Saratoga Investment Corp. Announces Fiscal Third Quarter 2018 Financial Results

NEW YORK, Jan. 10, 2018 /PRNewswire/ -- Saratoga Investment Corp. (NYSE: SAR) ("Saratoga Investment" or "the Company"), a business development company, today announced financial results for its 2018 fiscal third quarter.

Summary Financial Information

The Company's summarized financial information is as follows:

"During the fiscal third quarter of 2018, we continued to build on our core objectives of growing the size and improving the quality of our asset base by utilizing our highly effective originations team, and flexible and well-structured capital sources," said Christian L. Oberbeck, Chairman and Chief Executive Officer of Saratoga Investment. "Despite the competitive and challenging environment, our new deal pipeline remains robust and our credit quality is high. The strength and solidity of our performance is reflected in our performance metrics: - adjusted NII per share is $0.54, five cents above our current $0.49 dividend; adjusted NII Yield is 9.6%; LTM ROE is 10.2%, almost 200 basis points above the BDC industry mean; and NAV per share is $22.58, up $0.61 from year-end. NAV increased again to $138.8 million, representing a 61% increase over the past 7 years. We increased our dividend for the thirteenth consecutive quarter, announcing a $0.01 increase to $0.49 per share, and continue to out-earn our dividend payments, a differentiator for us in the marketplace. We also remain well-structured for the current rising interest rate environment, with 84% of our investments having floating-rate interest rates and through their floors, and all of our debt, except for our revolving credit facility, being fixed-rate."

Michael J. Grisius, President and Chief Investment Officer, added, "This fiscal quarter has demonstrated both the continued attractiveness of our financial offerings and our relentless focus on credit quality, a combination that has allowed us to navigate a difficult sourcing environment and maintain high credit quality. As we always emphasize, quarterly originations can be lumpy and repayments unpredictable, but we remain confident that we can continue to grow our AUM steadily over the long-term, as demonstrated again this year with our 16% growth since year-end. We also continue to keep over 97% of our credits in our highest ratings category. We believe successful investing rests on sound judgment and steady, continuous discipline, taken one decision at a time."

As of November 30, 2017, Saratoga Investment increased its assets under management ("AUM") to $338.8 million, an increase of 1.8% from $333.0 million as of August 31, 2017, an increase of 15.8% from $292.7 million as of February 28, 2017, and an increase of 22.1% from $277.6 million as of November 30, 2016. The increase this quarter reflects originations of $5.2 million, offset by repayments and amortizations of $1.8 million. Including realized and unrealized gains, Saratoga Investment's portfolio has continued to grow this quarter and remains strong, with a continued high level of investment quality in loan investments, with 97.2% of our loans this quarter at our highest internal rating.

For the three months ended November 30, 2017, total investment income of $9.5 million increased $1.1 million, or 12.8%, compared to $8.4 million for the three months ended November 30, 2016. This increased investment income was generated from an investment base that has grown significantly by 22.1% in total investments to $338.8 million at November 30, 2017 from $277.6 million at November 30, 2016, with the weighted average current coupon increasing from 10.8% to 11.3%. This increase was offset by other income reducing from $0.6 million last year to $0.05 million this year, reflecting the lower levels of originations this quarter. In addition, this quarter's investment income was also 7.1% down from $10.3 million for the quarter ended August 31, 2017, primarily reflecting (i) the announced downsizing of our Easy Ice, LLC investment by $10.2 million that was fully outstanding for the three months ended August 31, 2017, and (ii) the reduced other income discussed above.

As compared to the three months ended November 30, 2016, the investment income increase of $1.1 million was offset by (i) increased debt and financing expenses from higher outstanding Notes payable, revolving debt outstanding with Madison Capital Funding and SBA debentures this quarter, reflective of the growing investment and asset base, (ii) increased base management fees generated from the management of this larger pool of investments and (iii) increased total expenses, excluding interest and debt financing expenses, base management fees and incentive fees, reflecting primarily higher professional fees due to increased Sarbanes-Oxley ("SOX") activities now that the Company qualifies as an accelerated filer next year.   

Net investment income on a weighted average per share basis was $0.50 for the quarter ended November 30, 2017. Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income on a weighted average per share basis was $0.54. This compares to adjusted net investment income per share of $0.62 for the quarter ended August 31, 2017 and $0.53 for the quarter ended November 30, 2016, reflecting a decrease of 12.9% and an increase of 1.9%, respectively.

Net investment income yield as percentage of average net asset value ("Net Investment Income Yield") was 8.9% for the quarter ended November 30, 2017. Adjusted for the incentive fee accrual related to net unrealized capital gains, the Net Investment Income Yield was 9.6%. In comparison, Net Investment Income Yield was 8.9% and 10.7% for the quarters ended August 31, 2017 and November 30, 2016, respectively. Adjusted Net Investment Income Yield was 11.3% and 9.5% for the same quarters, respectively.

Net Asset Value ("NAV") was $138.8 million as of November 30, 2017, an increase of $5.3 million from $133.5 million as of August 31, 2017, and an increase of $11.5 million from $127.3 million as of February 28, 2017.

