UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
_______________________________
Form 10-Q
S
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended August 31, 2020
£
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 814-00732
SARATOGA INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
Maryland
20-8700615
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
535 Madison Avenue
New York, New York 10022
(Address of principal executive offices)
(212) 906-7800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
SAR
The New York Stock Exchange
6.25% Notes due 2025
SAF
7.25% Notes due 2025
SAK
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes S No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes £ No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No S
The number of outstanding common shares of the registrant as of October 7, 2020 was 11,174,322.
________________________
TABLE OF CONTENTS ________________________
Page
PART I.
FINANCIAL INFORMATION
1
Item 1.
Consolidated Financial Statements
Consolidated Statements of Assets and Liabilities as of August 31, 2020 (unaudited) and February 29, 2020
Consolidated Statements of Operations for the three and six months ended August 31, 2020 (unaudited) and August 31, 2019 (unaudited)
2
Consolidated Statements of Changes in Net Assets for three and six months ended August 31, 2020 (unaudited) and August 31, 2019 (unaudited)
3
Consolidated Statements of Cash Flows for the three and six months ended August 31, 2020 (unaudited) and August 31, 2019 (unaudited)
4
Consolidated Schedules of Investments as of August 31, 2020 (unaudited) and February 29, 2020
5
Notes to Consolidated Financial Statements as of August 31, 2020 (unaudited)
20
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
84
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
119
Item 4.
Controls and Procedures
120
PART II.
OTHER INFORMATION
121
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
122
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
123
Signatures
126
i
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Saratoga Investment Corp.
Consolidated Statements of Assets and Liabilities
August 31,2020
February 29,2020
(unaudited)
ASSETS
Investments at fair value
Non-control/Non-affiliate investments (amortized cost of $452,233,107 and $418,006,725, respectively)
$
440,847,945
420,442,928
Affiliate investments (amortized cost of $26,051,719 and $23,998,917, respectively)
18,731,636
18,485,854
Control investments (amortized cost of $45,869,421 and $44,293,619, respectively)
48,537,411
46,703,192
Total investments at fair value (amortized cost of $524,154,247 and $486,299,261, respectively)
508,116,992
485,631,974
Cash and cash equivalents
39,052,320
24,598,905
Cash and cash equivalents, reserve accounts
26,342,863
14,851,447
Interest receivable (net of reserve of $1,729,764 and $1,238,049, respectively)
4,396,518
4,810,456
Management fee receivable
284,122
272,207
Other assets
619,543
701,007
Total assets
578,812,358
530,865,996
LIABILITIES
Revolving credit facility
—
Deferred debt financing costs, revolving credit facility
(466,094
)
(512,628
SBA debentures payable
170,000,000
150,000,000
Deferred debt financing costs, SBA debentures payable
(2,729,422
(2,561,495
6.25% Notes Payable 2025
60,000,000
Deferred debt financing costs, 6.25% notes payable 2025
(1,859,372
(2,046,735
7.25% Notes Payable 2025
43,125,000
Deferred debt financing costs, 7.25% notes payable 2025
(1,561,533
7.75% Notes Payable 2025
5,000,000
Deferred debt financing costs, 7.75% notes payable 2025
(266,420
Base management and incentive fees payable
3,738,729
15,800,097
Deferred tax liability
1,194,700
1,347,363
Accounts payable and accrued expenses
1,816,618
1,713,157
Interest and debt fees payable
2,287,313
2,234,042
Directors fees payable
59,500
61,500
Due to manager
295,981
543,842
Total liabilities
280,635,000
226,579,143
Commitments and contingencies (See Note 8)
NET ASSETS
Common stock, par value $0.001, 100,000,000 common shares authorized, 11,174,322 and 11,217,545 common shares issued and outstanding, respectively
11,174
11,218
Capital in excess of par value
288,699,868
289,476,991
Total distributable earnings
9,466,316
14,798,644
Total net assets
298,177,358
304,286,853
Total liabilities and net assets
NET ASSET VALUE PER SHARE
26.68
27.13
See accompanying notes to consolidated financial statements.
Consolidated Statements of Operations
For the three months ended
For the six months ended
August 31,2019
INVESTMENT INCOME
Interest from investments
Interest income:
Non-control/Non-affiliate investments
10,207,720
8,585,609
20,163,282
17,113,349
Affiliate investments
388,052
267,533
786,422
516,858
Control investments
1,249,972
1,678,326
2,383,556
3,326,472
Payment-in-kind interest income:
328,938
179,847
910,884
331,744
48,018
41,265
94,241
81,415
37,771
989,367
72,553
1,975,236
Total interest from investments
12,260,471
11,741,947
24,410,938
23,345,074
Interest from cash and cash equivalents
1,610
145,793
13,406
197,152
Management fee income
625,436
629,745
1,260,008
1,259,261
Structuring and advisory fee income*
940,000
1,047,350
1,253,306
1,363,725
Other income*
28,060
323,378
215,060
474,185
Total investment income
13,855,577
13,888,213
27,152,718
26,639,397
OPERATING EXPENSES
Interest and debt financing expenses
3,328,447
3,866,722
5,892,323
7,731,298
Base management fees
2,209,052
1,997,240
4,369,580
3,809,409
Incentive management fees expense (benefit)
1,529,677
2,085,486
(328,633
4,198,655
Professional fees
367,553
384,874
754,441
780,000
Administrator expenses
602,083
518,750
1,158,333
1,018,750
Insurance
67,727
64,619
135,453
129,238
Directors fees and expenses
75,000
97,500
135,000
157,500
General & administrative
333,824
382,873
684,638
641,474
Income tax expense (benefit)
7,501
(465,925
(1,444
(463,789
Total operating expenses
8,520,864
8,932,139
12,799,691
18,002,535
NET INVESTMENT INCOME
5,334,713
4,956,074
14,353,027
8,636,862
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from investments:
11,929
1,870,089
20,409
Net realized gain (loss) from investments
Net change in unrealized appreciation (depreciation) on investments:
10,601,529
365,541
(13,821,365
2,758,732
637,232
731,304
(1,807,020
901,248
5,341,640
361,027
258,417
1,787,022
Net change in unrealized appreciation (depreciation) on investments
16,580,401
1,457,872
(15,369,968
5,447,002
Net change in provision for deferred taxes on unrealized (appreciation) depreciation on investments
(116,521
(704,263
151,219
(725,193
Net realized and unrealized gain (loss) on investments
16,475,809
2,623,698
(15,198,340
6,591,898
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
21,810,522
7,579,772
(845,313
15,228,760
WEIGHTED AVERAGE – BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
1.95
0.91
(0.08
1.89
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC AND DILUTED
11,207,142
8,333,570
11,212,315
8,041,365
____________
* Certain prior period amounts have been reclassified to conform to current period presentation.
Consolidated Statements of Changes in Net Assets
INCREASE (DECREASE) FROM OPERATIONS:
Net investment income
Net realized gain from investments
Net increase (decrease) in net assets resulting from operations
DECREASE FROM SHAREHOLDER DISTRIBUTIONS:
Total distributions to shareholders
(4,487,015
(8,512,358
Net decrease in net assets from shareholder distributions
CAPITAL SHARE TRANSACTIONS:
Proceeds from issuance of common stock
35,875,017
Stock dividend distribution
774,990
1,381,918
Repurchases of common stock
(1,550,417
Repurchase fees
(1,740
Offering costs
(511,957
Net increase in net assets from capital share transactions
(777,167
36,744,978
Total increase (decrease) in net assets
(6,109,495
43,461,380
Net assets at beginning of period
180,875,187
Net assets at end of period
224,336,567
Consolidated Statements of Cash Flows
Operating activities
ADJUSTMENTS TO RECONCILE NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Payment-in-kind and other adjustments to cost
846,330
(3,077,640
Net accretion of discount on investments
(605,955
(480,989
Amortization of deferred debt financing costs
622,164
681,292
Net realized (gain) loss from investments
(20,409
(1,870,089
Net change in unrealized (appreciation) depreciation on investments
15,369,968
(5,447,002
Net change in provision for deferred taxes on unrealized appreciation (depreciation) on investments
(151,219
725,193
Proceeds from sales and repayments of investments
32,632,779
45,921,615
Purchases of investments
(70,707,731
(119,906,398
(Increase) decrease in operating assets:
Interest receivable
413,938
(1,150,165
Due from affiliate
1,673,747
Management and incentive fee receivable
(11,915
262,134
61,775
(82,701
Deferred tax asset
Increase (decrease) in operating liabilities:
(12,061,368
1,948,683
103,461
(111,576
53,271
(24,161
(2,000
13,000
(247,861
(16,389
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
(34,551,529
(66,176,475
Financing activities
Borrowings on debt
20,000,000
4,200,000
Paydowns on debt
(4,200,000
Issuance of notes
48,125,000
Payments of deferred debt financing costs
(2,364,458
(45,132
Payments of cash dividends
(3,712,025
(7,130,440
Repurchases fees
Payments of offering costs
(498,939
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
60,496,360
28,200,506
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS
25,944,831
(37,975,969
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, BEGINNING OF PERIOD
39,450,352
62,094,394
CASH AND CASH EQUIVALENTS AND CASH AND CASH EQUIVALENTS, RESERVE ACCOUNTS, END OF PERIOD
65,395,183
24,118,425
Supplemental information:
Interest paid during the period
5,216,888
7,074,168
Cash paid for taxes
13,830
16,022
Supplemental non-cash information:
Payment-in-kind interest income
(846,330
3,077,640
605,955
480,989
Consolidated Schedule of Investments
August 31, 2020
Company
Industry
Investment Interest Rate/Maturity
Original Acquisition Date
Principal/ Number of Shares
Cost
Fair Value(c)
% of Net Assets
Non-control/Non-affiliate investments – 147.8%(b)
CoConstruct, LLC
Construction Management Services
First Lien Term Loan (3M USD LIBOR+7.50%), 10.00% Cash, 7/5/2024
7/5/2019
4,164,825
4,146,240
1.4
%
Delayed Draw Term Loan (3M USD LIBOR+7.50%), 10.00% Cash, 7/5/2024
3,500,000
3,470,000
3,455,200
1.2
Total Construction Management Services
7,634,825
7,601,440
2.6
Targus Holdings, Inc.(d),(h)
Consumer Products
Common Stock
12/31/2009
210,456
1,589,630
417,596
0.1
Total Consumer Products
My Alarm Center, LLC(k)
Consumer Services
Preferred Equity Class A Units 8.00% PIK
7/14/2017
2,227
2,357,879
0.0
My Alarm Center, LLC(h)
Preferred Equity Class B Units
1,797
1,796,880
Preferred Equity Class Z Units
9/12/2018
676
712,343
1,526,993
0.5
96,224
Total Consumer Services
4,867,102
Passageways, Inc.
