SARATOGA INVESTMENT CORP. (SAJ, SAR, SAT, SAY, SAZ)
Saratoga Investment Corp. (NYSE: SAR) is a publicly traded BDC and RIC that provides senior and mezzanine debt financing to U.S. middle‐market companies (annual EBITDA $2–$50 million). Externally managed by Saratoga Investment Advisors, SAR pursues current income and capital appreciation through ...
Saratoga Investment Corp. (NYSE: SAR) 2025 10-K Review
Introduction
Saratoga Investment Corp. ("Company," "SAR," or "we") is a Maryland corporation structured as a closed-end, non-diversified management investment company, regulated as a Business Development Company ("BDC") under the Investment Company Act of 1940 and taxed as a Regulated Investment Company ("RIC") under the Internal Revenue Code. SAR provides customized finance solutions to U.S. middle-market businesses and targets attractive risk-adjusted returns through current income and long-term capital appreciation.
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This review summarizes SAR’s 2025 10-K filing, highlights its operating and financial results, outlines key risks, and assesses its investment potential.
Business Overview (Item 1)
Investment Focus
- Primary asset classes: Senior and unitranche leveraged loans (first- and second-lien term loans) and mezzanine debt of U.S. middle-market companies (EBITDA $2–$50 million).
- Equity: A smaller portion (up to 30% of the portfolio) in equity, preferred equity or opportunistic investments.
- Opportunistic: Distressed debt, small-cap public securities, structured finance vehicles (e.g., CLO tranches), joint ventures.
External Management
- SAR is advised by Saratoga Investment Advisors, LLC, led by principals with 28–38 years in leveraged finance.
- Investment decisions are vetted by a four-member Investment Committee that requires unanimous approval for investments > $1 million and for sales.
Capital Structure & Leverage
- SAR uses secured credit facilities (SIF II: $65 million; SIF III: $75 million) and SBA-guaranteed debentures ($170 million outstanding) to lever its portfolio.
- Under BDC rules, SAR may maintain no less than 150% asset coverage ratio (i.e., debt ≤ 66.7% of total assets) after April 16, 2019.
- Total assets as of 2/28/25: $1.19 billion; Net assets: $392.7 million; NAV per share: $25.86.
SBIC Subsidiaries
- SBIC II LP and SBIC III LP are licensed SBICs with $87.5 million each in regulatory capital and $131 million/$39 million debentures outstanding, respectively.
- SBIC I LP merged into the Company on January 3, 2024 after repaying its SBA debentures.
CLO Co-Investment
- SAR manages a joint-venture CLO, SLF JV (50/50 with TJHA JV I LLC), with $402 million of notes issued in October 2022 and SAR’s 87.5% share of Class E notes ($12.3 million fair value).
2025 Financial Highlights & Performance (Items 7, 8)
Net Asset Value and Market Performance
| Period | NAV at Start | NAV at End | Total Return NAV | Market Price Start | Market Price End | Total Return Market |
|---|---|---|---|---|---|---|
| FY 2025 (2/29/24–2/28/25) | $27.12 | $25.86 | +10.11% | $23.61 | $26.00 | +27.17% |
| FY 2024 (2/28/23–2/29/24) | $29.18 | $27.12 | +4.20% | $27.55 | $23.61 | –3.92% |
- NAV change: NAV fell from $27.12 to $25.86. After distributions, NAV generated +10.11% total return.
- Market: SAR shares traded at a discount, but rebounded to $26.00 at 2/28/25, a +27.17% total return.
- Premium/Discount: –3.9% discount to NAV on 5/6/25 closing of $24.86.
Income, Gains & Distributions
| Per Share | FY 2025 | FY 2024 | FY 2023 |
|---|---|---|---|
| Net investment income | $3.81 | $4.49 | $2.94 |
| Realized & unrealized gains (losses) | –$1.73 | –$3.77 | –$0.75 |
| Accrued loss on debt extinguishment | –$0.06 | –$0.01 | –$0.13 |
| Net increase from operations | $2.02 | $0.71 | $2.06 |
| Distributions per share | –$3.30 | –$2.82 | –$2.28 |
- Net cash income: Generated $3.81 of investment income per share, paid $3.30 in dividends, preserving RIC status.
- Net capital impact: A $1.73 per share dip in unrealized/realized values.
- Net assets grew by $30.7 million ($2.02 × 15.2 million shares).
- Total distributions: $50.2 million ($3.30 per share).
Portfolio Composition and Yields
| Asset Class | % of Portfolio | Yield (%) |
|---|---|---|
| First‐lien term loans | 88.7% | 11.3% |
| Second‐lien term loans | 0.7% | 16.7% |
| Unsecured loans | 1.7% | 10.7% |
| Structured finance (CLOs) | 1.5% | 19.9% |
| Equity interests | 7.4% | – |
| Weighted average yield | 100.0% | 10.8% |
- Depth: 48 portfolio companies across 41 industries.
