ITEM 2. MANAGEMENT’S 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 “Note about Forward-Looking Statements” and Part I, Item 1A. “Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022.
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:
| ● | our future operating results and the continued impact of
coronavirus (“COVID-19”) pandemic thereon; |
| ● | the introduction, withdrawal, success and timing of business
initiatives and strategies; |
| ● | changes in political, economic or industry conditions, the
interest rate environment or financial and capital markets, which could result in changes in the value of our assets; |
| ● | the impact of geopolitical conditions, including the ongoing
conflict between Ukraine and Russia and its impact on financial market volatility, global economic markets, and various sectors, industries
and markets for commodities globally, such as oil and natural gas; |
| ● | the relative and absolute investment performance and operations
of our Manager; |
| ● | the impact of increased competition; |
| ● | our ability to turn potential investment opportunities into
transactions and thereafter into completed and successful investments; |
| ● | the unfavorable resolution of any future legal proceedings; |
| ● | our business prospects and the operational and financial
performance of our portfolio companies, including their ability to achieve our respective objectives as a result of the current COVID-19
pandemic and the effects of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business; |
| ● | the impact of investments that we expect to make and future
acquisitions and divestitures; |
| ● | our contractual arrangements and relationships with third
parties; |
| ● | the dependence of our future success on the general economy
and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon; |
| ● | the ability of our portfolio companies to achieve their objectives; |
| ● | our expected financings and investments; |
| ● | 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”)
subsidiaries, and to continue to qualify to be taxed as a regulated investment company (“RIC”); |
| ● | the adequacy of our cash resources and working capital; |
| ● | the timing of cash flows, if any, from the operations of
our portfolio companies and the impact of the COVID-19 pandemic thereon; |
| ● | the impact of interest rate volatility, including the decommissioning
of LIBOR and the rising interest rate environment, on our results, particularly because we use leverage as part of our investment strategy; |
| ● | the impact of supply chain constraints and labor difficulties
on our portfolio companies and the global economy; |
| ● | the elevated level of inflation, and its impact on our portfolio
companies and on the industries in which we invest; |
| ● | the impact of legislative and regulatory actions and reforms
and regulatory, supervisory or enforcement actions of government agencies relating to us or our Manager; |
| ● | the impact of changes to tax legislation and, generally,
our tax position; |
| ● | our ability to access capital and any future financings by
us; |
| ● | the ability of our Manager to attract and retain highly talented
professionals; and |
| ● | the ability of our Manager to locate suitable investments
for us and to monitor and effectively administer our investments and the impacts of the COVID-19 pandemic thereon. |
The following statements are not guarantees of
future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict
and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without
limitation:
| ● | changes in laws and regulations, changes in political, economic,
geopolitical or industry conditions, and changes in the interest rate environment, including with respect to the decommissioning of LIBOR
and interest rate hikes by the U.S. Federal Reserve, or other conditions affecting the financial and capital markets, including with
respect to changes resulting from or in response to, or potentially even the absence of changes as a result of, the impact of the COVID-19
pandemic; |
| ● | the length and duration of the COVID-19 outbreak in the United
States as well as worldwide, and the magnitude of its impact and time required for economic recovery, including with respect to the impact
of travel restrictions, business closures and other restrictions on the ability of the Manager’s investment professionals to conduct
in-person diligence on, and otherwise monitor, existing and future investments; |
| ● | an economic downturn and the time period required for robust
economic recovery therefrom, including from increasing inflation, a shifting interest rate environment, geopolitical events (including
the war in Ukraine), and the ongoing impact of the COVID-19 pandemic, which may have a material impact on our portfolio companies’
results of operations and financial condition, which could lead to the loss of some or all of our investments in certain portfolio companies
and have a material adverse effect on our results of operations and financial condition; |
| ● | a contraction of available credit, an inability or unwillingness
of our lenders to fund their commitments to us and/or an inability to access capital markets or additional sources of liquidity, including
as a result of the impact and duration of the COVID-19 pandemic, could have a material adverse effect on our results of operations and
financial condition and impair our lending and investment activities; |
| ● | risks associated with possible disruption in our portfolio
companies’ operations due to wars and other forms of conflict, terrorist acts, security operations and catastrophic events such
as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics; and |
| ● | the risks, uncertainties and other factors we identify in
“Risk Factors” in our most recent Annual Report on Form 10-K under Part I, Item 1A, in our quarterly reports on Form 10-Q,
including this report, and in our other filings with the SEC that we make from time to time. |
Such forward-looking statements may include statements
preceded by, followed by or that otherwise include terms such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,”
“will” and “would” or the negative of these terms or other comparable terminology.
We have based the forward-looking statements included
in this Quarterly Report on Form 10-Q on information available to us on the date of this Quarterly Report on Form 10-Q, and we assume
no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking
statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or
regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future
may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
The following analysis of our financial condition
and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained
elsewhere in 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, as amended (the “1940 Act”). Our investment objective is
to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from our investments. We invest
primarily in senior and unitranche leveraged loans and mezzanine debt issued by private U.S. middle market companies, which we define
as companies having earnings before interest, tax, depreciation and amortization (“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 intend to qualify annually, to be treated for U.S. federal income tax purposes
as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
Corporate History
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 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 Funding’s 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 Madison 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 Madison 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”).
On August 14, 2019, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC II LP (“SBIC II LP”), also received an SBIC
license from the SBA.
In May 2013, we issued $48.3 million in aggregate
principal amount of our 7.50% fixed-rate 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. The 2020 Notes were listed on the New York Stock Exchange (“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 and are no longer
listed on the NYSE.
On May 29, 2015, we entered into a Debt Distribution
Agreement with Ladenburg Thalmann & Co. Inc. 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. Prior to the 2020 Notes being redeemed in full,
the Company had sold 539,725 2022 Notes with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of
$13.4 million (net of transaction costs).
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 $71.7 million after
deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance included
the partial exercise of the underwriters’ option to purchase an additional $9.8 million in aggregate principal amount of 2023 Notes
within 30 days. The 2023 Notes were listed on the NYSE under the trading symbol “SAB” with a par value of $25.00 per share.
On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.5 million, respectively, in aggregate principal
amount of the $74.5 million in aggregate principal amount of the issued and outstanding 2023 Notes and are no longer listed on the NYSE.
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. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were added
to the equity ATM program. On July 11, 2019, the amount of the common stock to be offered was increased to $70.0 million, and on October
8, 2019, the amount of the common stock to be offered was increased to $130.0 million. This agreement was terminated as of July 29, 2021,
and as of that date, the Company had sold 3,922,018 shares for gross proceeds of $97.1 million at an average price of $24.77 for aggregate
net proceeds of $95.9 million (net of transaction costs).
On July 13, 2018, the Company issued 1,150,000
shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds,
after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately
$27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common
stock, which was not exercised.
On August 28, 2018, the Company issued $40.0 million
in aggregate principal amount of our 6.25% fixed-rate notes due 2025 (the “6.25% 2025 Notes”) for net proceeds of $38.7 million
after deducting underwriting commissions of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance
included the full exercise of the underwriters’ option to purchase an additional $5.0 million in aggregate principal amount of 6.25%
2025 Notes within 30 days. The net proceeds from the offering were used for general corporate purposes in accordance with our investment
objective and strategies. Financing costs of $1.6 million related to the 6.25% 2025 Notes have been capitalized were amortized over the
term of the 6.25% 2025 Notes.
On
February 5, 2019, the Company issued an additional $20.0 million
in aggregate principal amount of the 6.25% 2025 Notes for net proceeds of $19.2 million after deducting underwriting commissions of approximately
$0.6 million and discount of $0.2 million. The additional 6.25% 2025 Notes were treated as a single series with the existing 6.25% 2025
Notes under the indenture and had the same terms as the existing 6.25% 2025 Notes. Offering costs incurred were approximately $0.2 million.
The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million in aggregate principal
amount of 6.25% 2025 Notes within 30 days. The net proceeds from this offering were used for general corporate purposes in accordance
with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 6.25% 2025 Notes have been
capitalized and were amortized over the term of the 6.25% 2025 Notes. On August 31, 2021, the 6.25% 2025 Notes were redeemed and are no
longer listed on the NYSE.
On December 14, 2018, the Company completed the
third refinancing of the Saratoga CLO (the “2013-1 Reset CLO Notes”). This refinancing, among other things, extended the Saratoga
CLO reinvestment period to January 2021, and extended its legal maturity to January 2030. A non-call period of January 2020 was also added.
In addition to and as part of the refinancing, the Saratoga CLO was also upsized from $300 million in assets to approximately $500 million.
As part of this refinancing and upsizing, the Company invested an additional $13.8 million in all of the newly issued subordinated notes
of the Saratoga CLO, and purchased $2.5 million in aggregate principal amount of the Class F-R-2 Notes tranche and $7.5 million in aggregate
principal amount of the Class G-R-2 Notes tranche at par. Concurrently, the existing $4.5 million of Class F notes were repaid.
On August 14, 2019, our wholly owned subsidiary,
Saratoga Investment Corp. SBIC II LP (“SBIC II LP”), also received an SBIC license from the SBA. SBIC II LP’s SBIC license
provides up to $175.0 million in additional long-term capital in the form of SBA debentures.
On June 24, 2020, the Company issued $37.5 million
in aggregate principal amount of our 7.25% fixed-rate notes due 2025 (the “7.25% 2025 Notes”) for net proceeds of $36.3 million
after deducting underwriting commissions of approximately $1.2 million. Offering costs incurred were approximately $0.3 million. On July
6, 2020, the underwriters exercised their option in full to purchase an additional $5.625 million in aggregate principal amount of its
7.25% unsecured notes due 2025. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately
$0.2 million. Interest on the 7.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate
of 7.25% per year. The 7.25% 2025 Notes mature on June 30, 2025 and commencing June 24, 2022, 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 for general corporate purposes in accordance with
our investment objective and strategies. Financing costs of $1.6 million related to the 7.25% 2025 Notes have been capitalized and are
being amortized over the term of the 7.25% 2025 Notes. As of May 31, 2022, the total 7.25% 2025 Notes outstanding was $43.1 million. The
7.25% 2025 Notes are listed on the NYSE under the trading symbol “SAK” with a par value of $25.00 per share.
On July 9, 2020, the Company issued $5.0 million
in aggregate principal amount of our 7.75% fixed-rate notes due in 2025 (the “7.75% Notes 2025”) for net proceeds of
$4.8 million after deducting underwriting commissions of approximately $0.2 million. Offering costs incurred were approximately $0.1 million.
Interest on the 7.75% Notes 2025 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per
year, beginning August 31, 2020. The 7.75% Notes 2025 mature on July 9, 2025 and may be redeemed in whole or in part at any time or from
time to time at our option, subject to a fee depending on the date of repayment. The net proceeds from the offering were used for general
corporate purposes in accordance with our investment objective and strategies. Financing costs of $0.3 million related to the 7.75% Notes
2025 have been capitalized and are being amortized over the term of the Notes. As of May 31, 2022, the total 7.25% 2025 Notes outstanding
was $5.0 million. The 7.75% Notes 2025 are not listed and has a par value of
$25.00 per share.
On December 29, 2020, the Company issued $5.0 million
in aggregate principal amount of our 6.25% fixed-rate notes due in 2027 (the “6.25% Notes 2027”). Offering costs incurred
were approximately $0.1 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November
30, at a rate of 6.25% per year. The 6.25% Notes 2027 mature on December 29, 2027 and may be redeemed in whole or in part at any time
or from time to time at our option on or after December 29, 2024. The net proceeds from the offering were used for general corporate purposes
in accordance with our investment objective and strategies. Financing costs of $0.1 million related to the 6.25% Notes 2027 have been
capitalized and are being amortized over the term of the 6.25% Notes 2027. The 6.25% 2027 Notes are not listed and have a par value of
$25.00 per share.
On
January 28, 2021, the Company issued $10.0 million in aggregate principal amount of our 6.25% fixed rate notes due in 2027 (the “Second
6.25% Notes 2027”) for net proceeds of $9.7 million after deducting underwriting commissions of approximately $0.3 million. Offering
costs incurred were approximately $0.0 million. Interest on the Second 6.25% Notes 2027 is paid quarterly in arrears on February 28,
May 31, August 31 and November 30, at a rate of 6.25% per year. The
Second 6.25% Notes 2027 mature on January 28, 2027 and commencing January 28, 2023, 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 for general corporate purposes in accordance with our investment
objective and strategies. Financing costs of $0.3 million related to the Second 6.25% Notes 2027 have been capitalized and are being
amortized over the term of the Notes. The Second 6.25% 2027 Notes are unlisted and have a par value of $25.00 per share.