Corporate Governance
First Lien Term Loan (3M USD LIBOR+7.00%), 8.75% Cash, 7/5/2023
7/5/2018
4,965,370
4,927,500
1.7
Passageways, Inc.(j)
Delayed Draw Term Loan (3M USD LIBOR+7.00%), 8.75% Cash, 7/5/2023
1/3/2020
2,000,000
1,992,171
1,927,500
Passageways, Inc.(h)
Series A Preferred Stock
2,027,205
1,000,000
2,165,329
0.7
Total Corporate Governance
7,957,541
9,020,329
2.9
C2 Educational Systems(d)
Education Services
First Lien Term Loan (3M USD LIBOR+7.00%), 8.50% Cash, 5/31/2021
5/31/2017
16,000,000
15,988,956
13,030,400
4.4
Texas Teachers of Tomorrow, LLC(h),(i)
12/2/2015
750,000
721,272
0.2
Texas Teachers of Tomorrow, LLC(d)
First Lien Term Loan (3M USD LIBOR+7.25%), 9.75% Cash, 6/28/2024
6/28/2019
18,798,424
18,643,928
18,037,773
6.0
Total Education Services
35,382,884
31,789,445
10.6
Destiny Solutions Inc.(d)
Education Software
First Lien Term Loan (3M USD LIBOR+7.50%), 9.50% Cash, 10/24/2024
5/16/2018
38,000,000
37,707,843
36,856,200
12.4
Destiny Solutions Inc.(h),(i)
Limited Partner Interests
2,342
2,468,464
2,952,770
1.0
Consolidated Schedule of Investments — (continued)
Non-control/Non-affiliate investments – 147.8%(b) – (continued)
Identity Automation Systems(d)
First Lien Term Loan (3M USD LIBOR+9.24%), 10.99% Cash, 5/8/2024
8/25/2014
17,335,000
17,311,905
16,905,093
5.7
Identity Automation Systems(h)
Common Stock Class A-2 Units
232,616
697,848
Common Stock Class A-1 Units
3/6/2020
43,715
171,571
178,387
EMS LINQ, Inc.
First Lien Term Loan (1M USD LIBOR+8.50%), 9.75% Cash, 8/9/2024
8/9/2019
14,850,000
14,738,355
14,551,515
4.9
GoReact
First Lien Term Loan (3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
1/17/2020
4,936,199
4,922,500
GoReact(j)
Delayed Draw Term Loan (3M USD LIBOR+7.50%), 9.50% Cash, 1/17/2025
(31,000
Kev Software Inc.(a)
First Lien Term Loan (1M USD LIBOR+8.63%), 9.63% Cash, 9/13/2023
9/13/2018
21,124,419
20,999,214
20,397,739
6.8
Total Education Software
98,566,167
97,431,052
32.8
Davisware, LLC
Field Service Management
First Lien Term Loan (3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
9/6/2019
3,000,000
2,974,552
2,923,200
Davisware, LLC(j)
Delayed Draw Term Loan (3M USD LIBOR+7.00%), 9.00% Cash, 7/31/2024
977,790
969,055
926,590
0.3
Service Fusion
First Lien Term Loan (3M USD LIBOR+9.50%), 10.50% Cash, 8/4/2025
8/4/2020
2,970,022
2,970,000
Delayed Draw Term Loan (3M USD LIBOR+9.50%), 10.50% Cash, 8/4/2025
(20,000
Total Field Service Management
6,913,629
6,799,790
2.3
GDS Software Holdings, LLC(h)
Financial Services
Common Stock Class A Units
8/23/2018
250,000
423,771
Total Financial Services
Ohio Medical, LLC(h)
Healthcare Products Manufacturing
1/15/2016
5,000
500,000
771,701
Ohio Medical, LLC
Senior Subordinated Note 12.00% Cash, 6/30/2022
7,300,000
7,283,038
2.4
Total Healthcare Products Manufacturing
7,783,038
8,071,701
2.7
6
Axiom Parent Holdings, LLC(h)
Healthcare Services
6/19/2018
400,000
1,368,304
Axiom Purchaser, Inc.(d)
First Lien Term Loan (3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
10,000,000
9,943,942
10,002,000
3.4
Delayed Draw Term Loan (3M USD LIBOR+6.00%), 7.75% Cash, 6/19/2023
4,000,000
3,972,518
4,000,800
1.3
ComForCare Health Care
First Lien Term Loan (3M USD LIBOR+7.50%), 8.50% Cash, 1/31/2022
1/31/2017
15,000,000
14,944,776
14,862,000
5.0
Total Healthcare Services
29,261,236
30,233,104
10.2
TRC HemaTerra, LLC(h)
Healthcare Software
Class D Membership Interests
4/15/2019
2,322,780
0.8
HemaTerra Holding Company, LLC
First Lien Term Loan (3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
6,000,000
5,949,617
5,937,600
2.0
HemaTerra Holding Company, LLC(d),(j)
Delayed Draw Term Loan (3M USD LIBOR+6.75%), 9.25% Cash, 4/15/2024
12,000,000
11,901,778
11,854,400
4.0
PDDS Buyer, LLC
First Lien Term Loan (3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
7/15/2019
14,000,000
13,881,612
13,953,800
4.7
Delayed Draw Term Loan (3M USD LIBOR+7.00%), 9.50% Cash, 7/15/2024
7,000,000
6,930,830
6,976,900
Series A-1 Preferred Shares
8/10/2020
1,755,831
Total Healthcare Software
42,663,837
43,045,480
14.5
Roscoe Medical, Inc.(d),(h)
Healthcare Supply
3/26/2014
5,081
508,077
Roscoe Medical, Inc.(k)
Second Lien Term Loan 11.25% Cash, 3/28/2021
3,488,451
Total Healthcare Supply
4,708,077
Knowland Group, LLC
Hospitality/Hotel
Second Lien Term Loan (3M USD LIBOR+8.00%), 10.00% Cash, 5/9/2024
11/9/2018
15,767,918
13,355,426
Sceptre Hospitality Resources, LLC
First Lien Term Loan (1M USD LIBOR+9.00%), 10.00% Cash, 4/27/2025
4/27/2020
2,971,552
Total Hospitality/Hotel
18,739,470
16,325,426
5.4
Vector Controls Holding Co., LLC(d)
Industrial Products
First Lien Term Loan 10.50% (9.00% Cash/1.50% PIK), 3/6/2022
3/6/2013
7,849,846
7,849,215
7,712,474
7
Vector Controls Holding Co., LLC(d),(h)
Warrants to Purchase Limited Liability Company Interests, Expires 11/30/2027
5/31/2015
343
1,955,572
Total Industrial Products
9,668,046
3.3
CLEO Communications Holding, LLC(d)
IT Services
First Lien Term Loan (3M USD LIBOR+8.00%), 9.00% Cash/2.00% PIK, 3/31/2022
3/31/2017
13,933,269
13,918,409
CLEO Communications Holding, LLC(d),(j)
Delayed Draw Term Loan (3M USD LIBOR+8.00%), 9.00% Cash/2.00% PIK, 3/31/2022
20,247,304
20,153,018
Erwin, Inc.(d)
Second Lien Term Loan (3M USD LIBOR+11.50%), 12.50% Cash/1.00% PIK, 8/28/2021
2/29/2016
16,131,047
16,092,273
LogicMonitor, Inc.
First Lien Term Loan (3M USD LIBOR+5.00), 6.00% Cash, 5/17/2023
3/20/2020
18,000,000
17,881,562
17,566,200
5.9
Total IT Services
68,045,262
67,877,820
22.8
inMotionNow, Inc.
Marketing Services
First Lien Term Loan (3M USD LIBOR+7.50), 10.00% Cash, 5/15/2024
5/15/2019
12,200,000
12,105,156
11,974,300
Delayed Draw Term Loan (3M USD LIBOR+7.50) 10.00% Cash, 5/15/2024
4,954,516
4,907,500
1.6
Total Marketing Services
17,059,672
16,881,800
5.6
Omatic Software, LLC
Non-profit Services
First Lien Term Loan (3M USD LIBOR+8.00%), 9.75% Cash, 5/29/2023
5/29/2018
5,500,000
5,464,983
5,474,700
1.8
Total Non-profit Services
Emily Street Enterprises, L.L.C.
Office Supplies
Senior Secured Note (3M USD LIBOR+8.50%), 10.00% Cash, 12/31/2020
12/28/2012
3,300,000
3,299,985
3,254,130
1.1
Emily Street Enterprises, L.L.C.(h)
Warrant Membership Interests Expires 12/28/2022
49,318
354,472
Total Office Supplies
3,699,985
3,608,602
Apex Holdings Software Technologies, LLC
Payroll Services
First Lien Term Loan (3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2021
9/21/2016
17,964,080
17,314,200
5.8
Delayed Draw Term Loan (3M USD LIBOR+8.00%), 9.00% Cash, 9/21/2021
10/1/2018
1,500,000
1,494,136
1,442,850
Total Payroll Services
19,458,216
18,757,050
6.3
8
Village Realty Holdings LLC
Property Management
First Lien Term Loan (3M USD LIBOR+6.75%), 9.00% Cash, 10/8/2024
10/8/2019
7,250,000
7,185,395
7,016,292
Village Realty Holdings LLC(j)
Delayed Draw Term Loan (3M USD LIBOR+6.75%), 9.00% Cash, 10/8/2024
3,876,322
3,842,870
3,715,144
V Rental Holdings LLC(h)
Class A-1 Membership Units
116,700
338,229
447,215
Total Property Management
11,366,494
11,178,651
3.8
Buildout, Inc.