• For the nine months ended November 30, 2017, $2.7 million of net realized and unrealized gains and $9.4 million of net investment income were earned, partially offset by $8.3 million of dividends declared. In addition, $1.8 million of stock dividend distributions were made through the Company's dividend reinvestment plan ("DRIP") and $6.0 million of shares were sold through the Company's At-the-Market ("ATM") equity offering.

NAV per share was $22.58 as of November 30, 2017, compared to $22.37 as of August 31, 2017 and $21.97 as of February 28, 2017.

• For the nine months ended November 30, 2017, NAV per share increased by $0.61 per share, primarily reflecting the $3.8 million, or $0.62 per share increase in net assets (net of the $1.41 dividend paid during the first nine months of fiscal year 2018). This was slightly offset by the $0.01 dilutive impact of the quarter's share issuances, with the dilutive impact of the 88,869 shares issued under the DRIP almost entirely offset by the 266,113 shares issued under the Company's ATM offering above net asset value.

Return on equity for the last twelve months ended November 30, 2017 was 10.2%, compared to 7.7% for the comparable period last year.

Earnings per share for the quarter ended November 30, 2017 was $0.71 (including $1.2 million net gain on investments), compared to earnings per share of $1.15 for the quarter ended August 31, 2017 and $0.27 for the quarter ended on November 30, 2016.

Investment portfolio activity for the quarter ended November 30, 2017:

• Cost of investments made during the period: $5.2 million
• Principal repayments during the period: $1.8 million

Additional Financial Information

For the fiscal quarter ended November 30, 2017, Saratoga Investment reported net investment income of $3.0 million, or $0.50 on a weighted average per share basis, and a net gain on investments of $1.2 million, or $0.21 on a weighted average per share basis, resulting in a net increase in net assets from operations of $4.3 million, or $0.71 on a weighted average per share basis. The $1.2 million net gain on investments was comprised of $1.2 million in net unrealized appreciation on investments and $0.02 million in net realized gain on investments. The net unrealized appreciation was due primarily to (i) $0.8 million unrealized appreciation on Saratoga Investment's Elyria equity investment and (ii) $0.5 million unrealized appreciation on Saratoga Investment's Courion Corporation second lien term loan. This compared to the fiscal quarter ended November 30, 2016 with net investment income of $3.4 million, or $0.60 on a weighted average per share basis, and a net loss on investments of $1.8 million, or $0.32 on a weighted average per share basis, resulting in a net increase in net assets from operations of $1.6 million, or $0.27 on a weighted average per share basis. The $1.8 million net loss on investments consisted of $0.3 million in net realized gains on investments and $2.1 million in unrealized depreciation.

Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income was $3.3 million and $3.1 million for the quarters ended November 30, 2017 and November 30, 2016, respectively – an increase of $0.2 million year-over-year, or 7.0%.

Total expenses, excluding interest and debt financing expenses, base management fees and incentive management fees, increased from $1.0 million for the quarter ended November 30, 2016 to $1.2 million for the quarter ended November 30, 2017, remaining unchanged at 1.4% of average total assets.

Portfolio and Investment Activity

As of November 30, 2017, the fair value of Saratoga Investment's portfolio was $338.8 million (excluding $8.7 million in cash and cash equivalents), principally invested in 32 portfolio companies and one collateralized loan obligation fund ("CLO"). The overall portfolio composition consisted of 54.8% of first lien term loans, 29.3% of second lien term loans, 4.8% of subordinated notes in a CLO, 2.7% of syndicated loans and 8.4% of common equity.

For the fiscal quarter ended November 30, 2017, Saratoga Investment invested $5.2 million in new or existing portfolio companies and had $1.8 million in aggregate amount of exits and repayments, resulting in net investment of $3.4 million for the quarter. 

As of November 30, 2017, the weighted average current yield on Saratoga Investment's portfolio for the twelve months ended was 11.3%, which was comprised of a weighted average current yield of 10.8% on first lien term loans, 11.9% on second lien term loans, 19.4% on CLO subordinated notes, 5.6% on syndicated loans and 3.6% on equity interests.

As of November 30, 2017, 84.0% of Saratoga Investment's portfolio is in floating rate debt, with many of these investments having floors. For all of these investments, the relevant 1-month or 3-month LIBOR rate is currently above the floors. Pursuant to the disclosure included in Item 3 of Saratoga Investment's Form 10-Q for the quarter ended November 30, 2017, assuming that the investments as of November 30, 2017 were to remain constant for a full fiscal year and no actions were taken to alter the existing interest rate terms, a hypothetical change of 1.0% in interest rates would cause a corresponding increase of approximately $2.4 million to interest income over twelve months.

Liquidity and Capital Resources

As of November 30, 2017, Saratoga Investment had $1.0 million in outstanding borrowings under its $45 million senior secured revolving credit facility with Madison Capital Funding LLC. At the same time, Saratoga Investment had $134.7 million SBA debentures outstanding, $74.5 million of Baby Bonds (fair value of $78.3 million) issued and an aggregate of $8.7 million in cash and cash equivalents.