On February 26, 2021, the Company completed the
fourth refinancing of the Saratoga CLO. This refinancing, among other things, extended the Saratoga CLO reinvestment period to April 2024,
and extended its legal maturity to April 2033. A non-call period ending February 2022 was also added. In addition, and as part of the
refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part of this refinancing
and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the Saratoga CLO, and
purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing $2.5 million
of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million CLO 2013-1 Warehouse 2 Loan were repaid. The Company also paid
$2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed from future
equity distributions.
On March 10, 2021, the Company issued $50.0 million
in aggregate principal amount of our 4.375% fixed-rate Notes due in 2026 (the “4.375% Notes 2026”) for net proceeds of $49.0
million after deducting underwriting commissions of approximately $1.0 million. Offering costs incurred were approximately $0.2 million. Interest
on the 4.375% Notes 2026 is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.375% per year, beginning August
28, 2021. The 4.375% Notes 2026 mature on February 28, 2026 and may be redeemed in whole or in part at any time on or after November 28,
2025 at par plus a “make-whole” premium, and thereafter at par. The net proceeds from the offering were used for general corporate
purposes in accordance with our investment objective and strategies. Financing costs of $1.2 million related to the 4.375% Notes
2026 have been capitalized and are being amortized over the term of the Notes. At August 31, 2021, the outstanding receivable of $2.6
million was paid in full.
On July 15, 2021, the Company issued an additional
$125.0 million in aggregate principal amount of the Company’s 4.375% Notes 2026 (the “Additional 4.375% 2026 Notes”)
for net proceeds for approximately $123.5 million, based on the public offering price of 101.00% of the aggregate principal amount of
the Additional 4.375% 2026 Notes, after deducting the underwriting discount of $2.5 million and the offering expenses payable by the Company.
The net proceeds from the offering were used redeem all of the outstanding 6.25% 2025 Notes (as described above), and for general corporate
purposes in accordance with our investment objective and strategies. The Additional 4.375% 2026 Notes were treated as a single series
with the existing 4.375% 2026 Notes under the indenture and had the same terms as the existing 4.375% 2026 Notes.
On July 30, 2021, we entered into an equity distribution
agreement with Ladenburg Thalmann & Co. Inc. and Compass Point Research and Trading, LLC (the “Agents”), through which
we may offer for sale, from time to time, up to $150.0 million of our common stock through the Agents, or to them, as principal for their
account. As of May 31, 2022, the Company sold 4,840,361 shares for gross proceeds of $124.0 million at an average price of $25.61 for
aggregate net proceeds of $122.4 million (net of transaction costs). During the three months ended May 31, 2022, there were no shares
sold pursuant to the equity distribution agreement with the Agents.
On August 9, 2021, the Company exchanged its existing
$17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021,
the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.
The Company has formed a wholly owned special purpose
entity, Saratoga Investment Funding II LLC, a Delaware limited liability company (“SIF II”), for the purpose of entering into
a $50.0 million senior secured revolving credit facility with Encina Lender Finance, LLC (the “Lender”), supported by loans
held by SIF II and pledged to the Lender under the credit facility (the “Encina Credit Facility). The Encina Credit Facility closed
on October 4, 2021. During the first two years following the closing date, SIF II may request an increase in the commitment amount under
the Encina Credit Facility to up to $75.0 million. The terms of the Encina Credit Facility require a minimum drawn amount of $12.5 million
at all times during the first six months following the closing date, which increases to the greater of $25.0 million or 50% of the commitment
amount in effect at any time thereafter. The term of the Encina Credit Facility is three years. Advances under the Encina Credit Facility
bear interest at a floating rate per annum equal to LIBOR plus 4.0%, with LIBOR having a floor of 0.75%, with customary provisions related
to the selection by the Lender and the Company of a replacement benchmark rate. Concurrently with the closing of the Encina Credit Facility,
all remaining amounts outstanding on the Company’s existing revolving credit facility with Madison Capital Funding, LLC were repaid and
the facility terminated.
On October 26, 2021, the Company and TJHA JV I
LLC (“TJHA”) entered into a Limited Liability Company Agreement (the “LLC Agreement”) to co-manage Saratoga Senior
Loan Fund I JV LLC (“SLF JV”). SLF JV is invested in Saratoga Investment Corp Senior Loan Fund 2021-1 Ltd (“SLF 2021”),
which is a wholly owned subsidiary of SLF JV. SLF 2021 was formed for the purpose of making investments in a diversified portfolio of
broadly syndicated first lien and second lien term loans or bonds in the primary and secondary markets.
The Company and TJHA have equal voting interest
on all material decisions with respect to SLF JV, including those involving its investment portfolio, and equal control of corporate governance.
No management fee is charged to SLF JV as control and management of SLF JV is shared equally.
The Company and TJHA have committed to provide
up to a combined $50.0 million of financing to SLF JV through cash contributions, with the Company providing $43.75 million and TJHA providing
$6.25 million, resulting in an 87.5% and 12.5% ownership between the two parties. The financing is issued in the form of an unsecured
note and equity. The unsecured note will pay a fixed rate of 10.0% per annum and is due and payable in full on June 15, 2023. As of May
31, 2022, the Company and TJHA’s investment in SLF JV consisted of an unsecured note of $13.1 million and $1.9 million, respectively;
and membership interest of $13.1 million and $1.9 million, respectively.
As of May 31, 2022, the Company earned approximately
$0.3 million of interest income related to SLF JV, which is included in interest income.
SLF JV’s investment in SLF 2021 is in the
form of an unsecured loan. The unsecured note will pay a floating rate of SOFR plus 7.00% per annum and is due and payable in full on
June 9, 2023. As of May 31, 2022, SLF JV’s investment in SLF 2021 had an aggregate fair value of approximately $19.8 million.
The Company has determined that SLF JV is an investment
company under ASC 946; however, in accordance with such guidance the Company will generally not consolidate its investment in a company
other than a wholly-owned investment company subsidiary. SLF JV is not a wholly-owned investment company subsidiary as the Company and
TJHA each have an equal 50% voting interest in SLF JV and thus neither party has a controlling financial interest. Furthermore, ASC 810
concludes that in a joint venture where both members have equal decision making authority, it is not appropriate for one member to consolidate
the joint venture since neither has control. Accordingly, the Company does not consolidate SLF JV.
Recent COVID-19 Developments
We have been closely monitoring, and will continue
to monitor, the impact of the COVID-19 pandemic (including new variants of COVID-19) and its impact on all aspects of our business, including
how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. Given the continued
fluidity of the pandemic, we cannot estimate the long-term impact of COVID-19 on our business, future results of operations, financial
position or cash flows at this time. Further, the operational and financial performance of the portfolio companies in which we make investments
may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We believe our portfolio companies
have taken, and continue to take, immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related
restrictions imposed by state and local governments and other private businesses, including developing liquidity plans supported by internal
cash reserves, and shareholder support. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused,
and are continuing to cause, business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand
for certain goods and services, reductions in business activity and financial transactions, supply chain disruptions, labor difficulties
and shortages, commodity inflation and elements of economic and financial market instability in the United States and globally. Such effects
will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter.
Critical Accounting Policies and Use of Estimates
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 Company’s 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 and estimates
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 or its liabilities are to be transferred at the measurement 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 Advisors, the audit committee of our board of directors and a third party independent
valuation firm. We use multiple techniques for determining fair value based on the nature of the investment and experience with those
types of investments and specific portfolio companies. The selections of the valuation techniques and the inputs and assumptions used
within those techniques often require subjective judgements and estimates. These techniques include market comparables, discounted cash
flows and enterprise value waterfalls. Fair value is best expressed as a range of values from which the Company determines a single best
estimate. The types of inputs and assumptions that may be considered in determining the range of values of our investments include the
nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis and
volatility in future interest rates, call and put features, the markets in which the portfolio company does business, comparison to publicly
traded companies, discounted cash flows 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:
| ● | 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 |
| ● | 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. We use a third-party independent valuation firm to value our investment in the subordinated notes of
Saratoga CLO and the Class F-2-R-3 Notes tranche of the Saratoga CLO every quarter. |
In addition, all our investments are subject to
the following valuation process:
| ● | 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 |
| ● | 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. |
Our investment in Saratoga CLO is carried at
fair value, which is based on a discounted cash flows 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 market comparables for equity
interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by Saratoga Investment Advisors
and recommended to our board of directors. Specifically, we use Intex cash flows, or an appropriate substitute, to form the basis for
the valuation of our investment in Saratoga CLO. The cash flows use a set of inputs including projected default rates, recovery rates,
reinvestment rates and prepayment rates in order to arrive at estimated valuations. The inputs 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 the valuation for our investment in Saratoga
CLO.
The SEC has adopted new Rule 2a-5 under the 1940
Act. This rule establishes requirements for determining fair value in good faith for purposes of the 1940 Act. We will comply with the
new rule’s valuation requirements on or before the SEC’s compliance date in September 2022.
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 management’s
judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and,
in management’s 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.
Payment-in-Kind Interest
The Company holds debt and preferred equity 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.
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
or preferred equity investments may provide for a portion or all of the interest to be PIK. To the extent interest is PIK, 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 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 or common 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 with its reinvestment period extended to October 2016. On November 15, 2016, we completed a second refinancing of the
Saratoga CLO with its reinvestment period extended to October 2018.
On December 14, 2018, we completed a third refinancing
and upsize of the Saratoga CLO. The third Saratoga CLO refinancing, among other things, extended its reinvestment period to January 2021,
and extended its legal maturity date to January 2030. A non-call period of January 2020 was also added. Following this refinancing, the
Saratoga CLO portfolio increased from approximately $300.0 million in aggregate principal amount to approximately $500.0 million of predominantly
senior secured first lien term loans. In addition to refinancing its liabilities, we invested an additional $13.8 million in all of the
newly issued subordinated notes of the Saratoga CLO and also purchased $2.5 million in aggregate principal amount of the Class F-R-2 and
$7.5 million in aggregate principal amount of the Class G-R-2 notes tranches at par, with a coupon of 3M USD LIBOR plus 8.75% and 3M USD
LIBOR plus 10.00%, respectively. As part of this refinancing, we also redeemed our existing $4.5 million in aggregate amount of the Class
F notes tranche at par and the $20.0 million CLO 2013-1 Warehouse Loan was repaid.
On February 11, 2020, the Company entered into
an unsecured loan agreement with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd. (“CLO 2013-1 Warehouse 2”), a wholly
owned subsidiary Saratoga CLO.
On February 26, 2021, the Company completed the
fourth refinancing of the Saratoga CLO. This fourth Saratoga CLO refinancing, among other things, extended the Saratoga CLO reinvestment
period to April 2024, and extended its legal maturity to April 2033. The non-call period was extended to February 2022. In addition, and
as part of the refinancing, the Saratoga CLO has also been upsized from $500 million in assets to approximately $650 million. As part
of this refinancing and upsizing, the Company invested an additional $14.0 million in all of the newly issued subordinated notes of the
Saratoga CLO, and purchased $17.9 million in aggregate principal amount of the Class F-R-3 Notes tranche at par. Concurrently, the existing
$2.5 million of Class F-R-2 Notes, $7.5 million of Class G-R-2 Notes and $25.0 million of the CLO 2013-1 Warehouse 2 Loan were repaid.
The Company also paid $2.6 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO, to be reimbursed
from future equity distributions. At August 31, 2021, the outstanding receivable of $2.6 million was repaid in full.
On August 9, 2021, the Company exchanged its existing
$17.9 million Class F-R-3 Notes for $8.5 million Class F-1-R-3 Notes and $9.4 million Class F-2-R-3 Notes at par. On August 11, 2021,
the Company sold its Class F-1-R-3 Notes to third parties, resulting in a realized loss of $0.1 million.
The Saratoga CLO remains effectively 100% owned
and managed by Saratoga Investment Corp. We receive a base management fee of 0.10% per annum and a subordinated management fee of 0.40%
per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the extent of available proceeds. Prior
to the second refinancing and the issuance of the 2013-1 Amended CLO Notes, we received a base management fee of 0.25% per annum and a
subordinated management fee of 0.25% per annum of the outstanding principal amount of Saratoga CLO’s assets, paid quarterly to the
extent of available proceeds.
Following the third refinancing and the issuance
of the 2013-1 Reset CLO Notes on December 14, 2018, we are no longer 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%.