Real Estate Services
First Lien Term Loan (1D USD LIBOR+7.75%), 9.25% Cash, 7/9/2025
7/9/2020
13,860,179
13,860,000
4.6
Buildout, Inc.(i)
999
999,000
Total Real Estate Services
14,859,179
14,859,000
TMAC Acquisition Co., LLC(k)
Restaurant
Unsecured Term Loan 8.00% PIK, 9/01/2023
3/1/2018
2,261,017
1,879,523
0.6
Total Restaurant
ArbiterSports, LLC(d)
Sports Management
First Lien Term Loan (3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
2/21/2020
26,000,000
25,782,401
24,018,800
8.1
Delayed Draw Term Loan (3M USD LIBOR+6.50%), 8.25% Cash, 2/21/2025
923,800
Total Sports Management
26,782,401
24,942,600
8.4
Avionte Holdings, LLC(h)
Staffing Services
Class A Units
1/8/2014
100,000
672,475
Total Staffing Services
National Waste Partners(d)
Waste Services
Second Lien Term Loan 10.00% Cash, 2/13/2022
2/13/2017
9,000,000
8,969,247
8,873,100
3.0
Total Waste Services
Sub Total Non-control/Non-affiliate investments
452,233,107
147.8
9
Affiliate investments – 6.3%(b)
GreyHeller LLC(f)
Cyber Security
First Lien Term Loan (3M USD LIBOR+11.00%), 12.00% Cash, 11/16/2021
11/17/2016
6,978,843
GreyHeller LLC(f),(h)
Series A Preferred Units
850,000
3,225,397
Total Cyber Security
7,828,843
10,225,397
Top Gun Pressure Washing, LLC(f)
Facilities Maintenance
First Lien Term Loan (3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
8/12/2019
4,957,008
4,852,000
Top Gun Pressure Washing, LLC(f),(j)
Delayed Draw Term Loan (3M USD LIBOR+7.00%), 9.50% Cash, 8/12/2024
1,825,000
1,808,439
1,770,980
TG Pressure Washing Holdings, LLC(f),(h)
Preferred Equity
488,148
310,846
Total Facilities Maintenance
7,253,595
6,933,826
2.5
Elyria Foundry Company, L.L.C.(d),(f),(h)
Metals
7/30/2010
60,000
9,685,028
425,190
Elyria Foundry Company, L.L.C.(d),(f)
Second Lien Term Loan 15.00% PIK, 8/10/2022
1,284,253
1,147,223
Total Metals
10,969,281
1,572,413
0.4
Sub Total Affiliate investments
26,051,719
Control investments – 16.3%(b)
Netreo Holdings, LLC(g)
First Lien Term Loan (3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK, 7/3/2023
7/3/2018
5,234,684
5,198,930
5,235,208
Delayed Draw Term Loan (3M USD LIBOR +6.25%), 9.00% Cash/2.75% PIK, 7/3/2023
5/26/2020
1,208,915
1,197,539
1,209,036
Netreo Holdings, LLC(g),(h)
Common Stock Class A Unit
3,150,000
6,355,440
2.2
9,546,469
12,799,684
Saratoga Investment Corp. CLO 2013-1, Ltd.(a),(e),(g)
Structured Finance Securities
Other/Structured Finance Securities 19.26%, 1/20/2030
1/22/2008
69,500,000
21,322,952
21,577,477
7.2
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2 Note(a),(g)
Other/Structured Finance Securities (3M USD LIBOR+8.75%), 8.99%, 1/20/2030
12/14/2018
2,500,000
2,343,750
10
Control investments – 16.3%(b) – (continued)
Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2 Note(a),(g)
Other/Structured Finance Securities (3M USD LIBOR+10.00%), 10.24%, 1/20/2030
7,500,000
7,174,500
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.(a),(g),(j)
Unsecured Loan (3M USD LIBOR+7.50%), 7.74%, 8/20/2021
2/18/2020
4,642,000
Total Structured Finance Securities
36,322,952
35,737,727
11.9
Sub Total Control investments
45,869,421
16.3
TOTAL INVESTMENTS – 170.4%(b)
524,154,247
170.4
Number of Shares
Fair Value
Cash and cash equivalents and cash and cash equivalents, reserve accounts – 21.9%(b)
U.S. Bank Money Market(l)
21.9
Total cash and cash equivalents and cash and cash equivalents, reserve accounts
(a) Represents an ineligible investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of August 31, 2020, non-qualifying assets represent 11.0% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $298,177,358 as of August 31, 2020.
(c) Because there is no readily available market value for these investments, the fair values of these investments were determined using significant unobservable inputs and approved in good faith by our board of directors. These investments have been included as Level 3 in the Fair Value Hierarchy (see Note 3 to the consolidated financial statements).
(d) These securities are either fully or partially pledged as collateral under a senior secured revolving credit facility (see Note 7 to the consolidated financial statements).
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 19.26% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
11
(f) As defined in the Investment Company Act, this portfolio company is an Affiliate as we own between 5.0% and 25.0% of the voting securities. Transactions during the six months ended August 31, 2020 in which the issuer was an Affiliate are as follows:
Purchases
Sales
Total Interest from Investments
Management Fee Income
Net Realized Gain (Loss) from Investments
Net Change in Unrealized Appreciation (Depreciation)
Elyria Foundry Company, L.L.C.
(1,651,640
GreyHeller LLC
450,507
236,160
Top Gun Pressure Washing, LLC
1,806,750
335,915
(214,238
TG Pressure Washing Holdings, LLC
138,148
(177,302
Total
1,944,898
880,663
(g) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the six months ended August 31, 2020 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:
Netreo Holdings, LLC
1,188,000
345,635
(502,255
Saratoga Investment Corp. CLO 2013-1, Ltd.
1,356,121
1,217,713
Saratoga Investment Corp. CLO 2013-1, Ltd. Class F-R-2 Notes
126,108
(134,250
Saratoga Investment Corp. CLO 2013-1, Ltd. Class G-R-2 Notes
426,239
(260,250
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.(j)
202,006
(62,541
3,688,000
2,456,109
(h) Non-income producing at August 31, 2020.
(i) Includes securities issued by an affiliate of the Company.
(j) All or a portion of this investment has an unfunded commitment as of August 31, 2020. (see Note 8 to the consolidated financial statements).
(k) As of August 31, 2020, the investment was on non-accrual status. The fair value of these investments was approximately $5.4 million, which represented 1.1% of the Company’s portfolio (see Note 2 to the consolidated financial statements).
(l) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of August 31, 2020.
LIBOR — London Interbank Offered Rate
1M USD LIBOR — The 1 month USD LIBOR rate as of August 31, 2020 was 0.16%.
3M USD LIBOR — The 3 month USD LIBOR rate as of August 31, 2020 was 0.24%.
PIK — Payment-in-Kind (see Note 2 to the consolidated financial statements).
12
February 29, 2020*
Principal/Number of Shares
% ofNet Assets
Non-control/Non-affiliate investments – 138.2%(b)
4,161,917
4,284,000
CoConstruct, LLC(j)
Targus Holdings, Inc.(h)
417,619
1,997,158
0.60
4,961,214
5,034,500
1,991,001
2,013,800
2,042,180
7,952,215
9,090,480
0.03
First Lien Term Loan (3M USD LIBOR+7.00%), 8.50% Cash, 5/31/2020
15,981,853
5.3
703,910
19,661,200
19,483,213
6.5
36,215,066
36,365,110
12.0
First Lien Term Loan (3M USD LIBOR+7.25%), 9.25% Cash, 10/23/2024
36,000,000
35,686,318
35,888,400
11.8
2,805,839
0.9
860,269
15,422,500
15,389,090
15,524,289
5.1
13
Non-control/Non-affiliate investments – 138.2%(b) – (continued)
First Lien Term Loan (1M USD LIBOR+8.50%), 10.02% Cash, 8/9/2024
14,925,000
14,780,293
14,823,510
4.8
4,930,819
4,950,000
First Lien Term Loan (1M USD LIBOR+8.63%), 10.15% Cash, 9/13/2023
21,231,923
21,086,573
21,202,198
7.0
94,574,173
96,054,505
31.6
2,971,896
GDS Holdings US, Inc.(d)
First Lien Term Loan (3M USD LIBOR+7.00%), 8.50% Cash, 8/23/2023
7,444,170
7,650,000
Delayed Draw Term Loan (3M USD LIBOR+7.00%), 8.50% Cash, 8/23/2023
990,526
1,020,000
421,291
FMG Suite Holdings, LLC(d)
Second Lien Term Loan (1M USD LIBOR+8.00%), 9.52% Cash, 11/16/2023
23,000,000
22,863,835
7.6
31,548,531
32,091,291
10.5
416,550
Senior Subordinated Note 12.00% Cash, 7/15/2021
7,274,482
7,774,482
7,716,550
428,706
9,936,612
9,944,000
See accompanying notes to consolidated financial statements
14
Axiom Purchaser, Inc.(d),(j)
2,977,619
2,983,200
First Lien Term Loan (3M USD LIBOR+7.50%), 8.96% Cash, 1/31/2022
14,929,216
15,099,000
28,243,447
28,454,906
9.4
5,944,473
6,120,000
HemaTerra Holding Company, LLC(j)
9,912,295
10,200,000
2,259,190
11,888,585
12,184,800
PDDS Buyer, LLC(j)
29,745,353
30,763,990
10.1
Roscoe Medical, Inc.(h)
2,136,960
14,893,500
7,928,345
Vector Controls Holding Co., LLC(h)
2,850,231
10,778,576
3.5
CLEO Communications Holding, LLC
First Lien Term Loan (3M USD LIBOR+8.00%), 9.46% Cash/2.00% PIK, 3/31/2022
13,791,686
13,773,206
14,048,211
15
Delayed Draw Term Loan (3M USD LIBOR+8.00%), 9.46% Cash/2.00% PIK, 3/31/2022
20,041,560
19,919,746
20,414,333
6.7
Second Lien Term Loan (3M USD LIBOR+11.50%), 12.96% Cash/1.00% PIK, 8/28/2021
16,049,804
15,990,286
49,683,238
50,512,348
16.6
First Lien Term Loan (3M USD LIBOR+7.25), 9.75% Cash, 5/15/2024
12,094,364
4.1
inMotionNow, Inc.(j)
Delayed Draw Term Loan (3M USD LIBOR+7.25) 9.75% Cash, 5/15/2024
1,981,329
14,075,693
14,200,000
5,459,192
5,554,999
1.9
Omatic Software, LLC(j)
Delayed Draw Term Loan (3M USD LIBOR+8.00%), 9.75% Cash, 5/29/2023
Senior Secured Note (3M USD LIBOR+8.50%), 10.00% Cash, 4/22/2020
3,299,987
499,464
3,699,987
3,799,464
First Lien Term Loan (3M USD LIBOR+8.00%), 9.46% Cash, 9/21/2021
17,951,463
17,589,600
Delayed Draw Term Loan (3M USD LIBOR+8.00%), 9.46% Cash, 9/21/2021
1,491,938
1,465,800
19,443,401
19,055,400
First Lien Term Loan (3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
7,180,560
7,264,500
Delayed Draw Term Loan (3M USD LIBOR+6.50%), 8.75% Cash, 10/8/2024
3,838,783
3,884,075
16
354,280
11,357,572
11,502,855
3.9
TMAC Acquisition Co., LLC
2,140,880
ArbiterSports, LLC
25,765,288
25,740,000
8.6
Arbiter Sports, LLC(j)
922,337
8,959,602
418,006,725
138.2
Affiliate investments – 6.0%(b)
First Lien Term Loan (3M USD LIBOR+11.00%), 12.46% Cash, 11/16/2021
6,971,109
2,981,503
7,821,109
9,981,503
3.2
4,952,729
5,024,500
8//12/2019
350,000
5,302,729
5,374,500
Elyria Foundry Company, L.L.C.(f),(h)
1,939,800
1,190,051
10,875,079
3,129,851
23,998,917
17
Control investments – 15.4%(b)
First Lien Term Loan (3M USD LIBOR +6.25%), 9.00% Cash/2.00% PIK, 7/3/2023
5,162,734
5,123,191
5,265,989
6,762,672
8,273,191
12,028,661
Other/Structured Finance Securities 10.97%, 1/20/2030
23,520,428
22,557,240
7.4
Other/Structured Finance Securities (3M USD LIBOR+8.75%), 10.21%, 1/20/2030
2,478,000
Other/Structured Finance Securities (3M USD LIBOR+10.00%), 11.46%, 1/20/2030
7,434,750
Unsecured Loan (3M USD LIBOR+7.50%), 8.96%, 8/20/2021
2,204,541
36,020,428
34,674,531
11.4
44,293,619
15.4
TOTAL INVESTMENTS – 159.6%(b)
486,299,261
159.6
Cash and cash equivalents and cash and cash equivalents, reserve accounts – 13.0%(b)
13.0
* Certain reclassifications have been made to previously reported industry groupings to show results on a consistent basis across periods.