- CLO exposure: $0.2 million in SAR’s first-loss position of Saratoga CLO subordinated notes; $2.3 million in Class F-2-R-3 Notes.
- Collateralization: 88.7% of first-lien loans fully collateralized; enterprise value ≥ loan amount.
- Payment-in-kind: 14.0% contractual PIK; 29.5% elected PIK portion. 97.4% floating rate (SOFR/BBSY/Prime).
Borrowing Costs and Structure
| Facility | Amount | Rate | Margin Over Benchmark |
|---|---|---|---|
| Encina Credit Facility | $32.5 M | SOFR + 4.25%† | 4.25% |
| Live Oak Credit Fac. | $20.0 M | SOFR + 3.50–4.25%‡ | — |
| SBA Debentures | $170.0 M | Fixed rates 4.375–8.50% | — |
† SOFR floor 0.75%; maturity 1/27/26.
‡ Floating rate based on usage; maturity 3/27/27.
- Aggregate leverage: $222.5 million.
- Average cost of funds: Approx. 6.3%, resulting in a 4.5 pp net interest spread.
- Expense ratio: Annual total expenses ~ 26.1% of net assets (including debt costs).
Investment Strategy & Process
- Sourcing: Broad network of banks, finance companies & private equity sponsors for primary and secondary loans.
- Due diligence: Company & industry analysis; structural/security review; investment committee sign-off (4 members).
- Structuring: Favor first-lien term loans with maintenance leverage and cash flow covenants; call protections; negative/affirmative covenants.
- Portfolio management: Detailed monitoring; board observation or seats; regular committee review; timely workouts.
- Valuation: Quarterly board-approved fair value under ASC 820; Intex models for CLO tranches; independent quarterly & annual reviews.
Risk Management:
- Leverage test under Section 18 of the 1940 Act (min 150% coverage).
- Senior securities & affiliate transaction limits; SBIC & SBA regulations; compliance programs under Rule 2a-5.
- Cybersecurity & business continuity policies; independent audit oversight.
Key Risk Factors (Item 1A)
- Leverage: Magnifies gains & losses; 150% asset coverage test; secured facilities & CLO first-loss; $222.5 million debt.
- Interest rates: 97.4% floating rate; hedging limited by derivatives rules (Rule 18f-4); cost of funds vs. yield mismatch on floors.
- Credit & liquidity: 87.1% interest‐only loans; 14% contractual PIK; 29.5% elected PIK; illiquid private assets; credit deterioration risk.
- CLO risk: SAR’s subordinated notes in Saratoga CLO first-loss; structural & market risks; concentration in CMR green/yellow.
- SBIC regulation: $170 million SBA debentures; licensing & SBA exam risks; capital & leverage limits; regulatory compliance.
- Fees & conflicts: 5.2% base & 3.5% incentive fees; high expense ratio; potential mis-alignment of interests; related-party rules.
- Market price volatility: SAR trades at NAV discount; closed-end fund liquidity; no guaranteed shareholder distributions.
- Tax status: Must distribute ≥ 90% of taxable income; 4% excise tax on undeclared; risk of RIC disqualification.
2025–2027 Outlook & Conclusion
Strengths
- Attractive 10.8% blended yield with 100% first-lien collateralization on core portfolio.
- Seasoned management team & independent CMR oversight.
- Diversified across 41 industries & 48 companies.
- Favorable RIC/BDC tax & regulatory structure; SBIC debenture capacity.
Challenges
- Elevated borrowing costs (6.3%) & 26.1% expense ratio compress net spread.
- Interest-only & PIK features may amplify downside in stressed credit cycles.
- Heavy reliance on market liquidity & CLO and SBIC vehicles.
- Fees structure may entice excessive leverage or risk-taking.
Investment Score: 6.0/10 A balanced risk-return profile with above-average yield but elevated expenses, leverage and credit risk. Suitable for yield-seeking investors comfortable with private credit’s illiquidity and volatility.
Summary of Net Profit (Loss)
• Net increase from operations for FY 2025: $30.7 million (net investment income of $57.9 M less realized/unrealized losses of $26.3 M).
• Dividends paid: $50.2 million. • Net asset decrease: NAV declined from $27.12 to $25.86 per share.
Final Assessment
Saratoga Investment Corp. offers a 10.8% weighted yield on a portfolio predominantly secured by first-lien loans to middle-market companies. Leverage and fee structure create risk of volatility and expense pressure, but a strong management track record and disciplined credit process mitigate downside. SAR is a 6.0 out of 10 – a solid yield play for patient, yield-oriented investors willing to accept private credit’s illiquidity and leverage risks.