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 (“ASC 325-40”), 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 directors who are not “interested
persons” (as defined in Section 2(a)(19) of the 1940 Act) of the Company (“independent directors”) and administrator
expenses, including our allocable portion of our administrator’s overhead. Our investment advisory and management fees compensate
our Manager 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:
| ● | calculating our net asset value (including the cost and expenses
of any independent valuation firm); |
| ● | expenses incurred by our Manager 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; |
| ● | expenses incurred by our Manager payable for travel and due
diligence on our prospective portfolio companies; |
| ● | interest payable on debt, if any, incurred to finance our
investments; |
| ● | offerings of our common stock and other securities; |
| ● | investment advisory and management fees; |
| ● | fees payable to third parties, including agents, consultants
or other advisers, relating to, or associated with, evaluating and making investments; |
| ● | transfer agent and custodial fees; |
| ● | federal and state registration fees; |
| ● | all costs of registration and listing our common stock on
any securities exchange; |
| ● | federal, state and local taxes; |
| ● | independent directors’ fees and expenses; |
| ● | costs of preparing and filing reports or other documents
required by governmental bodies (including the U.S. Securities and Exchange Commission (“SEC”) and the SBA); |
| ● | costs of any reports, proxy statements or other notices to
common stockholders including printing costs; |
| ● | our fidelity bond, directors and officers errors and omissions
liability insurance, and any other insurance premiums; |
| ● | direct costs and expenses of administration, including printing,
mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and |
| ● | 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 administrator’s 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)). |
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:
| ● | 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. |
| ● | 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 on each investment in the Company’s portfolio, less the aggregate amount of capital gains incentive fees
paid to the investment adviser through such date. |
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:
| ● | 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. |
| ● | 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%. |
| ● | 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. |
Capital Gains Incentive Fee
The Company records an expense accrual relating
to the capital gains incentive fee payable by the Company to its Manager 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 Manager if the Company were to
liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s Manager 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.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference
Rate Reform (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to
contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company has
agreements that have LIBOR as a reference rate with certain portfolio companies and under the Encina Credit Facility. Many of these agreements
(including the credit agreements relating to the Encina Credit Facility) include an alternative successor rate or language for choosing
an alternative successor rate when LIBOR reference is no longer considered to be appropriate. With respect to other agreements, the Company
intends to work with its portfolio companies to modify agreements to choose an alternative successor rate. Contract modifications are
required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of
existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022. Management does not believe this optional
guidance has a material impact on the Company’s consolidated financial statements and disclosures.
Portfolio and Investment Activity
Investment Portfolio Overview
| |
May 31,
2022 | |
|
February 28,
2022 |
|
| |
($ in millions) |
|
Number of investments(1) | |
| 103 | |
|
| 94 | |
Number of portfolio companies(2) | |
| 47 | |
|
| 45 | |
Average investment per portfolio company(2) | |
$ | 18.1 | |
|
$ | 17.3 | |
Average investment size(1) | |
$ | 8.5 | |
|
$ | 8.4 | |
Weighted average maturity(3) | |
| 2.9 yrs | |
|
| 2.9 yrs | |
Number of industries(5) | |
| 38 | |
|
| 38 | |
Non-performing or delinquent investments (fair value) | |
$ | 10.1 | |
|
$ | - | |
Fixed rate debt (% of interest earning portfolio)(3) | |
$ | 11.8(1.5%) | |
|
$ | 16.9(2.5%) |
Fixed rate debt (weighted average current coupon)(3) | |
| 9.5% | |
|
| 10.0% | |
Floating rate debt (% of interest earning portfolio)(3) | |
$ | 757.1(98.5%) | |
|
$ | 671.2(97.5%) | |
Floating rate debt (weighted average current spread over LIBOR)(3)(4) | |
| 7.0% | |
|
| 7.1% | |
(1) |
Excludes our investment in the subordinated notes of Saratoga CLO. |
(2) |
Excludes our investment in the subordinated notes of Saratoga CLO and Class F-R-3 Note tranche, as well as the unsecured notes and equity interests in the SLF JV. |
(3) |
Excludes our investment in the subordinated notes of Saratoga CLO and equity interests, as well as the unsecured notes and equity interests in the SLF JV. |
(4) |
Calculation uses either 1-month or 3-month LIBOR, depending on the contractual terms, and after factoring in any existing LIBOR floors. |
| (5) | Our investment in the subordinated notes of Saratoga CLO
and Class F-R-3 Note tranche, as well as the unsecured notes and equity interests in the SLF JV are included in Structured Finance Securities
industry. |
During the three months ended May 31, 2022,
we invested $97.2 million in new or existing portfolio companies and had $10.1 million in aggregate amount of exits and repayments
resulting in net investment of $87.1 million for the period. During the three months ended May 31, 2021, we invested $119.2 million in
new or existing portfolio companies and had $14.9 million in aggregate amount of exits and repayments resulting in net investment of $104.3
million for the period.
Portfolio Composition
Our portfolio composition at May 31, 2022 and February 28, 2022 at
fair value was as follows:
| |
May 31, 2022 | | |
February 28, 2022 | |
| |
Percentage of Total Portfolio | | |
Weighted Average Current Yield | | |
Percentage of Total Portfolio | | |
Weighted Average Current Yield | |
First lien term loans | |
| 80.3 | % | |
| 8.6 | % | |
| 77.3 | % | |
| 8.3 | % |
Second lien term loans | |
| 4.3 | | |
| 7.0 | | |
| 5.4 | | |
| 11.1 | |
Unsecured term loans | |
| 1.8 | | |
| 9.7 | | |
| 1.9 | | |
| 9.7 | |
Structured finance securities | |
| 3.7 | | |
| 8.0 | | |
| 4.7 | | |
| 10.5 | |
Equity interests | |
| 9.9 | | |
| - | | |
| 10.7 | | |
| - | |
Total | |
| 100.0 | % | |
| 7.7 | % | |
| 100.0 | % | |
| 7.7 | % |
At May 31, 2022, our investment in the subordinated
notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $24.1 million and constituted 2.7% of our portfolio.
This investment constitutes a first loss position in a portfolio that, as of May 31, 2022 and February 28, 2022, was composed of
$647.3 million and $660.2 million, respectively, in aggregate principal amount of primarily senior secured first lien term loans. In addition,
as of May 31, 2022, we also own $9.4 million in aggregate principal of the F-2-R-3 Notes in the Saratoga CLO, which only rank senior to
the subordinated notes.
This investment is subject to unique risks. (See
Part 1. Item 1A. Risk Factors—“Our 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, 2022).
We do not consolidate the Saratoga CLO portfolio
in our consolidated financial statements. Accordingly, the metrics below do not include the underlying Saratoga CLO portfolio investments.
However, at May 31, 2022, $593.2 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. At February 28, 2022, $630.3 million or 98.7% of the Saratoga CLO portfolio investments
in terms of market value had a CMR color rating of green or yellow and four Saratoga CLO portfolio investments were in default with a
fair value of $2.8 million. For more information relating to the Saratoga CLO, see the audited financial statements for Saratoga in our
Annual Report on Form 10-K for the fiscal year ended February 28, 2022.
Saratoga Investment Advisors normally grades all
of our investments using a credit and monitoring rating system (“CMR”). The CMR consists of a single component: a color rating.
The color rating is based on several criteria, including financial and operating strength, probability of default, and restructuring risk.
The color ratings are characterized as follows: (Green)—performing credit; (Yellow)—underperforming credit; (Red)—in
principal payment default and/or expected loss of principal.
Portfolio
CMR distribution
The
CMR distribution for our investments at May 31, 2022 and February 28, 2022 was as follows:
Saratoga
Investment Corp.
| |
May 31, 2022 | | |
February 28, 2022 | |
Color Score | |
Investments at Fair Value | | |
Percentage of Total Portfolio | | |
Investments at Fair Value | | |
Percentage of Total Portfolio | |
| |
($ in thousands) | |
Green | |
$ | 743,116 | | |
| 83.1 | % | |
$ | 690,672 | | |
| 84.5 | % |
Yellow | |
| 38,888 | | |
| 4.3 | | |
| 10,593 | | |
| 1.3 | |
Red | |
| - | | |
| 0.0 | | |
| - | | |
| 0.0 | |
N/A(1) | |
| 112,529 | | |
| 12.6 | | |
| 116,302 | | |
| 14.2 | |
Total | |
$ | 894,533 | | |
| 100.0 | % | |
$ | 817,567 | | |
| 100.0 | % |
(1) | Comprised
of our investment in the subordinated notes of Saratoga CLO and equity interests. |
The
change in reserve from $0.0 million as of February 28, 2022 to $0.7 million as of May 31, 2022 was related to the non-accrual of interest
income related to the Knowland Group.
The
CMR distribution of Saratoga CLO investments at May 31, 2022 and February 28, 2022 was as follows:
Saratoga
CLO
| |
May 31, 2022 | | |
February 28, 2022 | |
Color Score | |
Investments at Fair Value | | |
Percentage of Total Portfolio | | |
Investments at Fair Value | | |
Percentage of Total Portfolio | |
| |
($ in thousands) | |
Green | |
$ | 568,023 | | |
| 94.5 | % | |
$ | 595,324 | | |
| 93.2 | % |
Yellow | |
| 25,164 | | |
| 4.2 | | |
| 34,983 | | |
| 5.5 | |
Red | |
| 7,739 | | |
| 1.3 | | |
| 8,622 | | |
| 1.3 | |
N/A(1) | |
| - | | |
| 0.0 | | |
| 34 | | |
| 0.0 | |
Total | |
$ | 600,926 | | |
| 100.0 | % | |
$ | 638,963 | | |
| 100.0 | % |
(1) | Comprised
of Saratoga CLO’s equity interests. |
Portfolio
composition by industry grouping at fair value
The
following table shows our portfolio composition by industry grouping at fair value at May 31, 2022 and February 28, 2022:
Saratoga
Investment Corp.