(a) Represents a non-qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. As of February 29, 2020, non-qualifying assets represent 11.5% of the Company’s portfolio at fair value. As a BDC, the Company can only invest 30% of its portfolio in non-qualifying assets.
(b) Percentages are based on net assets of $304,286,853 as of February 29, 2020.
(e) This investment does not have a stated interest rate that is payable thereon. As a result, the 10.97% interest rate in the table above represents the effective interest rate currently earned on the investment cost and is based on the current cash interest and other income generated by the investment.
18
(f) As defined in the Investment Company Act, this portfolio company is an Affiliate as we own between 5.0% and 25.0% of the voting securities. Transactions during the year ended February 29, 2020 in which the issuer was an Affiliate are as follows:
961,322
1,331,201
167,835
135,600
269,257
71,771
5,300,000
1,398,414
1,538,572
(g) As defined in the Investment Company Act, we “Control” this portfolio company because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the year ended February 29, 2020 in which the issuer was both an Affiliate and a portfolio company that we Control are as follows:
ManagementFee Income
Net Realized Gain (Loss) fromInvestments
Easy Ice, LLC
(65,219,080
3,335,320
31,225,165
(3,816,610
Easy Ice Masters, LLC
(4,169,121
382,066
(51,436
578,617
1,654,603
4,058,715
2,503,804
(2,840,298
280,689
(5,500
937,378
(15,750
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd(j)
7,642
(295,459
(69,388,201
9,580,427
(5,370,450
(h) Non-income producing at February 29, 2020.
(j) All or a portion of this investment has an unfunded commitment as of February 29, 2020. (see Note 8 to the consolidated financial statements).
(k) As of February 29, 2020, the investment was on non-accrual status. The fair value of these investments was approximately $2.1 million, which represented 0.4% of the Company’s portfolio (see Note 2 to the consolidated financial statements).
(l) Included within cash and cash equivalents and cash and cash equivalents, reserve accounts in the Company’s consolidated statements of assets and liabilities as of February 29, 2020.
1M USD LIBOR — The 1 month USD LIBOR rate as of February 29, 2020 was 1.52%.
3M USD LIBOR — The 3 month USD LIBOR rate as of February 29, 2020 was 1.46%.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Saratoga Investment Corp. (the “Company”, “we”, “our” and “us”) is a non-diversified closed end management investment company incorporated in Maryland that has elected to be treated and is regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company commenced operations on March 23, 2007 as GSC Investment Corp. and completed its initial public offering (“IPO”) on March 28, 2007. The Company has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company expects to continue to qualify and to elect to be treated, for tax purposes, as a RIC. The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments.
GSC Investment, LLC (the “LLC”) was organized in May 2006 as a Maryland limited liability company. As of February 28, 2007, the LLC had not yet commenced its operations and investment activities.
On March 21, 2007, the Company was incorporated and concurrently therewith the LLC was merged with and into the Company, with the Company as the surviving entity, in accordance with the procedure for such merger in the LLC’s limited liability company agreement and Maryland law. In connection with such merger, each outstanding limited liability company interest of the LLC was converted into a share of common stock of the Company.
On July 30, 2010, the Company changed its name from “GSC Investment Corp.” to “Saratoga Investment Corp.” in connection with the consummation of a recapitalization transaction.
The Company is externally managed and advised by the investment adviser, Saratoga Investment Advisors, LLC (the “Manager” or “Saratoga Investment Advisors”), pursuant to an investment advisory and management agreement (the “Management Agreement”). Prior to July 30, 2010, the Company was managed and advised by GSCP (NJ), L.P.
The Company has established wholly-owned subsidiaries, SIA-Avionte, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc., which are structured as Delaware entities, or tax blockers (“Taxable Blockers”), to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass through entities). Tax Blockers are consolidated for accounting purposes, but are not consolidated for U.S. federal income tax purposes and may incur U.S. federal income tax expenses as a result of their ownership of portfolio companies.
On February 11, 2020, the Company entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd. (“CLO 2013-1 Warehouse 2”), a wholly-owned subsidiary of Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”), pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse 2 Loan, which expires on August 20, 2021, bears interest at an annual rate of 3M USD LIBOR + 7.5%. As of August 31, 2020, the Company’s investment in the CLO 2013-1 Warehouse 2 had a fair value of $4.6 million.
On March 28, 2012, our wholly-owned subsidiary, Saratoga Investment Corp. SBIC, LP (“SBIC LP”), received a Small Business Investment Company (“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. The new license will provide up to $175.0 million in additional long- term capital in the form of SBA debentures.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), are stated in U.S. Dollars and include the accounts of the Company and its special purpose financing subsidiaries, Saratoga Investment Funding,
SARATOGA INVESTMENT CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAugust 31, 2020
Note 2. Summary of Significant Accounting Policies (cont.)
LLC (previously known as GSC Investment Funding LLC), SBIC LP, SBIC II LP, SIA-Avionte, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc. All intercompany accounts and transactions have been eliminated in consolidation. All references made to the “Company,” “we,” and “us” herein include Saratoga Investment Corp. and its consolidated subsidiaries, except as stated otherwise.
The Company, SBIC LP and SBIC II LP are all considered to be investment companies for financial reporting purposes and have applied the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services — Investment Companies” (“ASC 946”). There have been no changes to the Company, SBIC LP or SBIC II LP’s status as investment companies during the three months ended August 31, 2020.
Use of Estimates in the Preparation of Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and income, gains (losses) and expenses during the period reported. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value. Per section 12(d)(1)(A) of the 1940 Act, the Company may not invest in another registered investment company such as, a money market fund if such investment would cause the Company to exceed any of the following limitations:
• we were to own more than 3.0% of the total outstanding voting stock of the money market fund;
• we were to hold securities in the money market fund having an aggregate value in excess of 5.0% of the value of our total assets, except as allowed pursuant to Rule 12d1-1 of Section 12(d)(1) of the 1940 Act which is designed to permit “cash sweep” arrangements rather than investments directly in short-term instruments; or
• we were to hold securities in money market funds and other registered investment companies and BDCs having an aggregate value in excess of 10.0% of the value of our total assets.
As of August 31, 2020, the Company did not exceed any of these limitations.
Cash and Cash Equivalents, Reserve Accounts
Cash and cash equivalents, reserve accounts include amounts held in designated bank accounts in the form of cash and short-term liquid investments in money market funds, representing payments received on secured investments or other reserved amounts associated with the Company’s $45.0 million senior secured revolving credit facility with Madison Capital Funding LLC. The Company is required to use these amounts to pay interest expense, reduce borrowings, or pay other amounts in accordance with the terms of the senior secured revolving credit facility.
In addition, cash and cash equivalents, reserve accounts also include amounts held in designated bank accounts, in the form of cash and short-term liquid investments in money market funds, within our wholly-owned subsidiaries, SBIC LP and SBIC II LP.
The statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts.
21
The following table provides a reconciliation of cash and cash equivalents and cash and cash equivalents, reserve accounts reported within the consolidated statements of assets and liabilities that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
August 31, 2019
2,846,767
21,271,658
Investment Classification
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which we own more than 25.0% of the voting securities or maintain greater than 50.0% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which we own between 5.0% and 25.0% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments.
Investment Valuation
The Company accounts for its investments at fair value in accordance with the FASB ASC Topic 820, Fair Value Measurement (“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 balance sheet date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.
Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third-party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from our Manager, the audit committee of our board of directors and a third-party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.
The Company undertakes 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 the Manager and preliminary valuation conclusions are documented, reviewed 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.
22
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 our Manager and 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 our Manager, independent valuation firm (to the extent applicable) and the audit committee of our board of directors.
The Company’s investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. The Company uses 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.
Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. The Company’s net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.
Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 requires recognizing all derivative instruments as either assets or liabilities on the consolidated statements of assets and liabilities at fair value. The Company values derivative contracts at the closing fair value provided by the counterparty. Changes in the values of derivative contracts are included in the consolidated statements of operations.
Investment Transactions and Income Recognition
Purchases and sales of investments and the related realized gains or losses are recorded on a trade-date basis. 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 using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts over the life of the investment and amortization of premiums on investments up to the earliest call date.
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
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this general rule if the loan has sufficient collateral value and is in the process of collection. At August 31, 2020, certain investments in three portfolio companies, including preferred equity interests, were on non-accrual status with a fair value of approximately $5.4 million, or 1.1% of the fair value of our portfolio. At February 29, 2020, certain investments in two portfolio companies, including preferred equity interests, were on non-accrual status with a fair value of approximately $2.1 million, or 0.4% of the fair value of our portfolio.
Interest income on our investment in Saratoga CLO is recorded using the effective interest method in accordance with the provisions of ASC Topic 325, Investments-Other, Beneficial Interests in Securitized Financial Assets, (“ASC 325”), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the investment from the date the estimated yield was changed.
Payment-in-Kind Interest
The Company holds debt 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. The Company stops accruing PIK interest if it is expected that the issuer will not be able to pay all principal and interest when due.
Structuring and Advisory Fee Income
Structuring and advisory fee income represents various fee income earned and received performing certain investment structuring and advisory activities during the closing of new investments.
Other Income
Other income includes dividends received, origination and monitoring fees and prepayment income fees and is recorded in the consolidated statements of operations when earned.
Deferred Debt Financing Costs
Financing costs incurred in connection with our credit facility and notes are deferred and amortized using the straight-line method over the life of the respective facility and debt securities. Financing costs incurred in connection with our SBA debentures are deferred and amortized using the straight-line method over the life of the debentures.
The Company presents deferred debt financing costs on the balance sheet as a contra-liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
Contingencies
In the ordinary course of business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote. Therefore, the Company has not accrued any liabilities in connection with such indemnifications.
In the ordinary course of business, the Company may directly or indirectly be a defendant or plaintiff in legal actions with respect to bankruptcy, insolvency or other types of proceedings. Such lawsuits may involve claims that could adversely affect the value of certain financial instruments owned by the Company.
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Income Taxes
The Company has elected to be treated for tax purposes as a RIC under the Code and, among other things, intends to make the requisite distributions to its stockholders which will relieve the Company from federal income taxes. Therefore, no provision has been recorded for federal income taxes, except as related to the Taxable Blockers when applicable.
In order to qualify as a RIC, among other requirements, the Company is required to timely distribute to its stockholders at least 90.0% of its investment company taxable income, as defined by the Code, for each fiscal tax year. The Company will be subject to a nondeductible U.S. federal excise tax of 4.0% on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31.
Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4.0% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned.
In accordance with certain applicable U.S. Treasury regulations and private letter rulings 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 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. If too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20.0% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock.
The Company may utilize wholly-owned holding companies taxed under Subchapter C of the Code or tax blockers, when making equity investments in portfolio companies taxed as pass-through entities to meet its source-of-income requirements as a RIC. Taxable Blockers are consolidated in the Company’s U.S. GAAP financial statements and may result in current and deferred federal and state income tax expense with respect to income derived from those investments. Such income, net of applicable income taxes, is not included in the Company’s tax-basis net investment income until distributed by the Taxable Blocker, which may result in timing and character differences between the Company’s U.S. GAAP and tax-basis net investment income and realized gains and losses. Income tax expense or benefit from Taxable Blockers related to net investment income are included in total operating expenses, while any expense or benefit related to federal or state income tax originated for capital gains and losses are included together with the applicable net realized or unrealized gain or loss line item. Deferred tax assets of the Taxable Blockers are reduced by a valuation allowance when, in the opinion of management, it is more-likely than-not that some portion or all of the deferred tax assets will not be realized.
FASB ASC Topic 740, Income Taxes, (“ASC 740”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the consolidated statements of operations. During the fiscal year ended February 29, 2020, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal. The 2017, 2018 and 2019 federal tax years for the Company remain subject to examination by the IRS. As of August 31, 2020 and February 29, 2020, there were no uncertain tax positions. The Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change significantly in the next 12 months.
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Dividends
Dividends to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the board of directors. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for reinvestment.
We have adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of our dividend distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividends automatically reinvested into additional shares of our common stock, rather than receiving the cash dividends. We have the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator.
Capital Gains Incentive Fee
The Company records an expense accrual on the consolidated statements of operations, relating to the capital gains incentive fee payable on the consolidated statements of assets and liabilities, by the Company to the Manager when the net realized and unrealized gain on its investments exceed all net realized and unrealized 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 only reflected those realized capital gains net of realized and unrealized losses for the period.
New 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 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.
SEC Rule 12b-2 Update
In March 2020, the SEC adopted a final rule under SEC Release No. 34-88365 (the “Final Rule”), amending the accelerated filer and large accelerated filer definitions in Exchange Act Rule 12b-2. The amendments include a provision under which a BDC will be excluded from the “accelerated filer” and “large accelerated filer” definitions if the BDC has (1) a public float of $75 million or more, but less than $700 million, and (2) has annual investment income of less than $100 million. In addition, BDCs are subject to the same transition provisions for accelerated filer and large accelerated filer status as other issuers, but instead substituting investment income for revenue. The amendments will reduce the number of issuers required to comply with the auditor attestation on the internal control over financial reporting requirement provided under Section 404(b) of the Sarbanes-Oxley Act of 2002. The Final Rule applies to annual report filings due on or after April 27, 2020. The Company is currently assessing this Final Rule, but believes it most likely will no longer be an accelerated filer.
Risk Management
In the ordinary course of its business, the Company manages a variety of risks, including market risk and credit risk. Market risk is the risk of potential adverse changes to the value of investments because of changes in market conditions such as interest rate movements and volatility in investment prices.
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Credit risk is the risk of default or non-performance by portfolio companies, equivalent to the investment’s carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents, including those in reserve accounts, at a major financial institution and credit risk related to any of its derivative counterparties.
The Company has investments in lower rated and comparable quality unrated high yield bonds and bank loans. Investments in high yield investments are accompanied by a greater degree of credit risk. The risk of loss due to default by the issuer is significantly greater for holders of high yield securities, because such investments are generally unsecured and are often subordinated to other creditors of the issuer.
Note 3. Investments
As noted above, the Company values all investments in accordance with ASC 820. ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
• Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
• Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities, for which some level of recent trading activity has been observed.
• Level 3 — Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the asset or liability or may use Level 2 inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level 3 if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.
In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by the board of directors that is consistent with ASC 820 and the 1940 Act (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.
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Note 3. Investments (cont.)
The following table presents fair value measurements of investments, by major class, as of August 31, 2020 (dollars in thousands), according to the fair value hierarchy:
Fair Value Measurements
Level 1
Level 2
Level 3
First lien term loans
389,912
Second lien term loans
50,295
Unsecured term loans
6,522
Structured finance securities
31,096
Equity interests
30,292
508,117
The following table presents fair value measurements of investments, by major class, as of February 29, 2020 (dollars in thousands), according to the fair value hierarchy:
346,233
73,570
4,346
32,470
29,013
485,632
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2020 (dollars in thousands):
Balance as of February 29, 2020
408
943
(2,197
(846
431
175
606
(12,446
(1,393
(324
823
(2,030
(15,370
64,899
2,500
3,309
70,708
Sales and repayments
(9,633
(23,000
(32,633
Balance as of August 31, 2020
Net change in unrealized appreciation (depreciation) for the period relating to those Level 3 assets that were still held by the Company at the end of the period
(12,211
(1,345
822
(2,028
(15,086
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Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK interests.
Sales and repayments represent net proceeds received from investments sold, and principal paydowns received during the period.
Transfers and restructurings, if any, are recognized at the beginning of the period in which they occur. There were no transfers or restructures in or out of Levels 1, 2 or 3 during the six months ended August 31, 2020.
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended August 31, 2019 (dollars in thousands):
Balance as of February 28, 2019
202,846
125,786
2,100
35,328
35,960
402,020
309
1,795
2,040
(1,066
3,078
257
224
481
(175
225
(26
(1,474
6,897
5,447
116,631
3,275
119,906
(15,669
(28,000
(2,253
(45,922
60
1,810
1,870
Balance as of August 31, 2019
304,259
100,030
2,074
35,894
44,623
486,880
Net change in unrealized appreciation (depreciation) for the year relating to those Level 3 assets that were still held by the Company at the end of the period
71
(1,473
3,726
2,123
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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of August 31, 2020 were as follows (dollars in thousands):
Valuation Technique
Unobservable Input
Range
Weighted Average*
Market Comparables
Market Yield (%)
7.0% – 38.1%
11.3%
EBITDA Multiples (x)
0.0x
11.1% – 46.6%
16.2%
5.0x
15.8% – 25.1%
18.5%
5.2x
Discounted Cash Flow
Discount Rate (%)
11.75% – 22.00%
19.2%
Recovery Rate (%)
35% – 70%
70.0%
Prepayment Rate (%)
10.0%
4.0x – 14.0x
7.0x
Revenue Multiples (x)
1.0x – 38.3x
6.7x
* The weighted average in the table above is calculated based on each investment’s fair value weighting, using the applicable unobservable input.
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of February 29, 2020 were as follows (dollars in thousands):
7.8% – 12.5%
9.7%
9.5% – 85.1%
13.0%
18.3% – 21.3%
19.8%
9.25% – 16.00%
14.2%
35.0% – 70.0%
20.0%
6.5x
1.0x – 40.7x
7.3x
For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the earnings before interest, tax, depreciation and amortization (“EBITDA”) or revenue valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For
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investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate and prepayment rate, in isolation, would result in a significantly lower (higher) fair value measurement while a significant increase (decrease) in recovery rate, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a market quote in deriving a value, a significant increase (decrease) in the market quote, in isolation, would result in a significantly higher (lower) fair value measurement.
The composition of our investments as of August 31, 2020 at amortized cost and fair value was as follows (dollars in thousands):
Investments at Amortized Cost
Amortized Cost Percentage of Total Portfolio
Investments at Fair Value
Fair Value Percentage of Total Portfolio
399,226
76.2
76.7
53,596
9.9
7,261
31,323
6.1
32,748
6.2
524,154
100.0
The composition of our investments as of February 29, 2020 at amortized cost and fair value was as follows (dollars in thousands):
343,100
70.5
71.3
75,478
15.5
15.1
4,761
33,521
6.9
29,439
486,299
For loans and debt securities for which market quotations are not available, we determine their fair value based on third party indicative broker quotes, where available, or the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield valuation methodology. In applying the market yield valuation methodology, we determine the fair value based on such factors as market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. If, in our judgment, the market yield methodology is not sufficient or appropriate, we may use additional methodologies such as an asset liquidation or expected recovery model.
For equity securities of portfolio companies and partnership interests, we determine the fair value based on the market approach with value then attributed to equity or equity like securities using the enterprise value waterfall valuation methodology. Under the enterprise value waterfall valuation methodology, we determine the enterprise fair value of the portfolio company and then waterfall the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For
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non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities. We also take into account historical and anticipated financial results.
Our investment in Saratoga CLO is carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by our Manager and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. In connection with the refinancing of the Saratoga CLO liabilities, we ran Intex models based on assumptions about the refinanced Saratoga CLO’s structure, including capital structure, cost of liabilities and reinvestment period. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO at August 31, 2020. The inputs at August 31, 2020 for the valuation model include:
• Default rate: 2.0%
• Recovery rate: 35% – 70%
• Discount rate: 22.0%
• Prepayment rate: 10.0%
• Reinvestment rate / price: L+375bps / $97.00
Investment Concentration
Set forth is a brief description of each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of August 31, 2020.
CLEO Communications Holding, LLC (“Cleo”) is a provider of technology enabled data communication and integration platform for daily business transactions. Cleo’s platform allows for the automation of business-to-business transaction information for customers operating in the retail, manufacturing, logistics and the healthcare verticals. The platform also allows for internal application-to-application communication, allowing customers’ core enterprise software applications to easily share and transfer data.
Destiny Solutions Inc.
Destiny Solutions provides a SaaS-based student lifecycle management (“SLM”) software solution used by higher education institutions to manage their continuing education (“CE”) and non-degree educational programs for “non-traditional” students who fall outside of the “traditional” student profile. Traditional students are full-time students working toward an undergraduate, graduate, or doctorate degree. Destiny’s software acts as the ERP, CRM, e-commerce platform, and student information management system for non-traditional student programs.
The Company has a collateral management agreement with Saratoga CLO, pursuant to which the Company acts as its collateral manager. The Saratoga CLO invests primarily in senior secured first lien term loans. The
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Company also holds an investment in the subordinated note and Class F-R-2 and G-R-2 notes of the Saratoga CLO. In addition, the Company entered into an unsecured loan agreement with CLO 2013-1 Warehouse 2, a wholly-owned subsidiary of Saratoga CLO, in order to provide capital necessary to support warehouse activities.
Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”)
On January 22, 2008, the Company entered into a collateral management agreement with Saratoga CLO, pursuant to which the Company acts 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, the Company completed a second refinancing of the Saratoga CLO with its reinvestment period extended to October 2018.
On December 14, 2018, the Company completed a third refinancing and upsize of the Saratoga CLO (the “2013-1 Reset CLO Notes”). 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 ending 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, the Company 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 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, the Company also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par.
