, 2017 and
February 28, 2017 is shown in the table below (dollars in thousands):
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As of
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August 31, 2017
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February 28, 2017
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CLEO Communications Holding, LLC
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$
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3,000
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$
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GreyHeller LLC
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2,000
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2,000
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Total
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$
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5,000
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$
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2,000
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