| |
May 31, 2022 | | |
February 28, 2022 | |
| |
Investments At Fair Value | | |
Percentage of Total Portfolio | | |
Investments At Fair Value | | |
Percentage of Total Portfolio | |
| |
($ in thousands) | |
Healthcare Software | |
$ | 90,008 | | |
| 10.1 | % | |
$ | 90,126 | | |
| 11.0 | % |
IT Services | |
| 82,743 | | |
| 9.1 | | |
| 80,804 | | |
| 9.9 | |
Dental Practice Management Software | |
| 58,995 | | |
| 6.5 | | |
| 35,038 | | |
| 4.3 | |
Real Estate Services | |
| 53,399 | | |
| 6.0 | | |
| 53,506 | | |
| 6.6 | |
Consumer Services | |
| 44,522 | | |
| 5.0 | | |
| 38,234 | | |
| 4.7 | |
Healthcare Services | |
| 38,237 | | |
| 4.3 | | |
| 42,054 | | |
| 5.1 | |
Education Services | |
| 35,511 | | |
| 4.0 | | |
| 35,309 | | |
| 4.3 | |
Education Software | |
| 35,864 | | |
| 4.0 | | |
| 33,656 | | |
| 4.1 | |
HVAC Services and Sales | |
| 35,063 | | |
| 3.9 | | |
| 29,976 | | |
| 3.7 | |
Structured Finance Securities(1) | |
| 33,493 | | |
| 3.7 | | |
| 38,030 | | |
| 4.7 | |
Specialty Food Retailer | |
| 28,986 | | |
| 3.2 | | |
| 34,013 | | |
| 4.2 | |
Marketing Orchestration Software | |
| 28,705 | | |
| 3.2 | | |
| 28,777 | | |
| 3.5 | |
Sports Management | |
| 26,695 | | |
| 3.0 | | |
| 26,654 | | |
| 3.3 | |
Direct Selling Software | |
| 25,998 | | |
| 2.9 | | |
| - | | |
| - | |
Talent Acquisition Software | |
| 25,516 | | |
| 2.9 | | |
| 19,652 | | |
| 2.4 | |
Restaurant | |
| 24,721 | | |
| 2.8 | | |
| 15,686 | | |
| 1.9 | |
Financial Services | |
| 24,560 | | |
| 2.7 | | |
| 23,540 | | |
| 2.9 | |
Hospitality/Hotel | |
| 22,000 | | |
| 2.5 | | |
| 19,925 | | |
| 2.4 | |
Legal Software | |
| 21,194 | | |
| 2.4 | | |
| 7,425 | | |
| 0.9 | |
Investment Fund | |
| 19,770 | | |
| 2.2 | | |
| 25,140 | | |
| 3.1 | |
Mentoring Software | |
| 18,310 | | |
| 2.0 | | |
| 18,321 | | |
| 2.2 | |
Marketing Services | |
| 17,131 | | |
| 1.9 | | |
| 17,327 | | |
| 2.1 | |
Payroll Services | |
| 16,488 | | |
| 1.8 | | |
| 17,000 | | |
| 2.1 | |
Employee Collaboration Software | |
| 11,524 | | |
| 1.3 | | |
| 10,000 | | |
| 1.2 | |
Insurance Software | |
| 11,197 | | |
| 1.3 | | |
| 10,921 | | |
| 1.3 | |
Non-profit Services | |
| 9,940 | | |
| 1.1 | | |
| 10,039 | | |
| 1.2 | |
Waste Services | |
| 8,994 | | |
| 1.0 | | |
| 9,000 | | |
| 1.1 | |
Industrial Products | |
| 8,683 | | |
| 1.0 | | |
| 8,427 | | |
| 1.0 | |
Dental Practice Management | |
| 8,658 | | |
| 1.0 | | |
| 8,403 | | |
| 1.0 | |
Financial Services Software | |
| 7,227 | | |
| 0.8 | | |
| 5,940 | | |
| 0.7 | |
Field Service Management | |
| 6,925 | | |
| 0.8 | | |
| 6,981 | | |
| 0.9 | |
Office Supplies | |
| 3,760 | | |
| 0.4 | | |
| 3,726 | | |
| 0.5 | |
Corporate Education Software | |
| 3,448 | | |
| 0.4 | | |
| 3,306 | | |
| 0.4 | |
Cyber Security | |
| 2,375 | | |
| 0.3 | | |
| 1,636 | | |
| 0.2 | |
Staffing Services | |
| 2,060 | | |
| 0.2 | | |
| 1,912 | | |
| 0.2 | |
Consumer Products | |
| 699 | | |
| 0.1 | | |
| 693 | | |
| 0.1 | |
Healthcare Products Manufacturing | |
| 634 | | |
| 0.1 | | |
| 714 | | |
| 0.1 | |
Facilities Maintenance | |
| 500 | | |
| 0.1 | | |
| 482 | | |
| 0.1 | |
Healthcare Supply | |
| - | | |
| - | | |
| 5,194 | | |
| 0.6 | |
Total | |
$ | 894,533 | | |
| 100.0 | % | |
$ | 817,567 | | |
| 100.0 | % |
(1) | As
of May 31, 2022 and February 28, 2022, comprised of our investment in the subordinated notes and F-2-R-3 Notes of Saratoga CLO, as well
as the unsecured notes and equity interests in the SLF JV. |
The
following table shows Saratoga CLO’s portfolio composition by industry grouping at fair value at May 31, 2022 and February 28,
2022:
Saratoga
CLO
| |
May 31, 2022 | | |
February 28, 2022 | |
| |
Investments at Fair Value | | |
Percentage of Total Portfolio | | |
Investments at Fair Value | | |
Percentage of Total Portfolio | |
| |
($ in thousands) | |
Banking, Finance, Insurance & Real Estate | |
$ | 113,563 | | |
| 19.0 | % | |
$ | 123,124 | | |
| 19.4 | % |
Services: Business | |
| 60,341 | | |
| 10.0 | | |
| 69,491 | | |
| 10.9 | |
High Tech Industries | |
| 59,399 | | |
| 9.9 | | |
| 60,048 | | |
| 9.4 | |
Services: Consumer | |
| 41,306 | | |
| 7.0 | | |
| 41,393 | | |
| 6.5 | |
Healthcare & Pharmaceuticals | |
| 39,275 | | |
| 6.5 | | |
| 43,136 | | |
| 6.9 | |
Telecommunications | |
| 25,150 | | |
| 4.3 | | |
| 27,058 | | |
| 4.2 | |
Consumer goods: Durable | |
| 24,427 | | |
| 4.1 | | |
| 21,085 | | |
| 3.2 | |
Automotive | |
| 23,881 | | |
| 4.0 | | |
| 24,207 | | |
| 3.7 | |
Beverage, Food & Tobacco | |
| 20,957 | | |
| 3.4 | | |
| 22,086 | | |
| 3.4 | |
Chemicals, Plastics, & Rubber | |
| 19,197 | | |
| 3.1 | | |
| 22,669 | | |
| 3.5 | |
Media: Advertising, Printing & Publishing | |
| 18,541 | | |
| 3.1 | | |
| 19,660 | | |
| 3.1 | |
Retail | |
| 17,997 | | |
| 2.9 | | |
| 16,050 | | |
| 2.5 | |
Containers, Packaging & Glass | |
| 15,056 | | |
| 2.4 | | |
| 15,253 | | |
| 2.4 | |
Hotel, Gaming & Leisure | |
| 14,748 | | |
| 2.5 | | |
| 16,572 | | |
| 2.6 | |
Consumer goods: Non-durable | |
| 13,477 | | |
| 2.2 | | |
| 14,359 | | |
| 2.2 | |
Aerospace & Defense | |
| 12,791 | | |
| 2.1 | | |
| 14,369 | | |
| 2.2 | |
Media: Broadcasting & Subscription | |
| 12,258 | | |
| 2.0 | | |
| 11,539 | | |
| 1.8 | |
Construction & Building | |
| 10,736 | | |
| 1.8 | | |
| 11,102 | | |
| 1.7 | |
Capital Equipment | |
| 9,770 | | |
| 1.6 | | |
| 10,062 | | |
| 1.6 | |
Media: Diversified & Production | |
| 8,732 | | |
| 1.5 | | |
| 9,203 | | |
| 1.4 | |
Utilities: Oil & Gas | |
| 7,960 | | |
| 1.3 | | |
| 8,095 | | |
| 1.3 | |
Metals & Mining | |
| 6,658 | | |
| 1.1 | | |
| 6,846 | | |
| 1.1 | |
Forest Products & Paper | |
| 5,597 | | |
| 0.9 | | |
| 9,367 | | |
| 1.5 | |
Transportation: Consumer | |
| 4,756 | | |
| 0.8 | | |
| 4,891 | | |
| 0.8 | |
Wholesale | |
| 3,983 | | |
| 0.7 | | |
| 4,155 | | |
| 0.7 | |
Transportation: Cargo | |
| 3,492 | | |
| 0.6 | | |
| 3,752 | | |
| 0.6 | |
Energy: Electricity | |
| 3,409 | | |
| 0.6 | | |
| 3,660 | | |
| 0.6 | |
Utilities: Electric | |
| 2,306 | | |
| 0.4 | | |
| 4,026 | | |
| 0.6 | |
Environmental Industries | |
| 996 | | |
| 0.2 | | |
| 1,550 | | |
| 0.2 | |
Energy: Oil & Gas | |
| 167 | | |
| 0.0 | | |
| 155 | | |
| 0.0 | |
Total | |
$ | 600,926 | | |
| 100.0 | % | |
$ | 638,963 | | |
| 100.0 | % |
Portfolio
composition by geographic location at fair value
The
following table shows our portfolio composition by geographic location at fair value at May 31, 2022 and February 28, 2022. The geographic
composition is determined by the location of the corporate headquarters of the portfolio company.
| |
May 31, 2022 | | |
February 28, 2022 | |
| |
Investments at Fair Value | | |
Percentage of Total Portfolio | | |
Investments at Fair Value | | |
Percentage of Total Portfolio | |
| |
($ in thousands) | |
Southeast | |
$ | 267,304 | | |
| 29.9 | % | |
$ | 257,199 | | |
| 31.5 | % |
West | |
| 213,499 | | |
| 23.9 | | |
| 183,643 | | |
| 22.5 | |
Midwest | |
| 155,510 | | |
| 17.4 | | |
| 160,718 | | |
| 19.7 | |
Southwest | |
| 103,875 | | |
| 11.6 | | |
| 62,475 | | |
| 7.6 | |
Northeast | |
| 93,409 | | |
| 10.4 | | |
| 85,414 | | |
| 10.4 | |
Northwest | |
| 2,375 | | |
| 0.3 | | |
| 1,636 | | |
| 0.2 | |
Other(1) | |
| 58,561 | | |
| 6.5 | | |
| 66,482 | | |
| 8.1 | |
Total | |
$ | 894,533 | | |
| 100.0 | % | |
$ | 817,567 | | |
| 100.0 | % |
(1) | Comprised
of our investment in the subordinated notes and F-2-R-3 Notes of Saratoga CLO, as well as the unsecured notes and equity interests in
the SLF JV. |
Results
of operations
Operating
results for the three months ended May 31, 2022 and May 31, 2021 was as follows:
| |
For the three months
ended | |
| |
May 31,
2022 | | |
May 31,
2021 | |
| |
($ in thousands) | |
Total investment income | |
$ | 18,679 | | |
$ | 16,816 | |
Total operating expenses | |
| 10,703 | | |
| 14,260 | |
Net investment income | |
| 7,976 | | |
| 2,556 | |
Net realized gain (loss) from investments | |
| 163 | | |
| 1,910 | |
Income tax (provision) benefit from realized gain on investments | |
| 69 | | |
| - | |
Net change in unrealized appreciation (depreciation) on investments | |
| (9,333 | ) | |
| 16,813 | |
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments | |
| (362 | ) | |
| (230 | ) |
Net increase (decrease) in net assets resulting from operations | |
$ | (1,487 | ) | |
$ | 21,049 | |
Investment income
The composition of our investment income for three months ended May
31, 2022 and May 31, 2021 was as follows:
| |
For the three months
ended | |
| |
May 31,
2022 | | |
May 31,
2021 | |
| |
($ in thousands) | |
Interest from investments | |
$ | 16,606 | | |
$ | 13,687 | |
Interest from cash and cash equivalents | |
| - | | |
| - | |
Management fee income | |
| 816 | | |
| 818 | |
Dividend Income | |
| 300 | | |
| 399 | |
Structuring and advisory fee income | |
| 853 | | |
| 1,302 | |
Other income | |
| 104 | | |
| 610 | |
Total investment income | |
$ | 18,679 | | |
$ | 16,816 | |
For
the three months ended May 31, 2022, total investment income increased $1.9 million, or 11.1%, to $18.7 million from $16.8 million for
the three months ended May 31, 2021. Interest income from investments increased $2.9 million, or 21.3%, to $16.6 million for the three
months ended May 31, 2022 from $13.7 million for the three months ended May 31, 2021. Interest income from investment increased due to
the increase of $216.8 million, or 32.0%, in total investments at May 31, 2022 from $677.9 million at May 31, 2021, partially offset
by (i) the reduction in LIBOR and interest spreads during this same period and (ii) the increase in equity positions that are not interest-bearing.
At May 31, 2022, the weighted average current yield on investments was 7.7%, down from 8.6% at May 31, 2021, which partially offset the
increase in interest income due to the increased investments.
For
the three months ended May 31, 2022 and May 31, 2021, total PIK income was $0.2 million and $0.3 million, respectively.
Management
fee income reflects the fee income received for managing the Saratoga CLO. For the three months ended May 31, 2022 and May 31, 2021,
total management fee income was $0.8 million and $0.8 million, respectively.
For
the three months ended May 31, 2022 and May 31, 2021, total dividend income was $0.3 million and $0.4 million, respectively. Dividends
received is recorded in the consolidated statements of operations when earned, and the decrease primarily reflects dividend income received
on various preferred equity investments last year that were not received this year.
For
the three months ended May 31, 2022 and May 31, 2021, total structuring and advisory fee income was $0.9 million and $1.3 million, respectively.
Structuring and advisory fee income represents fee income earned and received performing certain investment and advisory activities during
the closing of new investments.
For
the three months ended May 31, 2022 and May 31, 2021, other income was $0.1 million and $0.6 million, respectively. Other income includes
origination fees and prepayment income fees and is recorded in the consolidated statements of operations when earned. The decrease was
driven primarily by prepayment penalties earned from certain redemptions in the prior year that did not recur this year.