On February 11, 2020, the Company entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with CLO 2013-1 Warehouse 2, a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse 2 Loan, which expires on August 20, 2021, bears interest at an annual rate of 3M USD LIBOR + 7.5%. As of August 31, 2020, the aggregate principal amount and fair value of the Company’s investment in the CLO 2013-1 Warehouse 2 Loan was $5.0 million and $4.6 million, respectively.
The Saratoga CLO remains 100.0% owned and managed by the Company. 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. 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%.
For the three months ended August 31, 2020 and August 31, 2019, we accrued management fee income of $0.6 million and $0.6 million, respectively, and interest income of $0.7 million and $1.1 million, respectively, from the Saratoga CLO.
For the six months ended August 31, 2020 and August 31, 2019, we accrued management fee income of $1.3 million and $1.3 million, respectively, and interest income of $1.4 million and $2.2 million, respectively, from the Saratoga CLO.
As of August 31, 2020, the aggregate principal amounts of the Company’s investments in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of the Saratoga CLO was $69.5 million, $2.5 million and $7.5 million, respectively, which had a corresponding fair value of $21.6 million, $2.3 million and $7.2 million, respectively. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga
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Note 4. Investment in Saratoga Investment Corp. CLO 2013-1, Ltd. (“Saratoga CLO”) (cont.)
CLO. As of August 31, 2020, Saratoga CLO had investments with a principal balance of $521.6 million and a weighted average spread over LIBOR of 3.9% and had debt with a principal balance of $489.2 million with a weighted average spread over LIBOR of 2.2%. As a result, Saratoga CLO earns a “spread” between the interest income it receives on its investments and the interest expense it pays on its debt and other operating expenses, which is distributed quarterly to the Company as the holder of its subordinated notes. As of August 31, 2020, the present value of the projected future cash flows of the subordinated notes was approximately $ 22.0 million, using a 22.0% discount rate. The Company’s total investment in the subordinate notes of Saratoga CLO is $43.8 million, which is comprised of the initial investment of $30.0 million in January 2008 plus the additional investment of $13.8 million in December 2018, and to date the Company has since received distributions of $63.9 million, management fees of $23.4 million and incentive fees of $1.2 million. In conjunction with the third refinancing of the 2013-1 Reset CLO Notes on December 14, 2018, the Company is no longer entitled to receive an incentive management fee from Saratoga CLO.
As of February 29, 2020, the Company determined that the fair value of its investment in the subordinated notes of Saratoga CLO was $22.6 million. The Company determines the fair value of its investment in the subordinated notes of Saratoga CLO based on the present value of the projected future cash flows of the subordinated notes over the life of Saratoga CLO. As of February 29, 2020, the fair value of its investment in the Class F-R-2 Notes and G-R-2 Notes of Saratoga CLO was $2.5 million and $7.4 million, respectively. As of February 29, 2020, Saratoga CLO had investments with a principal balance of $528.4 million and a weighted average spread over LIBOR of 4.0% and had debt with a principal balance of $475.1 million with a weighted average spread over LIBOR of 2.2%. As of February 29, 2020, the present value of the projected future cash flows of the subordinated notes was approximately $22.9 million, using a 16.0% discount rate.
Below is certain financial information from the separate financial statements of Saratoga CLO as of August 31, 2020 (unaudited) and February 29, 2020 and for the three and six months ended August 31, 2020 (unaudited) and August 31, 2019 (unaudited).
34
Statements of Assets and Liabilities
February 29, 2020
Loans at fair value (amortized cost of $513,438,299 and $523,438,207, respectively)
486,024,173
500,999,677
Equities at fair value (amortized cost of $2,708,549 and $2,566,752, respectively)
Total investments at fair value (amortized cost of $516,146,848 and $526,004,959, respectively)
500,999,934
5,108,193
9,081,041
Receivable from open trades
5,146,467
10,419,700
Interest receivable (net of reserve of $370,149 and $307,705, respectively)
1,645,239
1,294,523
Prepaid expenses and other assets
28,898
84,526
497,952,970
521,879,724
Interest payable
1,500,259
2,090,188
Payable from open trades
9,852,500
36,673,471
Accrued base management fee
56,825
54,441
Accrued subordinated management fee
227,298
217,766
69,290
81,822
Loan payable, related party
Loan payable, third party
14,161,707
2,600,000
Saratoga Investment Corp. CLO 2013-1, Ltd. Notes:
Class A-1FL-R-2 Senior Secured Floating Rate Notes
255,000,000
Class A-1FXD-R-2 Senior Secured Fixed Rate Notes
25,000,000
Class-A-2-R-2 Senior Secured Floating Rate Notes
40,000,000
Class B-R-2 Senior Secured Floating Rate Notes
59,500,000
Class C-R-2 Deferrable Mezzanine Floating Rate Notes
22,500,000
Discount on Class C-R-2 Notes
(502,993
(530,448
Class D-R-2 Deferrable Mezzanine Floating Rate Notes
31,000,000
Discount on Class D-R-2 Notes
(915,299
(965,259
Class E-1-R-2 Deferrable Mezzanine Floating Rate Notes
27,000,000
Class E-2-R-2 Deferrable Mezzanine Fixed Rate Notes
Class F-R-2 Deferrable Junior Floating Rate Notes
Class G-R-2 Deferrable Junior Floating Rate Notes
Deferred debt financing costs
(2,222,411
(2,340,764
Subordinated Notes
Discount on Subordinated Notes
(21,714,099
(22,899,324
545,013,077
556,981,893
Ordinary equity, par value $1.00, 250 ordinary shares authorized, 250 and 250 common shares issued and outstanding, respectively
250
Total distributable earnings (loss)
(47,060,357
(35,102,419
(47,060,107
(35,102,169
35
Statements of Operations
6,437,801.0
8,304,492
13,651,290
16,508,199
214
26,440
3,501
33,803
Other income
184,969
40,845
294,610
180,968
6,622,984
8,371,777
13,949,401
16,722,970
EXPENSES
5,769,357
6,748,508
13,057,925
13,167,316
Base management fee
126,481
125,949
252,002
251,852
Subordinated management fee
505,921
503,796
1,008,006
1,007,409
94,782
88,204
183,272
212,712
Trustee expenses
53,876
118,136
105,734
138,015
Other expense
12,228
11,196
40,280
43,734
Total expenses
6,562,645
7,595,789
14,647,219
14,821,038
NET INVESTMENT INCOME (LOSS)
60,339
775,988
(697,818
1,901,932
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss from investments
(4,338,586
(1,218,364
(6,142,470
(2,162,298
Net change in unrealized depreciation on investments
26,457,779
(2,174,060
(5,117,650
(4,380,055
22,119,193.00
(3,392,424
(11,260,120
(6,542,353
22,179,532
(2,616,436
(11,957,938
(4,640,421
36
Schedule of Investments
Issuer Name
Asset Name
Asset Type
Reference Rate/Spread
LIBOR Floor
Current Rate (All In)
Maturity Date
Education Management II LLC(b)
Services: Consumer
Education Management II A-2 Preferred Shares
Equity
0.00
18,975
1,897,538
Education Management II A-1 Preferred Shares
6,692
669,214
McDermott International (Americas) Inc.
Construction & Building
McDermott International - Class A C/S (07/20)
141,797
1011778 B.C. Unlimited Liability Company
Beverage Food & Tobacco
Term Loan B4
Loan
1M USD LIBOR+
1.75
1.91
11/19/2026
1,492,500
1,451,681
1,434,666
ABB Con-Cise Optical Group LLC
Consumer goods: Non-durable
Term Loan B
6M USD LIBOR+
5.00
1.00
6.00
6/15/2023
2,071,167
2,054,288
1,734,603
ADMI Corp.
2.75
2.91
4/30/2025
1,960,276
1,953,089
1,885,550
Advantage Sales & Marketing Inc.
Services: Business
First Lien Term Loan
3M USD LIBOR+
3.25
4.25
7/23/2021
2,358,618
2,357,934
2,240,687
Term Loan B Incremental
487,437
484,632
461,847
Advisor Group Holdings Inc
Banking Finance Insurance & Real Estate
Term Loan (7/19)
5.16
7/31/2026
497,500
496,345
480,709
Aegis Toxicology Sciences Corporation
Healthcare & Pharmaceuticals
Term Loan
5.50
6.50
5/9/2025
3,930,000
3,902,756
3,178,388
Agiliti Health Inc.
Term Loan (1/19)
3.00
3.16
1/5/2026
493,750
482,641
AI Convoy (Luxembourg) S.a.r.l.
Aerospace & Defense
3.50
4.50
1/15/2027
1,496,250
1,489,146
1,458,844
AI Mistral (Luxembourg) Subco Sarl
High Tech Industries
4.00
3/11/2024
483,750
357,975
AIS Holdco LLC
5.24
8/15/2025
2,390,625
2,381,617
2,079,844
Alchemy Copyrights LLC
Media: Diversified & Production
Prime+
2.25
0.75
8/14/2027
496,270
Alchemy US Holdco 1 LLC
Metals & Mining
5.66
10/10/2025
1,925,000
1,902,423
1,780,625
Alion Science and Technology Corporation
Term Loan 7/20
3.75
4.75
7/23/2024
3,982,197
4,013,320
Allen Media LLC
Media: Advertising Printing & Publishing
Term Loan B (1/20)
5.74
2/10/2027
2,992,027
2,978,282
2,876,086
Altisource S.a r.l.
Term Loan B (03/18)
4/3/2024
1,454,005
1,447,377
1,066,265
Altra Industrial Motion Corp.
Capital Equipment
2.00
2.16
10/1/2025
1,686,566
1,683,362
1,650,204
37
Schedule of Investments — (continued)
American Greetings Corporation
4/5/2024
4,693,527
4,690,468
4,517,520
American Residential Services LLC
6/30/2022
3,905,209
3,897,455
3,983,313
Amerilife Holdings LLC
Unfunded Commitment
4.16
3/18/2027
113,636
60,606
Term loan
1,386,364
1,376,801
1,362,102
Amynta Agency Borrower Inc.
4.66
2/28/2025
3,444,786
3,411,261
3,097,069
Anastasia Parent LLC
3.99
8/11/2025
982,500
978,802
404,869
Anchor Glass Container Corporation
Containers Packaging & Glass
Term Loan (07/17)
12/7/2023
482,575
481,256
370,806
Api Group DE Inc
2.50
2.66
10/1/2026
995,000
990,443
975,926
APLP Holdings Limited Partnership
Utilities
Term Loan B (01/20)
4/11/2025
1,815,789
1,786,846
Aramark Services Inc.
2,493,750
2,407,504
2,373,427
Arctic Glacier U.S.A. Inc.
Term Loan (3/18)
3/20/2024
3,350,967
3,334,451
2,736,266
Aretec Group Inc.
Term Loan (10/18)
4.41
1,970,000
1,966,202
1,827,175
Aristocrat International PTY Ltd
Hotel Gaming & Leisure
Term Loan (5/20)
10/21/2024
981,030
1,002,500
ASG Technologies Group Inc.