With $44.0 million available under the credit facility and the $15.3 million additional borrowing capacity at the SBIC subsidiary, as well as the $8.7 million of cash and cash equivalents, Saratoga Investment has a total of $68.0 million of undrawn borrowing capacity and cash and cash equivalents available as of November 30, 2017. The proceeds from the DRIP and ATM program totaled $4.0 million of equity investments in the third fiscal quarter of 2018, for a total of $7.8 million for the nine months ended November 30, 2017. Saratoga Investment also has the ability to issue additional baby bonds through the existing shelf registration statement.

On March 16, 2017, Saratoga Investment entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., through which Saratoga may offer for sale, from time to time, up to $30.0 million of its common stock through an ATM offering. As of November 30, 2017, the Company sold 266,113 shares for gross proceeds of $6.0 million at an average price of $22.49 for aggregate net proceeds of $5.9 million (net of transaction costs).

Share Repurchase Plan

In fiscal year 2015, the Company announced the approval of an open market share repurchase plan that allows 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 financial statements. During fiscal year 2017, this share repurchase plan was extended for another year through October 2017, and increased to 600,000 shares of common stock. On October 10, 2017, the Company's board of directors extended the open market share repurchase plan for another year to October 15, 2018, leaving the number of shares unchanged at 600,000 shares of its common stock.

As of November 30, 2017, the Company purchased 218,491 shares of common stock, at the average price of $16.87 for approximately $3.7 million pursuant to this repurchase plan. There were no share repurchases during the quarter ended November 30, 2017.

Dividend

During fiscal year 2017, Saratoga Investment declared and paid dividends of $1.93 per share, composed of $0.41 for the quarter ended February 29, 2016, $0.43 per share for the quarter ended May 31, 2016, $0.44 per share for the quarter ended August 31, 2016, $0.45 per share for the quarter ended November 30, 2016 and a special dividend of $0.20 per share in the second quarter of fiscal year 2017.

Saratoga Investment has continued to pay quarterly dividends regularly throughout fiscal year 2018, including $0.46 per share for the quarter ended February 28, 2017, $0.47 per share for the quarter ended May 31, 2017 and $0.48 per share for the quarter ended August 31, 2017.  On November 29, 2017, the Company declared a dividend of $0.49 per share payable 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 the Company's DRIP. Total dividends declared and paid during fiscal year 2018 thus far is $1.90 per share.

2018 Fiscal Third Quarter Conference Call/Webcast Information

About Saratoga Investment Corp.

Saratoga Investment Corp. is a specialty finance company that provides customized financing solutions to U.S. middle-market businesses.  The Company invests primarily in senior and unitranche leveraged loans, mezzanine debt, and, to a lesser extent, equity to provide financing for change of ownership transactions, strategic acquisitions, recapitalizations and growth initiatives in partnership with business owners, management teams and financial sponsors.  Saratoga Investment Corp.'s objective is to create attractive risk-adjusted returns by generating current income and long-term capital appreciation from its debt and equity investments.  Saratoga Investment Corp. has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940 and is externally-managed by Saratoga Investment Advisors, LLC, an SEC-registered investment advisor focusing on credit-driven strategies.  Saratoga Investment Corp. owns an SBIC-licensed subsidiary and manages a $300 million Collateralized Loan Obligation (CLO) fund.  It also owns 100% of the subordinated notes of the CLO.  These diverse funding sources, combined with a permanent capital base, enable Saratoga Investment Corp. to provide a broad range of financing solutions.

Forward Looking Statements

This press release contains certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties and other factors enumerated in this press release and the filings Saratoga Investment Corp. makes with the SEC.  Saratoga Investment Corp. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Financials

Supplemental Information Regarding Adjusted Net Investment Income, Adjusted Net Investment Income Yield and Adjusted Net Investment Income per share

On a supplemental basis, we provide information relating to adjusted net investment income, adjusted net investment income yield and adjusted net investment income per share, which are non-GAAP measures. These measures are provided in addition to, but not as a substitute for, net investment income, net investment income yield and net investment income per share. Adjusted net investment income represents net investment income excluding any capital gains incentive fee expense or reversal attributable to unrealized gains. The management agreement with our advisor provides that a capital gains incentive fee is determined and paid annually with respect to cumulative realized capital gains (but not unrealized capital gains) to the extent such realized capital gains exceed realized and unrealized losses for such year. In addition, we accrue, but do not pay, a capital gains incentive fee in connection with any unrealized capital appreciation, as appropriate. As such, we believe that adjusted net investment income,  adjusted net investment income yield and adjusted net investment income per share is a useful indicator of operations exclusive of any capital gains incentive fee expense or reversal attributable to unrealized gains. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. The following table provides a reconciliation of net investment income to adjusted net investment income, net investment income yield to adjusted net investment income yield and net investment income per share to adjusted net investment income per share for the three and six months ended November 30, 2017 and November 30, 2016.

Contact: Henri Steenkamp
Saratoga Investment Corp.
212-906-7800

Roland Tomforde
Broadgate Consultants
212-232-2222

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SOURCE Saratoga Investment Corp.