Operating
expenses
The
composition of our operating expenses for the three months ended May 31, 2022 and May 31, 2021 was as follows:
| |
For the three
months ended | |
| |
May 31,
2022 | | |
May 31,
2021 | |
| |
($ in thousands) | |
Interest and debt financing expenses | |
$ | 6,872 | | |
$ | 4,341 | |
Base management fees | |
| 3,802 | | |
| 2,759 | |
Incentive management fees expense (benefit) | |
| (1,903 | ) | |
| 5,263 | |
Professional fees | |
| 417 | | |
| 507 | |
Administrator expenses | |
| 750 | | |
| 694 | |
Insurance | |
| 87 | | |
| 86 | |
Directors fees and expenses | |
| 110 | | |
| 92 | |
General & administrative and other expenses | |
| 667 | | |
| 491 | |
Income tax expense (benefit) | |
| (99 | ) | |
| 28 | |
Total operating expenses | |
$ | 10,703 | | |
$ | 14,260 | |
For
the three months ended May 31, 2022, total operating expenses decreased $3.5 million, or 24.7%, compared to the three months ended
May 31, 2021.
For
the three months ended May 31, 2022, interest and debt financing expenses increased $2.5 million, or 58.3%, compared to the three months
ended May 31, 2021. The increase is primarily attributable to an increase in average outstanding debt from $286.2 million for the three
months ended May 31, 2021 to $591.3 million for the three months ended May 31, 2022, primarily reflecting (i) the issuance of the 4.375%
2026 Notes and the 4.35% 2027 Notes during the year ended February 28, 2022, and (ii) the issuance of the 6.00% 2027 Notes during the
three months ended May 31, 2022.
For
the three months ended May 31, 2022 and May 31, 2021, the weighted average interest rate on our outstanding indebtedness was 4.06% and
5.27%, respectively. The decrease in weighted average interest rate was primarily driven by the issuance of the lower-rate 4.375% 2026
Notes and 4.35% 2026 Notes, the redemption of the 6.25% 2025 Notes, and the issuance of lower cost SBA debentures over the past year.
As
of May 31, 2022 and February 28, 2022, the SBA debentures represented 33.3% and 36.2% of overall debt, respectively.
For
the three months ended May 31, 2022, base management fees increased $1.0 million, or 37.8%, from $2.8 million to $3.8 million compared
to the three months ended May 31, 2021. The increase in base management fees results from the 25.8% increase in the average value of
our total assets, less cash and cash equivalents, from $625.5 million for the three months ended May 31, 2021 to $862.0 million for
the three months ended May 31, 2022.
For
the three months ended May 31, 2022, incentive management fees decreased $7.1 million, or 135.5%, compared to the three months ended
May 31, 2021. The incentive fee on income decreased from $1.6 million for the three months ended May 31, 2021 to $0.0 million for the
three months ended May 31, 2022, reflecting the Company’s net investment income being below the hurdle based on net asset value
for incentive fee purposes. The incentive fee on capital gains decreased from a $3.7 million expense for the three months ended May 31,
2021 to a $(1.8) million benefit for the three months ended May 31, 2022, both reflecting the incentive fee income on net unrealized
appreciation and depreciation recognized during both these periods.
For
the three months ended May 31, 2022, professional fees decreased $0.1 million, or 17.7%, compared to the three months ended May 31,
2021. This decrease primarily reflects optimization across accounting, legal and consulting fees in connection with an increase in our
assets and the Company bringing certain services in-house.
For
the three months ended May 31, 2021, administrator expenses increased $0.05 million, or 8.1%, compared to the three months
ended May 31, 2021.
As
discussed above, the increase in interest and debt financing expenses for the three months ended May 31, 2022 compared to the three
months ended May 31, 2021 is primarily attributable to an increase in the average dollar amount of outstanding debt. During the
three months ended May 31, 2022 and May 31, 2021, the average borrowings outstanding under the Encina Credit Facility and the
Madison Credit Facility was $20.0 million and $4.1 million, respectively, and the average weighted average interest rate on
the outstanding borrowing under the Credit Facility was 4.86% and 6.37%, respectively. For the three months ended May 31, 2022 and
May 31, 2021, the average borrowings outstanding of SBA debentures was $214.9 million and $158.4 million, respectively.
For the three months ended May 31, 2022 and May 31, 2021, the weighted average interest rate on the outstanding borrowings
of the SBA debentures was 2.58% and 2.93%, respectively. During the three months ended May 31, 2022 and May 31, 2021, the average
dollar amount of our 6.25% fixed-rate 2025 Notes outstanding was $0.0 million and $60.0 million, respectively. During the three
months ended May 31, 2022 and May 31, 2021, the weighted average dollar amount of our 7.25% fixed-rate 2025 Notes outstanding was $43.1
million and $43.1 million, respectively.
During
the three months ended May 31, 2022 and May 31, 2021, the weighted average dollar amount of our 7.75% fixed-rate 2025 Notes outstanding
was $5.0 million and $5.0 million, respectively. During the three months ended May 31, 2022 and May 31, 2021, the average dollar
amount of our 6.25% fixed-rate 2027 Notes outstanding was $15.0 million and $15.0 million, respectively. During the three months
ended May 31, 2022 and May 31, 2021, the average dollar amount of our 4.375% fixed-rate 2026 Notes outstanding was $175.0 million
and $50.0 million, respectively. During the three months ended May 31, 2022 and May 31, 2021, the average dollar amount
of our 4.35% fixed-rate 2027 Notes outstanding was $75.0 million and $0.0 million, respectively. During the three months ended
May 31, 2022 and May 31, 2021, the average dollar amount of our 6.00% fixed-rate 2027 Notes outstanding was $43.8 million
and $0.0 million, respectively.
For
the three months ended May 31, 2022 and May 31, 2021, there were income tax expense (benefits) of $(0.1) million and $0.03 million, respectively.
This relates to net deferred federal and state income tax expense (benefit) with respect to operating gains and losses and income derived
from equity investments held in the taxable blockers, as well as current federal and state income taxes on those operating gains and
losses when realized.
Net
realized gains (losses) on sales of investments
For
the three months ended May 31, 2022, the Company had $10.1 million of sales, repayments, exits or restructurings resulting
in $0.2 million of net realized gains.
Three Months ended May 31, 2022 |
| |
| |
| | |
| | |
| |
Issuer | |
Asset Type | |
Gross Proceeds | | |
Cost | | |
Net Realized Gain (Loss) | |
Censis Technologies | |
Equity Interests | |
$ | - | | |
$ | - | | |
$ | 68,731 | |
Texas Teachers of Tomorrow, LLC | |
Equity Interests | |
| - | | |
| - | | |
| 24,977 | |
V Rental Holdings LLC | |
Equity Interests | |
| - | | |
| - | | |
| 68,800 | |
The
Company received escrow payments from the prior sales of its investments in Censis Technologies, Texas Teachers of Tomorrow, LLC and
V Rental Holdings, LLC.
For
the three months ended May 31, 2021, the Company had $14.9 million of sales, repayments, exits or restructurings resulting
in $1.9 million of net realized gains.
Three Months ended May 31, 2021
Issuer | |
Asset Type | |
Gross Proceeds | | |
Cost | | |
Net Realized Gain | |
V Rental Holdings LLC | |
Equity Interests | |
$ | 2,276,055 | | |
$ | 365,914 | | |
$ | 1,910,141 | |
The
$1.9 million of net realized gains was from the sales of the equity position in the Company’s V Rental Holdings LLC investment.
Net
change in unrealized appreciation (depreciation) on investments
For
the three months ended May 31, 2022, our investments had a net change in unrealized depreciation of $9.2 million versus a net
change in unrealized appreciation of $16.8 million for the three months ended May 31, 2021. The most significant cumulative
net change in unrealized appreciation (depreciation) for the three months ended May 31, 2022 were the following (dollars in thousands):
Three Months ended May 31, 2022 |
Issuer | |
Asset Type | |
Cost | | |
Fair Value | | |
Total Unrealized Appreciation (Depreciation) | | |
YTD Change in Unrealized Appreciation (Depreciation) | |
PDDS Buyer, LLC | |
First Lien Term Loan & Equity Interests | |
| 50,787 | | |
| 58,995 | | |
| 8,208 | | |
| 3,113 | |
Pepper Palace, Inc. | |
First Lien Term Loan & Equity Interests | |
| 34,458 | | |
| 28,986 | | |
| (5,472 | ) | |
| (4,954 | ) |
Saratoga Senior Loan Fund I JV, LLC | |
Equity Interests | |
| 13,125 | | |
| 6,645 | | |
| (6,480 | ) | |
| (5,371 | ) |
Saratoga Investment Corp. CLO 2013-1, Ltd. | |
Structured Finance Securities | |
$ | 30,974 | | |
$ | 24,118 | | |
$ | (6,856 | ) | |
$ | (3,238 | ) |
The
$4.3 million net change in unrealized appreciation in our investment in PDDS Buyer, LLC was primarily driven by overall strong company
performance and a recent acquisition.
The
$4.9 million net change in unrealized depreciation in our investment in Pepper Palace, Inc. was primarily driven by overall company performance.
The
$5.3 million net change in unrealized depreciation in our investment in Saratoga Senior Loan Fund I JV, LLC was primarily driven by the
decrease in market prices of the underlying CLO warehouse assets.
The
$3.2 million net change in unrealized depreciation in our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. was primarily driven
by the increase in discount rates, impact of LIBOR changes and overall market conditions.
The
most significant cumulative net change in unrealized appreciation for the three months ended May 31, 2021 were the following (dollars
in thousands):
Three Months ended May 31, 2021 |
Issuer | |
Asset Type | |
Cost | | |
Fair Value | | |
Total Unrealized Appreciation | | |
YTD Change in Unrealized Appreciation | |
Saratoga Investment Corp. CLO 2013-1, Ltd. | |
Structured Finance Securities | |
$ | 33,412 | | |
$ | 35,546 | | |
$ | 2,134 | | |
$ | 4,531 | |
Passageways, Inc. | |
First Lien Term Loan & Equity Interests | |
| 10,954 | | |
| 17,598 | | |
| 6,645 | | |
| 4,333 | |
Netreo Holdings, LLC | |
First Lien Term Loan & Equity Interests | |
| 23,792 | | |
| 33,604 | | |
| 9,812 | | |
| 4,224 | |
Schoox, Inc. | |
Equity Interests | |
| 1,050 | | |
| 3,108 | | |
| 2,058 | | |
| 2,058 | |
GreyHeller LLC | |
First Lien Term Loan & Equity Interests | |
| 14,032 | | |
| 19,131 | | |
| 5,098 | | |
| 1,996 | |
Top Gun Pressure Washing, LLC | |
First Lien Term Loan & Equity Interests | |
| 10,902 | | |
| 10,731 | | |
| (171 | ) | |
| 896 | |
Destiny Solutions Inc. | |
First Lien Term Loan & Equity Interests | |
| 45,709 | | |
| 47,395 | | |
| 1,686 | | |
| 659 | |
V Rental Holdings LLC | |
Equity Interests | |
| - | | |
| - | | |
| - | | |
| (1,843 | ) |
The
$4.5 million of unrealized appreciation in our investment in Saratoga Investment Corp. CLO 2013-1, Ltd. was primarily driven by improved
market performance, combined with outperformance achieved from the assets in the CLO.
The
$4.3 million net change in unrealized appreciation in our investment in Passageways, Inc. was primarily driven by growth, including a
potential upcoming acquisition.
The
$4.2 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was primarily driven by growth and improved
financial performance.
The
$2.1 million net change in unrealized appreciation in our investment in Schoox, Inc. was primarily driven by new customers and increased
customer demand.
The
$2.0 million net change in unrealized appreciation in our investment in GreyHeller LLC was primarily driven by improved financial performance.
The
$0.9 million net change in unrealized appreciation in our investment in Top Gun Pressure Washing, LLC was primarily driven by improved
financial performance.
The
$0.7 million net change in unrealized appreciation in our investment in Destiny Solutions Inc. was primarily driven by improved financial
performance and the potential of an upcoming acquisition.
The
$1.8 million net change in unrealized depreciation in our investment in Village Realty Holdings, LLC was primarily driven by the sale
of that investment, resulting in a reversal of previously recognized unrealized appreciation reclassified to realized gains.
Changes
in net assets resulting from operations
For
the three months ended May 31, 2022, we recorded a net decrease in net assets resulting from operations of $1.5 million. Based on 12,112,372
weighted average common shares outstanding as of May 31, 2022, our per share net decrease in net assets resulting from operations was
$0.12 for the three months ended May 31, 2022. For the three months ended May 31, 2021, we recorded a net increase in net assets
resulting from operations of $21.0 million. Based on 11,170,045 weighted average common shares outstanding as of May 31, 2021, our
per share net increase in net assets resulting from operations was $1.88 for the three months ended May 31, 2021.
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, the Encina Credit Facility, our continued access to the SBA debentures, future borrowings
and future offerings of debt and equity securities.