7/31/2024
463,892
462,437
431,651
Asplundh Tree Expert LLC
2.74
8/19/2027
1,000,310
AssetMark Financial Holdings Inc.
3.24
11/14/2025
1,237,500
1,235,762
1,225,125
Asurion LLC
Term Loan B-4 (Replacement)
8/4/2022
868,184
866,338
858,052
Term Loan B6
11/3/2023
490,182
487,591
481,197
Athenahealth Inc.
4.74
2/11/2026
1,975,000
1,942,973
1,956,494
Avaya Inc.
Telecommunications
12/16/2024
3,169,156
3,141,330
3,075,412
38
Avison Young (Canada) Inc.
1/30/2026
3,458,665
3,406,041
3,216,558
Avolon TLB Borrower 1 (US) LLC
Term Loan B3
1/15/2025
854,775
962,780
B&G Foods Inc.
10/10/2026
206,458
205,536
205,362
Ball Metalpack Finco LLC
7/31/2025
3,924,912
3,910,129
3,732,592
Berry Global Inc.
Chemicals Plastics & Rubber
Term Loan Y
7/1/2026
4,962,437
4,957,197
4,806,766
Blackstone Mortgage Trust Inc.
Term Loan B-2
5.75
4/23/2026
485,536
496,250
Blount International Inc.
Forest Products & Paper
Term Loan B (09/18)
4/12/2023
3,436,294
3,433,892
3,413,099
Blucora Inc.
Term Loan (11/17)
5/22/2024
1,454,367
1,443,021
1,428,916
Bombardier Recreational Products Inc.
Consumer goods: Durable
Term Loan (1/20)
5/24/2027
990,025
981,661
948,256
Bracket Intermediate Holding Corp.
4.49
9/5/2025
978,839
956,709
Broadstreet Partners Inc.
3.41
1/27/2027
2,019,552
2,017,887
1,951,392
Brookfield Property REIT Inc.
8/27/2025
3,989,847
3,141,492
3,190,960
Brookfield WEC Holdings Inc.
Energy: Electricity
Term Loan 1/20
8/1/2025
494,975
493,943
486,135
Buckeye Partners L.P.
Utilities: Oil & Gas
11/2/2026
997,500
993,227
979,685
BW Gas & Convenience Holdings LLC
6.25
6.41
11/18/2024
2,925,000
2,822,650
2,910,375
Calceus Acquisition Inc.
2/12/2025
962,500
953,838
938,438
Callaway Golf Company
Retail
1/2/2026
693,750
682,035
692,453
Cardtronics USA Inc
6/29/2027
491,402
498,440
CareerBuilder LLC
6.75
7.75
7/31/2023
3,393,388
3,202,226
3,065,349
Casa Systems Inc.
12/20/2023
1,447,500
1,439,932
1,351,603
Castle US Holding Corporation
Term Loan B (USD)
1/29/2027
498,958
496,722
479,624
CCS-CMGC Holdings Inc.
2,462,500
2,443,119
2,187,784
Cengage Learning Inc.
5.25
6/7/2023
1,439,959
1,429,478
1,182,566
39
CenturyLink Inc.
2.41
3/15/2027
2,985,000
2,981,784
2,879,898
Chemours Company The
4/3/2025
994,911
939,133
945,991
Citadel Securities LP
Term Loan (2/20)
2/27/2026
987,538
986,514
978,897
Clarios Global LP
Automotive
3.66
4/30/2026
1,488,750
1,475,687
1,457,576
Compass Power Generation L.L.C.
Utilities: Electric
Term Loan B (08/18)
12/20/2024
1,868,660
1,864,793
1,832,072
Concordia International Corp.
9/6/2024
1,171,510
1,124,552
1,117,328
Connect U.S. Finco LLC
Delayed Draw Term Loan B
12/11/2026
2,992,500
2,835,106
2,908,351
Consolidated Communications Inc.
10/5/2023
1,467,819
1,458,706
1,429,905
Coral-US Co-Borrower LLC
Term Loan B-5
1/31/2028
1,929,000
Covia Holdings Corporation(b)
6/2/2025
679,153
CPI Acquisition Inc
Term Loan B (1st Lien)
8/17/2022
1,436,782
1,429,560
1,245,690
Crown Subsea Communications Holding Inc.
6.16
11/3/2025
949,545
941,321
941,236
CSC Holdings LLC
Media: Broadcasting & Subscription
Term Loan B (03/17)
7/17/2025
1,964,467
1,944,222
1,893,255
1/15/2026
492,500
491,569
474,647
4/15/2027
480,799
Cushman & Wakefield U.S. Borrower LLC
8/21/2025
3,935,187
3,920,178
3,761,370
Daseke Companies Inc.
Transportation: Cargo
Replacement Term Loan
2/27/2024
1,945,716
1,937,945
1,883,706
Dealer Tire LLC
Term Loan B-1
12/12/2025
2,978,001
2,912,853
Delek US Holdings Inc.
3/31/2025
6,413,343
6,352,525
6,038,868
Dell International L.L.C.
9/19/2025
3,776,190
3,772,197
3,747,869
Delta 2 (Lux) SARL
2/1/2024
818,289
818,662
792,210
Delta Air Lines Inc.
Transportation: Consumer
Term Loan B (4/20)
5/1/2023
243,209
248,973
DHX Media Ltd.
12/29/2023
279,282
278,182
263,922
40
Diamond Sports Group LLC
8/24/2026
3,461,281
2,889,534
2,920,456
Digital Room Holdings Inc.
5.31
5/21/2026
2,935,026
2,509,650
Dole Food Company Inc.
4/8/2024
462,500
461,258
456,816
DRW Holdings LLC
11/27/2026
4,975,000
4,929,654
4,850,625
DynCorp International Inc.
7.00
8/18/2025
2,887,500
2,812,505
2,858,625
Eagletree-Carbide Acquisition Corp.
8/28/2024
4,887,115
4,864,317
4,850,461
EIG Investors Corp.
Term Loan (06/18)
2/9/2023
2,174,120
2,163,623
2,160,532
Encapsys LLC
Term Loan B2
11/7/2024
494,856
490,713
484,959
Endo Luxembourg Finance Company I S.a.r.l.
Term Loan B (4/17)
4/29/2024
3,916,835
3,897,568
3,769,132
Energy Acquisition LP
Term Loan (6/18)
6/26/2025
1,960,000
1,952,522
1,695,400
Envision Healthcare Corporation
Term Loan B (06/18)
3.91
4,925,000
4,916,157
3,554,373
EyeCare Partners LLC
EyeCare Partners T/L B
4.06
2/18/2027
1,617,568
1,615,998
1,502,575
EyeCare Partners LLC(a)
FinCo I LLC
2018 Term Loan B
12/27/2022
359,858
359,362
355,990
First Brands Group LLC
Term Loan B-3
2M USD LIBOR+
7.50
8.50
2/2/2024
5,134,766
5,010,802
5,032,070
First Eagle Holdings Inc.
Refinancing Term Loan
2/1/2027
5,422,750
5,401,370
5,283,331
Fitness International LLC
Term Loan B (4/18)
3.56
4/18/2025
1,330,058
1,323,599
749,820
Franklin Square Holdings L.P.
4,421,245
4,393,989
4,321,767
Froneri US Inc.
1,995,417
1,923,920
Fusion Connect Inc.
Take Back 2nd Out Term Loan
7/14/2025
784,776
766,136
329,606
GBT Group Services B.V.
8/13/2025
4,421,250
4,420,330
4,012,284
General Nutrition Centers Inc.(b)
FILO Term Loan
9.00
9.16
1/3/2023
585,849
584,990
567,178
8.75
9.50
3/4/2021
644,902
644,620
467,554
41
DIP New Money Term Loan
11.25
12.25
12/23/2020
207,475
201,279
DIP Roll-Up Term Loan
207,451
Genesee & Wyoming Inc.
Term Loan (11/19)
2.24
12/30/2026
1,489,453
1,470,904
GEO Group Inc. The
Term Loan Refinance
3/25/2024
3,984,563
3,641,859
3,663,925
GI Chill Acquisition LLC
4.24
8/6/2025
2,456,250
2,446,891
2,407,125
Gigamon Inc.
12/27/2024
2,945,200
2,925,117
2,893,659
Global Tel*Link Corporation
11/28/2025
5,022,463
4,767,463
4,358,393
Go Wireless Inc.
12/22/2024
3,113,636
3,076,635
2,886,341
Goodyear Tire & Rubber Company The
Second Lien Term Loan
3/7/2025
2,926,213
2,869,380
Graham Packaging Company Inc
Initial Term Loan
8/4/2027
992,528
998,000
Greenhill & Co. Inc.
4/12/2024
3,661,538
3,628,690
3,533,385
Grosvenor Capital Management Holdings LLLP
3/28/2025
660,340
657,910
657,038
Guidehouse LLP
5/1/2025
3,944,810
3,924,153
3,900,431
Harland Clarke Holdings Corp.
1,667,985
1,661,951
1,174,061
Helix Acquisition Holdings Inc.
Term Loan (2019 Incremental)
9/30/2024
2,962,500
2,915,706
2,540,344
Helix Gen Funding LLC
Term Loan B (02/17)
6/3/2024
259,851
259,560
255,194
HLF Financing SaRL LLC
3,916,369
3,863,190
Holley Purchaser Inc.
10/24/2025
2,443,587
2,290,125
Hudson River Trading LLC
5,970,000
5,947,878
5,902,837
Hyperion Refinance S.a.r.l.
Tem Loan (12/17)
1,701,058
1,693,898
1,682,397
ICH US Intermediate Holdings II Inc.
12/24/2026
4,875,000
4,693,983
4,777,500
42
Idera Inc.
6/28/2024
3,916,989
3,904,408
3,871,277
Inmar Inc.
5/1/2024
3,439,315
3,368,971
3,210,841
Innophos Holdings Inc.
2/5/2027
498,750
496,411
492,516
Intrado Corporation
Term Loan B (Olympus Merger)
10/10/2024
1,231,061
1,165,176
1,098,599
2,946,140
2,881,961
2,610,192
ION Media Networks Inc.
12/18/2024
1,992,500
1,949,175
1,942,688
Isagenix International LLC
6/16/2025
2,719,166
2,677,938
1,196,433
Jane Street Group LLC
1/31/2025
997,494
976,498
982,531
Jefferies Finance LLC / JFIN Co-Issuer Corp
6/3/2026
3,213,091
3,196,484
3,102,657
Jill Holdings LLC
Term Loan (1st Lien)
5/9/2022
1,789,685
1,786,926
1,055,914
JP Intermediate B LLC
11/20/2025
4,558,806
4,516,813
3,583,222
KAR Auction Services Inc.
Term Loan B (09/19)
9/21/2026
248,125
247,593
240,061
Kindred Healthcare Inc.
7/2/2025
1,989,873
1,971,233
1,969,975
KREF Holdings X LLC
487,500
495,000
Lakeland Tours LLC
2,444,975
2,438,428
1,224,517
Lealand Finance Company B.V.