Although
we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings, including our dividend
reinvestment plan (“DRIP”) and our equity ATM program, 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 operating taxable income in order to satisfy the distribution
requirement applicable to RICs under the Code. In satisfying this distribution requirement, in accordance with certain applicable provisions
of the Code and the Treasury regulations and a revenue procedure issued by the Internal Revenue Service (“IRS”), 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 that the aggregate amount of cash to be distributed
to all stockholders must be at least 20% of the aggregate declared distribution. We may rely on the revenue procedure 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%,
reduced to 150.0% effective April 16, 2019 following the approval received from the board of directors, including a majority of our independent
directors, on April 16, 2018. This requirement limits the amount that we may borrow. Our asset coverage ratio, as defined in the 1940
Act, was 179.3% as of May 31, 2022 and 209.2% as of February 28, 2022. 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, to pay dividends 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.
Due
to the diverse capital sources available to us at this time, we believe we have adequate liquidity to support our near-term capital requirements.
As the impact of COVID-19 continues to evolve, we will continually evaluate our overall liquidity position and take proactive steps to
maintain that position based on the current circumstances. This “Financial Condition, Liquidity and Capital Resources” section
should be read in conjunction with “Recent COVID-19 Developments” above, as well as with the notes of our consolidated financial
statements.
Madison
Revolving Credit Facility
The
senior secured revolving credit facility we entered into with Madison Capital Funding LLC (the “Madison Credit Facility”)
on June 30, 2010, was most recently amended on September 3, 2021 and then fully repaid and terminated on October 4, 2021.
Encina
Credit Facility
Below
is a summary of the terms of the senior secured revolving credit facility we entered into with Encina Lender Finance, LLC on October
4, 2021.
Commitment.
The Company entered into a senior secured revolving credit facility in the initial facility amount of $50.0 million (the “Facility
Amount”). The Company has the ability to request an increase in the Facility Amount during the first two years following the closing
date to up to $75.0 million. The commitment termination date is October 4, 2024.
Availability.
The Company can draw up to the lesser of (i) the Facility Amount and (ii) the Borrowing Base. The Borrowing Base is an amount equal to
(i) the difference of (A) the product of the applicable advance rate which varies from 50.0% to 75.0% depending on the type of loan asset
(Defaulted Loans being excluded in that they carry an advance rate of 0%) and the value, determined in accordance with the Encina Credit
Facility (the “Adjusted Borrowing Value”), of certain “eligible” loan assets pledged as security for the loan
(the “Borrowing Base Value”) and (B) the Excess Concentration Amount, as calculated in accordance with the Encina Credit
Facility, plus (ii) any amounts held in the Prefunding Account and, without duplication, Excess Cash held in the Collection Account,
less (iii) the product of (a) the amount of any undrawn funding commitments the Company has under any loan asset and (b) the Unfunded
Exposure Haircut Percentage, and less (iv) $100,000. Each loan asset held by the Company as of the date on which the Encina 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 and under certain circumstances, 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
Encina 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.
The
Encina Credit Facility requires certain minimum drawn amounts. For the period beginning on the closing date and ended April 4, 2022,
the minimum funding amount was $12.5 million. For the period beginning on April 5, 2022 through maturity, the minimum funding amount
is the greater of $25.0 million and 50% of the Facility Amount in effect from time to time.
Collateral.
The Encina Credit Facility is secured by assets of Saratoga Investment Funding II LLC (“SIF II”) and pledged to the lender
under the credit facility. SIF II is a wholly owned special purpose entity formed by the Company for the purpose of entering into the
Encina Credit Facility.
Interest
Rate and Fees. Under the Encina Credit Facility, funds are borrowed from or through certain lenders at the greater of the prevailing
LIBOR rate and 0.75%, plus an applicable margin of 4.00%. The Encina Credit Facility includes benchmark replacement provisions which
permit the Administrative Agent and the Borrower to select a replacement rate upon the unavailability of LIBOR. In addition, the Company
pays the lenders a commitment fee of 0.75% per year (or 0.50% if the ratio of advances outstanding to aggregate commitments is greater
than or equal to 50%) on the unused amount of the Encina Credit Facility for the duration of the term of the credit facility. Accrued
interest and commitment fees are payable monthly in arrears. The Company was also obligated to pay certain other fees to the lenders
in connection with the closing of the Encina Credit Facility.
Collateral
Tests. It is a condition precedent to any borrowing under the Encina Credit Facility that the principal amount outstanding under
the Encina Credit Facility, after giving effect to the proposed borrowings, not exceed the Borrowing Base (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”):
| o | 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 Encina Credit Facility, to accrued interest and commitment fees payable to the lenders under the Encina
Credit Facility for the last 6 payment periods must equal at least 175.0%. |
| o | 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 (in each case, subject to certain adjustments) to outstanding borrowings
under the Encina Credit Facility plus the Unfunded Exposure Amount must equal at least 200.0%. |
The
Encina Credit Facility also may require payment of outstanding borrowings or replacement of pledged loan assets upon the Company’s
breach of its representation and warranty that pledged loan assets included in the Borrowing Base are “eligible” loan assets.
Such ineligible collateral loans will be excluded from the calculation of the Borrowing Base and may lead to a Borrowing Base Deficiency,
which may be cured by effecting one or more (or any combination thereof) of the following actions: (A) deposit into or credit to the
collection account cash and eligible investments, (B) repay outstanding borrowings (together with certain costs and expenses), (C) sell
or substitute loan assets in accordance with the Encina Credit Facility, or (D) pledge additional loan assets as collateral. Compliance
with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.
Priority
of Payments. The priority of payments provisions of the Encina Credit Facility require, after payment of specified fees and expenses,
that collections of interest from the loan assets and, to the extent that these are insufficient, collections of principal 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.
Operating
Expenses. The priority of payments provision of the Encina Credit Facility provides for the payment of certain operating expenses
of the Company out of collections on interest and principal in accordance with the priority established in such provision. The operating
expenses payable pursuant to the priority of payment provisions is limited to $200,000 per annum.
Covenants;
Representations and Warranties; Events of Default. The Encina Credit Facility contains customary representations and warranties,
affirmative covenants, negative covenants and events of default. The Encina Credit Facility does not contain grace periods for breach
by the Company of any negative covenants or of certain of the affirmative covenants, including, without limitation, those related to
preservation of the existence and separateness of the Company. Other events of default under the Encina Credit Facility include, among
other things, the following:
| o | failure
of the Company to maintain an Interest Coverage Ratio of less than 175.0%; |
| o | failure
of the Company to maintain an Overcollateralization Ratio of less than 200.0%; |
| o | the
filing of certain ERISA or tax liens on assets of the Company or the Equityholder; |
| o | failure
by Specified Holders to collectively, directly or indirectly, own and control at least 51% of the outstanding equity interests of Saratoga
Investment Advisor, or (y) possess the right to elect (through contract, ownership of voting securities or otherwise) at all times a
majority of the board of directors (or similar governing body) of Saratoga Investment Advisor and to direct the management policies and
decisions of Saratoga Investment Advisor, or (ii) the dissolution, termination or liquidation in whole or in part, transfer or other
disposition, in each case, of all or substantially all of the assets of, Saratoga Investment Advisor; |
| o | 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 Encina Lender Finance appointed to replace such key person within 30 days; |
| o | 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 Encina
Lender Finance appointed within 30 days. |
Fees
and Expenses. The Company paid certain fees and reimbursed Encina Lender Finance, LLC for the aggregate amount of all documented,
out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred by Encina Lender Finance, LLC in connection
with the Encina Credit Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing.
These amounts totaled $1.4 million.
As
of May 31, 2022, we had $25.0 million outstanding borrowings under the Encina Credit Facility and $217.0 million of SBA- guaranteed debentures
outstanding (which are discussed below).
SBA-guaranteed
debentures
In
addition, we, through two wholly owned subsidiaries, sought and obtained licenses 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 and on August 14, 2019, our wholly owned subsidiary, Saratoga Investment
Corp. SBIC II LP, also received a license. 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 licenses allows our SBIC subsidiaries 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 previously limited 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. This maximum has been increased by SBA regulators for new licenses to $175.0 million of SBA debentures when it has at least
$87.5 million in regulatory capital. SBIC II LP’s SBIC license provides up to $175.0 million in additional long-term capital in
the form of SBA-guaranteed debentures. The SBIC LP and SBIC II LP are regulated by the SBA. As a result of the 2016 omnibus spending
bill signed into law in December 2015, the maximum amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding
was increased from $225.0 million to $350.0 million, subject to SBA approval. Our wholly owned SBIC subsidiaries are able to borrow funds
from the SBA against regulatory capital (which generally approximates equity capital in the respective SBIC) and is subject to customary
regulatory requirements, including, but not limited to, a periodic examination by the SBA. With this license approval, Saratoga can grow
its SBA relationship from $150.0 million to $325.0 million of committed capital.
We
received exemptive relief from the SEC to permit us to exclude the senior securities issued by of our SBIC subsidiaries from the definition
of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. This allows us increased flexibility
under the asset coverage requirement by permitting us to borrow up to $325.0 million more than we would otherwise be able to absent the
receipt of this exemptive relief. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into
law on March 23, 2018, our independent directors approved of our becoming subject to a reduced minimum asset coverage ratio of 150.0%
from 200% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. The 150% asset coverage ratio became effective on April 16, 2019.
As
of May 31, 2022, our SBIC LP subsidiary had $75.0 million in regulatory capital and $86.0 million in SBA-guaranteed debentures outstanding
and our SBIC II LP subsidiary had $87.5 million in regulatory capital and $131.0 million in SBA-guaranteed debentures outstanding.
Unsecured
notes
In
May 2013, the Company issued $48.3 million in aggregate principal amount of 7.50% fixed-rate notes due 2020 (the “2020 Notes”).
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 Inc. 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. Prior to the 2020 Notes
being redeemed in full, the Company had sold 539,725 bonds with a principal of $13.5 million at an average price of $25.31 for aggregate
net proceeds of $13.4 million (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 net proceeds from the offering were used to repay all of the outstanding
indebtedness under the 2020 Notes (as described above), and for general corporate purposes in accordance with our investment objective
and strategies. On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.5 million, respectively, in aggregate
principal amount of the $74.5 million in aggregate principal amount of the issued and outstanding 2023 Notes and are no longer listed
on the NYSE.
On August 28, 2018, the Company issued $40.0
million in aggregate principal amount of the 6.25% 2025 Notes for net proceeds of $38.7 million after deducting underwriting commissions
of approximately $1.3 million. Offering costs incurred were approximately $0.3 million. The issuance included the full exercise of the
underwriters’ option to purchase an additional $5.0 million in aggregate principal amount of 6.25% 2025 Notes within 30 days. The
net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing
costs of $1.6 million related to the 6.25% 2025 Notes have been capitalized and were amortized over the term of the 6.25% 2025 Notes.
On February 5, 2019, the Company issued an additional
$20.0 million in aggregate principal amount of the 6.25% 2025 Notes for net proceeds of $19.2 million after deducting underwriting commissions
of approximately $0.6 million and discount of $0.2 million. The additional 6.25% 2025 Notes were treated as a single series with the
existing 6.25% 2025 Notes under the indenture and had the same terms as the existing 6.25% 2025 Notes. Offering costs incurred were approximately
$0.2 million. The issuance included the full exercise of the underwriters’ option to purchase an additional $2.5 million in aggregate
principal amount of 6.25% 2025 Notes within 30 days. The net proceeds from this offering were used for general corporate purposes in
accordance with our investment objective and strategies. The financing costs and discount of $1.0 million related to the 6.25% 2025 Notes
have been capitalized and were amortized over the term of the 6.25% 2025 Notes.
On August 31, 2021, the Company redeemed $60.0
million in aggregate principal amount of the issued and outstanding 6.25% 2025 Notes at par. The 6.25% 2025 Notes were listed on the
NYSE under the trading symbol of “SAF” with a par value of $25.00 per share and have been delisted following the full redemption
on August 31, 2021.
On June 24, 2020, the Company issued $37.5 million
in aggregate principal amount of our 7.25% fixed-rate notes due 2025 (the “7.25% 2025 Notes”) for net proceeds of $36.3 million
after deducting underwriting commissions of approximately $1.2 million. Offering costs incurred were approximately $0.3 million. On July
6, 2020, the underwriters exercised their option in full to purchase an additional $5.625 million in aggregate principal amount of its
7.25% unsecured notes due 2025. Net proceeds to the Company were $5.4 million after deducting underwriting commissions of approximately
$0.2 million. Interest on the 7.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate
of 7.25% per year, beginning August 31, 2020. The 7.25% 2025 Notes mature on June 30, 2025 and commencing June 24, 2022, 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 for general corporate
purposes in accordance with our investment objective and strategies. Financing costs of $1.6 million related to the 7.25% 2025 Notes
have been capitalized and are being amortized over the term of the 7.25% 2025 Notes. The Company has received an investment grade private
rating of “BBB+” from Egan-Jones Ratings Company, an independent, unaffiliated rating agency. The 7.25% 2025 Notes are listed
on the NYSE under the trading symbol “SAK” with a par value of $25.00 per share.
At May 31, 2022, the total 7.25% 2025 Notes outstanding
was $43.1 million.
On July 9, 2020, the Company issued $5.0 million
in aggregate principal amount of our 7.75% fixed-rate Notes due in 2025 (the “7.75% 2025 Notes”) for net proceeds of $4.8
million after deducting underwriting commissions of approximately $0.2 million. Offering costs incurred were approximately $0.1 million.
Interest on the 7.75% Notes 2025 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 7.75% per
year, beginning August 31, 2020. The 7.75% Notes 2025 mature on July 9, 2025 and 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 for general corporate purposes in accordance with our investment
objective and strategies. Financing costs of $0.3 million related to the 7.75% Notes 2025 have been capitalized and are being amortized
over the term of the Notes. The 7.75% 2025 Notes are unlisted and have a par value of $25.00 per share.
At May 31, 2022, the total 7.75% 2025 Notes outstanding
was $5.0 million.
On December 29, 2020, the Company issued $5.0
million in aggregate principal amount of our 6.25% fixed-rate notes due in 2027 (the “6.25% Notes 2027”). Offering
costs incurred were approximately $0.1 million. Interest on the 6.25% Notes 2027 is paid quarterly in arrears on February 28,
May 31, August 31 and November 30, at a rate of 6.25% per year, beginning February 28, 2021. The 6.25% Notes 2027 mature on
December 29, 2027 and may be redeemed in whole or in part at any time or from time to time at our option, on or after December 29, 2024.
The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective and strategies.
Financing costs of $0.1 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the term of the
6.25% Notes 2027.
On January 28, 2021, the Company issued $10.0
million in aggregate principal amount of the 6.25% Notes 2027 for net proceeds of $9.7 million after deducting underwriting commissions
of approximately $0.3 million. Offering costs incurred were approximately $0.0 million. Interest on the 6.25% Notes 2027 is paid quarterly
in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year. The 6.25% Notes 2027 mature on January 28,
2027 and commencing January 28, 2023, may be redeemed in whole or in part at any time or from time to time at our option on or after
December 29, 2024. The net proceeds from the offering were used for general corporate purposes in accordance with our investment objective
and strategies. Financing costs of $0.3 million related to the 6.25% Notes 2027 have been capitalized and are being amortized over the
term of the 6.25% Notes 2027.
At May 31, 2022, the total 6.25% 2027 Notes outstanding
was $15.0 million.
On March 10, 2021, the Company issued $50.0 million
in aggregate principal amount of the 4.375% Notes 2026 for net proceeds of $49.0 million after deducting underwriting commissions of
approximately $1.0 million. Offering costs incurred were approximately $0.2 million. Interest on the 4.375% Notes 2026 is
paid semi-annually in arrears on February 28 and August 28, at a rate of 4.375% per year. The 4.375% Notes 2026 mature on February
28, 2026 and may be redeemed in whole or in part at any time on or after November 28, 2025 at par plus a “make-whole” premium,
and thereafter at par. The net proceeds from the offering were used for general corporate purposes in accordance with our investment
objective and strategies. Financing costs of $1.2 million related to the 4.375% Notes 2026 have been capitalized and are being amortized
over the term of the Notes.
On July 15, 2021, the Company issued an additional
$125.0 million in aggregate principal amount of the Company’s 4.375% Notes 2026 (the “Additional 4.375% 2026 Notes”)
for net proceeds for approximately $123.5 million, based on the public offering price of 101.00% of the aggregate principal amount of
the Additional 4.375% 2026 Notes, after deducting the underwriting discount of $2.5 million and offering expenses of $0.2 million payable
by the Company. The net proceeds from the offering were used to redeem all of the outstanding 6.25% 2025 Notes (as described above),
and for general corporate purposes in accordance with our investment objective and strategies. The Additional 4.375% 2026 Notes were
treated as a single series with the existing 4.375% 2026 Notes under the indenture and had the same terms as the existing 4.375% 2026
Notes.
At May 31, 2022, the total 4.375% Notes 2027
outstanding was $175.0 million.
On January 19, 2022, the Company issued $75.0
million in aggregate principal amount of our 4.35% fixed-rate Notes due in 2027 (the “4.35% Notes 2027”) for net proceeds
of $73.0 million, based on the public offering price of 99.317% of the aggregate principal amount of the 4.35% Notes 2027, after deducting
the underwriting commissions of approximately $1.5 million. Offering costs incurred were approximately $0.2 million. Interest
on the 4.35% Notes 2027 is paid semi-annually in arrears on February 28 and August 28, at a rate of 4.35% per year, beginning August
28, 2022. The 4.35% Notes 2027 mature on February 28, 2027 and may be redeemed in whole or in part at the Company’s option at any
time prior to November 28, 2026, at par plus a “make-whole” premium, and thereafter at par. The net proceeds from
the offering were used for general corporate purposes in accordance with our investment objective and strategies. Financing costs of
$1.7 million related to the 4.35% Notes 2027 have been capitalized and are being amortized over the term of the Notes.
At May 31, 2022 the total 4.35% Notes 2027 outstanding
was $75.0 million.
On April 27, 2022, the Company issued $87.5 million
in aggregate principal amount of our 6.00% fixed-rate notes due 2027 (the “6.00% Notes 2027”) for net proceeds of $84.8 million
after deducting underwriting commissions of approximately $2.7 million. Offering costs incurred were approximately $0.1 million. On May
10, 2022, the underwriters partially exercised their option to purchase an additional $10.0 million in aggregate principal amount of
its 6.00% Notes 2027. Net proceeds to the Company were $9.7 million after deducting underwriting commissions of approximately $0.3 million.
Interest on the 6.00% Notes 2027 is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.00% per
year, beginning August 31, 2022. The 6.00% Notes 2027 mature on April 30, 2027 and commencing April 27, 2024, may be redeemed in whole
or in part at any time or from time to time at our option. We expect to use the net proceeds from this offering to make investments in
middle-market companies (including investments made through our SBIC Subsidiaries) in accordance with our investment objective and strategies
and for general corporate purposes. We may use the net proceeds from this offering to redeem all of the outstanding 7.25% 2025 Notes,
which are redeemable by us commencing June 24, 2022. Financing costs of $3.0 million related to the 6.00% Notes 2027 have been
capitalized and are being amortized over the term of the 6.00% 2027 Notes. The 6.00% 2027 Notes are listed on the NYSE under the trading
symbol “SAT” with a par value of $25.00 per share.
At May 31, 2022 the total 6.00% Notes 2027 outstanding
was $97.5 million.
At May 31, 2022 and February 28, 2022, the fair
value of investments, cash and cash equivalents and cash and cash equivalents, reserve accounts were as follows:
| |
May 31, 2022 | | |
February 28, 2022 | |
| |
Fair Value | | |
Percentage of
Total | | |
Fair Value | | |
Percentage of
Total | |
| |
($ in thousands) | |
Cash and cash equivalents | |
$ | 94,939 | | |
| 9.5 | % | |
$ | 47,258 | | |
| 5.4 | % |
Cash and cash equivalents, reserve accounts | |
| 6,550 | | |
| 0.7 | | |
| 5,613 | | |
| 0.6 | |
First lien term loans | |
| 718,090 | | |
| 72.0 | | |
| 631,573 | | |
| 72.6 | |
Second lien term loans | |
| 38,629 | | |
| 3.9 | | |
| 44,385 | | |
| 5.1 | |
Unsecured term loans | |
| 15,910 | | |
| 1.6 | | |
| 38,030 | | |
| 4.4 | |
Structured finance securities | |
| 33,493 | | |
| 3.4 | | |
| 15,931 | | |
| 1.8 | |
Equity interests | |
| 88,411 | | |
| 8.9 | | |
| 87,648 | | |
| 10.1 | |
Total | |
$ | 996,022 | | |
| 100.0 | % | |
$ | 870,438 | | |
| 100.0 | % |
On July 13, 2018, the Company issued 1,150,000
shares of its common stock priced at $25.00 per share (par value $0.001 per share) at an aggregate total of $28.75 million. The net proceeds,
after deducting underwriting commissions of $1.15 million and offering costs of approximately $0.2 million, amounted to approximately
$27.4 million. The Company also granted the underwriters a 30-day option to purchase up to an additional 172,500 shares of its common
stock, which was not exercised.
On 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. Subsequent to this, BB&T Capital Markets and B. Riley FBR, Inc. were added to the equity
ATM program. On July 11, 2019, the amount of the common stock to be offered was increased to $70.0 million, and on October 8, 2019, the
amount of the common stock to be offered was increased to $130.0 million. This agreement was terminated as of July 29, 2021, and as of
that date, the Company had sold 3,922,018 shares for gross proceeds of $97.1 million at an average price of $24.77 for aggregate net
proceeds of $95.9 million (net of transaction costs).
On July 30, 2021, we entered into an equity distribution
agreement with Ladenburg Thalmann & Co. Inc. and Compass Point Research and Trading, LLC (the “Agents”), through which
we may offer for sale, from time to time, up to $150.0 million of our common stock through the Agents, or to them, as principal for their
account. As of May 31, 2022, the Company sold 4,840,361 shares for gross proceeds of $124.0 million at an average price of $25.61 for
aggregate net proceeds of $122.4 million (net of transaction costs). During the three months ended May 31, 2022, there were no shares
sold pursuant to the equity distribution agreement with the Agents.
On September 24, 2014, the Company announced
the approval of an open market share repurchase plan that allowed it to repurchase up to 200,000 shares of its common stock at prices
below its NAV as reported in its then most recently published consolidated financial statements (the “Share Repurchase Plan”).
On October 7, 2015, our board of directors extended the Share Repurchase Plan for another year and increased the number of shares the
Company is permitted to repurchase at prices below its NAV, as reported in its then most recently published consolidated financial statements,
to 400,000 shares of its common stock. On October 5, 2016, our board of directors extended the Share Repurchase Plan for another year
to October 15, 2017 and increased the number of shares the Company is permitted to repurchase at prices below its NAV, as reported in
its then most recently published consolidated financial statements, to 600,000 shares of its common stock. On October 10, 2017, January
8, 2019 and January 7, 2020, our board of directors extended the Share Repurchase Plan for another year to October 15, 2018, January
15, 2020 and January 15, 2021, respectively, each time leaving the number of shares unchanged at 600,000 shares of its common stock.
On May 4, 2020, our board of directors increased the Share Repurchase Plan to 1.3 million shares of common stock. On January 5, 2021,
our board of directors extended the Shares Repurchase Plan for another year to January 15, 2022, leaving the number of shares unchanged
at 1.3 million shares of common stock. On January 4, 2022, our board of directors extended the Shares Repurchase Plan for another year
to January 15, 2023, leaving the number of shares unchanged at 1.3 million shares of common stock. As of May 31, 2022, the Company purchased
650,612 shares of common stock, at the average price of $20.86 for approximately $13.6 million pursuant to the Share Repurchase Plan.
During the three months ended May 31, 2022, the Company purchased 142,177 shares of common stock, at the average price of $26.27 for
approximately $3.8 million pursuant to the Share Repurchase Plan.
On May 26, 2022, the Company declared a dividend of $0.53 per share payable on June 29, 2022, to common stockholders of record on June
14, 2022. Shareholders have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the
Company's DRIP. Based on shareholder elections, the dividend consisted of approximately $5.1 million in cash and 48,590 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 $22.40 per share, which equaled 95% of the volume weighted average trading price
per share of the common stock on June 15, 16, 17, 21, 22, 23, 24, 27, 28 and 29, 2022.
On February 24, 2022, the Company declared a
dividend of $0.53 per share payable on March 28, 2022, to common stockholders of record on March 14, 2022. Shareholders have the option
to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder
elections, the dividend consisted of approximately $5.3 million in cash and 42,825 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 $25.89 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
March 15, 16, 17, 18, 21, 22, 23, 24, 25 and 28, 2022.
On November 30, 2021, the Company declared a
dividend of $0.53 per share payable on January 19, 2022, to common stockholders of record on January 4, 2021. Shareholders have the option
to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder
elections, the dividend consisted of approximately $5.3 million in cash and 41,520 newly issued shares of common stock, or 0.3% 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 $26.85 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
January 5, 6, 7, 10, 11, 12, 13, 14, 18 and 19, 2022.
On August 26, 2021, the Company declared a dividend
of $0.52 per share payable on September 28, 2021, to common stockholders of record on September 14, 2021. Shareholders have the option
to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder
elections, the dividend consisted of approximately $4.9 million in cash and 38,016 newly issued shares of common stock, or 0.3% 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 $26.76 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
September 15, 16, 17, 20, 21, 22, 23, 24, 27 and 28, 2021.
On May 27, 2021, the Company declared a dividend
of $0.44 per share payable on June 29, 2021, to common stockholders of record on June 15, 2021. Shareholders have the option to receive
payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections,
the dividend consisted of approximately $4.1 million in cash and 33,100 newly issued shares of common stock, or 0.3% 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 $25.03 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on June 16,
17, 18, 21, 22, 23, 24, 25, 28 and 29, 2021.
On March 22, 2021, the Company declared a dividend
of $0.43 per share payable on April 22, 2021, to common stockholders of record on April 8, 2021. Shareholders have the option to receive
payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder elections,
the dividend consisted of approximately $3.9 million in cash and 38,580 newly issued shares of common stock, or 0.3% 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 $23.69 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on April 9,12,
13, 14, 15, 16, 19, 20, 21 and 22, 2021.
On January 5, 2021, our board of directors declared
a dividend of $0.42 per share, which was paid on February 10, 2021, to common stockholders of record as of January 26, 2021. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $3.8 million in cash and 41,388 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 $21.75 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
January 28, 29 and February 1, 2, 3, 4, 5, 8, 9 and 10, 2021.
On October 7, 2020, our board of directors declared
a dividend of $0.41 per share, which was paid on November 10, 2020, to common stockholders of record as of October 26, 2020. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $3.8 million in cash and 45,706 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 $17.63 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
October 28, 29, 30 and November 2, 3, 4, 5, 6, 9 and 10, 2020.
On July 7, 2020, the Company declared a
dividend of $0.40 per share payable on August 12, 2020, to common stockholders of record on July 27, 2020. Shareholders have the option
to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder
elections, the dividend consisted of approximately $3.7 million in cash and 47,098 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 $16.45 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock
on July 30, 31 and August 3, 4, 5, 6, 7, 10, 11 and 12, 2020.
On January 8, 2020, the Company declared a dividend
of $0.56 per share, which was paid on February 6, 2020, to common stockholders of record on January 24, 2020. Shareholders had the option
to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on shareholder
elections, the dividend consisted of approximately $5.4 million in cash and 35,682 newly issued shares of common stock, or 0.3% 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 $25.44 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock
on January 24, 27, 28, 29, 30, 31 and February 3, 4, 5 and 6, 2020.
On August 27, 2019, the Company declared a dividend
of $0.56 per share, which was paid on September 26, 2019, to common stockholders of record on September 13, 2019. Shareholders had the
option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based on
shareholder elections, the dividend consisted of approximately $4.5 million in cash and 34,575 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 $23.34 per share, which equaled 95.0% of the volume weighted average trading price per share of the
common stock on September 13, 16, 17, 18, 19, 20, 23, 24, 25 and 26, 2019.
On May 28, 2019, our board of directors
declared a dividend of $0.55 per share, which was paid on June 27, 2019, to common stockholders of record as of June 13, 2019. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $3.6 million in cash and 31,545 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 $22.65 per share, which equaled 95% of the volume weighted average trading price per share of the common
stock on June 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2019.
On February 26, 2019, our board of directors
declared a dividend of $0.54 per share, which was paid on March 28, 2019, to common stockholders of record as of March 14,
2019. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP.
Based on shareholder elections, the dividend consisted of approximately $3.5 million in cash and 31,240 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 $21.36 per share, which equaled 95% of the volume weighted average trading price per share
of the common stock on March 15, 18, 19, 20, 21, 22, 25, 26, 27 and 28, 2019.
On November 27, 2018, our board of directors
declared a dividend of $0.53 per share, which was paid on January 2, 2019, to common stockholders of record on December 17, 2018. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the Company’s DRIP. Based
on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 30,796 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 $18.88 per share, which equaled 95.0% of the volume weighted average trading price per share of the
common stock on December 18, 19, 20, 21, 24, 26, 27, 28, 31, 2018 and January 2, 2019.
On August 28, 2018, our board of directors declared
a dividend of $0.52 per share, which was paid on September 27, 2018, to common stockholders of record as of September 17, 2018. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $3.3 million in cash and 25,862 newly issued shares of common stock, or 0.3% 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 $22.35 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock
on September 14, 17, 18, 19, 20, 21, 24, 25, 26 and 27, 2018.
On May 30, 2018, our board of directors declared
a dividend of $0.51 per share, which was paid on June 27, 2018, to common stockholders of record as of June 15, 2018. Shareholders had
the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $2.7 million in cash and 21,562 newly issued shares of common stock, or 0.3% 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 $23.72 per share, which equaled 95.0% of the volume weighted average trading price per share of the common stock
on June 14, 15, 18, 19, 20, 21, 22, 25, 26 and 27, 2018.
On February 26, 2018, our board of directors
declared a dividend of $0.50 per share, which was paid on March 26, 2018, to common stockholders of record as of March 14, 2018. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $2.6 million in cash and 25,354 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 $19.91 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
March 13, 14, 15, 16, 19, 20, 21, 22, 23 and 26, 2018.
On November 29, 2017, our board of directors
declared a dividend of $0.49 per share, which was paid on December 27, 2017, to common stockholders of record on December 15, 2017. Shareholders
had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $2.5 million in cash and 25,435 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 $21.14 per share, which equaled 95% of the volume weighted average trading price per share of the common stock on
December 13, 14, 15, 18, 19, 20, 21, 22, 26 and 27, 2017.
On August 28, 2017, our board of directors
declared a dividend of $0.48 per share, which was paid 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 the 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 95% of 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 the 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 95% of 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 to the 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 95% of 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 to the DRIP. Based on shareholder
elections, the dividend consisted of approximately $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 95% of 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 to the 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 95% of 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 to the 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 95% of 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 to the 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 95% of 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 to the 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 95% of 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 to the 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 95% of 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 to the 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 95% of 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 to the 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 95% of 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.
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 to the 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 95% of 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 to the 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 95% of 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, to common stockholders of record on February 2, 2015. Shareholders
have the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to the 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 95% of 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, to
common stockholders of record on November 3, 2014. Shareholders had the option to receive payment of the dividend in cash or receive
shares of common stock pursuant to the 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 95% of 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 95% of 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 95% of 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. 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 95% of 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 95% of 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 95% of 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.
Our asset coverage ratio, as defined in the 1940
Act, was 179.3% as of May 31, 2022 and 209.3% as of February 28, 2022.
Subsequent Events
On June 14, 2022, the Company caused notices
to be issued to the holders of the 7.25% 2025 Notes regarding the Company’s exercise of its option to redeem, in whole, the issued
and outstanding 7.25% 2025. The Company will redeem $43.125 million in aggregate principal amount of the issued and outstanding 7.25%
2025 Notes on July 14, 2022 (the “Redemption Date”). The 7.25% 2025 Notes will be redeemed at 100% of their principal amount
($25 per Note), plus the accrued and unpaid interest thereon, through, but excluding, the Redemption Date.
Contractual obligations
The following table shows our payment obligations for repayment of
debt and other contractual obligations at May 31, 2022:
| |
| | |
Payment Due by Period | |
Long-Term Debt Obligations | |
Total | | |
Less Than 1 Year | | |
1 - 3 Years | | |
3 - 5 Years | | |
More Than 5 Years | |
| |
| | |
| | |
($ in thousands) | | |
| | |
| |
Revolving credit facility | |
$ | 25,000 | | |
$ | - | | |
$ | 25,000 | | |
$ | - | | |
$ | - | |
SBA debentures | |
| 217,000 | | |
| - | | |
| 15,000 | | |
| 33,660 | | |
| 168,340 | |
7.25% 2025 Notes | |
| 43,125 | | |
| - | | |
| - | | |
| 43,125 | | |
| - | |
7.75% 2025 Notes | |
| 5,000 | | |
| - | | |
| - | | |
| 5,000 | | |
| - | |
4.375% 2026 Notes | |
| 175,000 | | |
| - | | |
| - | | |
| 175,000 | | |
| - | |
4.35% 2027 Notes | |
| 75,000 | | |
| - | | |
| - | | |
| 75,000 | | |
| - | |
6.25% 2027 Notes | |
| 15,000 | | |
| - | | |
| - | | |
| - | | |
| 15,000 | |
6.00% 2027 Notes | |
| 97,500 | | |
| - | | |
| - | | |
| 97,500 | | |
| - | |
Total Long-Term Debt Obligations | |
$ | 652,625 | | |
$ | - | | |
$ | 40,000 | | |
$ | 429,285 | | |
$ | 183,340 | |
Off-balance sheet arrangements
As of May 31, 2022 and February 28, 2022, the
Company’s off-balance sheet arrangements consisted of $96.0 million and $83.4 million, respectively, of unfunded commitments outstanding
to provide debt financing to its portfolio companies or to fund limited partnership interests. Such commitments are generally up to the
Company’s 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 Company’s consolidated statements of assets and liabilities and
are not reflected in the Company’s consolidated statements of assets and liabilities.
A summary of the unfunded commitments outstanding as of May 31, 2022
and February 28, 2022 is shown in the table below (dollars in thousands):
| |
May 31,
2022 | | |
February 28,
2022 | |
At Company’s discretion | |
| | |
| |
Artemis Wax | |
$ | 15,000 | | |
$ | 3,700 | |
Ascend Software LLC | |
| 5,000 | | |
| 5,000 | |
Axero Holdings | |
| 3,000 | | |
| 3,000 | |
Davisware | |
| 2,000 | | |
| 2,000 | |
Granite Comfort | |
| 5,000 | | |
| - | |
JDXpert | |
| 5,000 | | |
| - | |
Lee’s Famous Recipe Chicken | |
| 4,000 | | |
| 10,000 | |
Netreo Holdings, LLC | |
| 1,500 | | |
| 4,000 | |
Pepper Palace | |
| 3,000 | | |
| 3,000 | |
Procrement Partners | |
| 2,800 | | |
| 2,800 | |
Saratoga Senior Loan Fund I JV LLC | |
| 17,500 | | |
| 17,500 | |
Sceptre Hospitality Resources | |
| 250 | | |
| 1,000 | |
Book4Time, Inc. | |
| - | | |
| 2,000 | |
Total | |
| 64,050 | | |
| 54,000 | |
| |
| | | |
| | |
At portfolio company’s discretion - satisfaction of certain financial and nonfinancial covenants required | |
| | | |
| | |
Ascend Software LLC | |
| 5,200 | | |
| 6,500 | |
Axero Holdings | |
| 900 | | |
| 2,000 | |
Axero Holdings - Revolver | |
| 500 | | |
| 500 | |
Davisware, LLC | |
| 1,000 | | |
| 1,000 | |
Exigo - DDTL | |
| 4,167 | | |
| - | |
Exigo - Revolver | |
| 833 | | |
| - | |
GDS Holdings US, Inc. | |
| 1,786 | | |
| 2,786 | |
Granite Comfort | |
| 5,000 | | |
| - | |
GoReact | |
| 500 | | |
| 2,500 | |
JDXpert | |
| 1,000 | | |
| - | |
Madison Logic - Revolver | |
| 1,084 | | |
| 1,084 | |
New England Dental Partners | |
| 4,500 | | |
| 4,500 | |
Pepper Palace - DDTL | |
| 2,000 | | |
| 2,000 | |
Pepper Palace - Revolver | |
| 2,500 | | |
| 2,500 | |
Zollege | |
| 1,000 | | |
| 1,000 | |
Lee’s Famous Recipe Chicken | |
| - | | |
| 3,000 | |
| |
| 31,970 | | |
| 29,370 | |
Total | |
$ | 96,020 | | |
$ | 83,370 | |
The Company believes its assets will provide
adequate coverage to satisfy these unfunded commitments. As of May 31, 2022, the Company had cash and cash equivalents of $94.9 million
and $6.6 million in available borrowings under the Encina Credit Facility.