Energy: Oil & Gas
Exit Term Loan
6/30/2025
320,681
258,950
Learfield Communications LLC
Initial Term Loan (A-L Parent)
12/1/2023
482,500
481,276
369,248
Lifetime Brands Inc.
2,905,639
2,872,366
2,774,885
Lighthouse Network LLC
12/2/2024
1,635,688
1,633,326
1,629,555
Lightstone Holdco LLC
1/30/2024
1,322,520
1,320,931
1,116,193
Term Loan C
74,592
74,506
62,955
Lindblad Expeditions Inc.
US 2018 Term Loan
3/27/2025
392,286
391,626
333,443
Cayman Term Loan
98,071
97,907
83,361
Liquidnet Holdings Inc.
7/15/2024
2,046,017
2,041,794
1,966,734
43
LogMeIn Inc.
Term Loan (8/20)
4.99
8/13/2027
1,950,000
1,949,160
LPL Holdings Inc.
Term Loan B1
11/11/2026
1,238,986
1,236,258
1,211,109
MA FinanceCo. LLC
6/5/2025
487,984
498,125
Marriott Ownership Resorts Inc.
8/29/2025
1,425,338
Match Group Inc.
1.99
2/15/2027
249,438
243,020
McAfee LLC
1,148,497
1,139,958
1,136,587
McGraw-Hill Global Education Holdings LLC
5/4/2022
2,926,093
2,644,605
2,518,868
Meredith Corporation
578,738
577,795
556,219
Messer Industries GMBH
3/2/2026
2,956,122
2,898,303
Michaels Stores Inc.
1/30/2023
2,584,336
2,577,265
2,477,732
Midwest Physician Administrative Services LLC
Term Loan (2/18)
8/15/2024
965,956
962,738
932,631
Milk Specialties Company
Term Loan (2/17)
8/16/2023
3,879,250
3,834,706
3,733,778
Mitchell International Inc.
Term Loan (7/20)
0.50
11/29/2024
940,632
975,000
MKS Instruments Inc.
2/2/2026
882,701
875,521
860,360
MLN US HoldCo LLC
985,000
983,345
832,946
MRC Global (US) Inc.
9/20/2024
487,481
486,660
443,607
Natgasoline LLC
3.81
490,629
458,025
National Mentor Holdings Inc.
3/9/2026
1,890,242
1,874,156
1,870,394
86,065
85,353
85,161
NeuStar Inc.
Term Loan B4 (03/18)
8/8/2024
2,641,566
2,607,050
2,470,973
885,162
871,566
835,814
Nexstar Broadcasting Inc.
9/18/2026
240,156
239,106
235,387
NorthPole Newco S.a r.l
7.24
3/3/2025
4,687,500
4,290,679
4,230,469
44
Novetta Solutions LLC
10/17/2022
1,909,870
1,902,890
1,856,164
10/16/2023
994,951
945,000
NPC International Inc.(b)
4/19/2024
487,124
341,859
Octave Music Group Inc. The
5/29/2025
3,965,517
3,928,861
3,370,690
Onex Carestream Finance LP
5/8/2023
2,359,150
2,354,150
2,241,193
Owens & Minor Distribution Inc.
490,000
482,815
469,939
Pathway Vet Alliance LLC
Term Loan (3/20)
3/31/2027
461,262
449,912
452,180
Pathway Vet Alliance LLC(a)
Delayed Draw Term Loan (3/20)
Patriot Container Corp.
Environmental Industries
3/20/2025
497,455
495,198
481,756
PCI Gaming Authority
5/29/2026
878,269
874,407
849,480
Penn National Gaming Inc.
10/15/2025
1,925,464
1,927,000
Peraton Corp.
1,434,898
1,433,909
1,413,374
PG&E Corporation
6/23/2025
492,700
491,565
PGX Holdings Inc.
9/29/2023
3,322,181
3,321,574
2,480,573
PI UK Holdco II Limited
Term Loan B1 (PI UK Holdco II)
1/3/2025
1,466,250
1,460,349
1,385,606
Pitney Bowes Inc.
1/7/2025
2,665,459
2,852,651
Pixelle Specialty Solutions LLC
10/31/2024
1,974,747
1,939,412
1,915,505
Plastipak Packaging Inc.
10/15/2024
2,944,583
2,923,183
2,900,414
Playtika Holding Corp.
Trm Loan B (12/19)
12/10/2024
2,912,658
2,861,250
2,933,833
Polymer Process Holdings Inc
2,919,204
2,816,540
Premier Dental Services Inc.
Term Loan (12/18)
6/30/2023
426,216
426,792
370,808
Presidio Holdings Inc.
3.74
1/22/2027
498,921
491,250
Prime Security Services Borrower LLC
Term Loan (Protection One/ADT)
9M USD LIBOR+
9/23/2026
2,977,500
2,961,836
2,964,846
Priority Payment Systems Holdings LLC
2,466,889
2,457,760
2,392,882
Project Accelerate Parent LLC
1/2/2025
1,955,000
1,948,413
1,661,750
45
Prometric Holdings Inc.
1/29/2025
488,813
487,171
447,874
Pug LLC
Term Loan B (02/20)
2/12/2027
490,405
416,985
Rackspace Hosting Inc.
471,065
468,014
465,473
Radiology Partners Inc.
7/9/2025
1,432,727
1,427,050
1,365,275
Research Now Group Inc.
3,907,368
3,806,563
3,692,150
Resolute Investment Managers Inc.
Term Loan (10/17)
4/29/2022
2,665,868
2,666,901
2,645,874
Rexnord LLC
8/21/2024
862,069
858,526
Reynolds Consumer Products LLC
2/4/2027
1,435,644
1,433,954
1,410,822
Robertshaw US Holding Corp.
977,500
975,708
816,213
Rocket Software Inc.
Term Loan (11/18)
2,950,000
2,939,336
2,841,027
RP Crown Parent LLC
Term Loan B (07/20)
1,990,049
1,983,760
RSA Security LLC
980,000
Russell Investments US Institutional Holdco Inc.
6/1/2023
5,637,965
5,584,591
5,585,814
Ryan Specialty Group LLC
7/23/2027
497,814
Sahara Parent Inc.
Term Loan B (11/18)
6.49
8/16/2024
1,945,350
1,930,898
1,905,236
Sally Holdings LLC
7/5/2024
768,409
765,889
751,119
Term Loan (Fixed)
Fixed
997,143
987,500
Samsonite International S.A.
4/25/2025
971,250
976,250
Savage Enterprises LLC
1,831,540
1,814,526
1,807,126
SCS Holdings I Inc.
1,980,050
1,975,903
1,934,271
Seadrill Operating LP
2/21/2021
899,872
891,020
121,258
Shutterfly Inc.
9/25/2026
870,968
831,783
788,844
SMB Shipping Logistics LLC
1,931,951
1,930,461
1,828,109
46
SMG US Midco 2 Inc.
Term Loan (01/20)
1/23/2025
422,253
Sotheby’s
3,307,138
3,244,553
3,253,396
SP PF Buyer LLC
12/19/2025
1,907,543
1,770,923
SRAM LLC
3/15/2024
1,697,664
1,691,551
1,684,932
SS&C European Holdings S.A.R.L.
4/16/2025
191,599
191,267
185,786
SS&C Technologies Inc.
272,712
272,232
264,438
491,158
490,238
476,703
Staples Inc.
Wholesale
Term Loan (03/19)
4/16/2026
1,950,313
1,651,271
Stats Intermediate Holdings LLC
5.41
7/10/2026
1,990,000
1,946,753
1,935,275
Steak N Shake Operations Inc.
3/19/2021
819,218
818,285
622,604
Sybil Software LLC
1,286,674
1,268,728
1,267,374
Teneo Holdings LLC
7/11/2025
2,481,250
2,396,921
2,382,000
Tenneco Inc.
1,477,500
1,466,301
1,313,749
Ten-X LLC
1,948,111
1,833,000
Terex Corporation
1/31/2024
984,071
967,750
TGG TS Acquisition Company
6.66
12/15/2025
2,716,936
2,600,449
2,615,050
The Edelman Financial Center LLC
7/21/2025
1,231,250
1,226,769
1,191,233
Thor Industries Inc.
Term Loan (USD)
2,935,080
2,867,994
2,898,391
Tivity Health Inc.
Term Loan A
3/8/2024
1,488,515
1,409,250
3/6/2026
2,312,501
2,263,829
2,168,617
T-Mobile USA Inc.
4/1/2027
1,970,460
2,004,260
Tosca Services LLC
8/18/2027
492,523
500,210
Transdigm Inc.
Term Loan G (02/20)
8/22/2024
4,085,761
4,089,847
3,874,078
Travel Leaders Group LLC
1/25/2024
2,450,000
2,447,192
1,739,500
47
TRC Companies Inc.
6/21/2024
3,359,545
3,350,429
3,209,777
992,500
979,476
949,495
Truck Hero Inc.
4/22/2024
2,912,431
2,897,909
2,805,223
Trugreen Limited Partnership
3/19/2026
976,452
968,278
961,806
Twin River Worldwide Holdings Inc.
5/11/2026
990,000
985,721
938,649
Uber Technologies Inc
7/13/2023
1,942,191
1,962,300
United Natural Foods Inc.
10/22/2025
3,447,500
3,268,118
3,357,003
Univar Solutions USA Inc.
Term Loan B3 (11/17)
7/1/2024
1,627,723
1,622,537
1,593,720
Univision Communications Inc.
2020 Replacement Term Loan
3/13/2026
2,529,686
2,520,324
2,469,606
URS Holdco Inc.
8/30/2024
968,337
959,206
786,474
US Ecology Holdings Inc.
496,461
490,038
VeriFone Systems Inc.
Term Loan (7/18)
8/20/2025
5,403,750
5,378,906
4,854,351
VFH Parent LLC
3,209,493
3,198,646
3,168,379
Victory Capital Holdings Inc.
1,881,527
1,843,330
1,850,952
Virtus Investment Partners Inc.
2,621,741
2,621,360
2,592,245
Vistra Operations Company LLC
2018 Incremental Term Loan
46,022.00
922,419
921,629
906,369
Vizient Inc.
Term Loan B-6
46,148.00
492,781
483,875
VM Consolidated Inc.
Term Loan B1 (02/20)
3.49
477,944
476,242
465,995
WeddingWire Inc.
3,940,000
3,933,426
3,762,700
Western Digital Corporation
Term Loan B-4
4/29/2023
823,135
809,384
815,931
Winter Park Intermediate Inc.
5.06
4/4/2025
1,974,745
1,958,221
1,879,306
Wirepath LLC
8/5/2024
2,940,156
2,919,340
2,697,592
48
WP CityMD Bidco LLC
8/13/2026
3,482,500
3,452,111
3,455,823
Xperi Holding Corporation
2,418,000
2,242,720
2,359,557
YS Garments LLC
6.24
8/9/2024
1,891,250
1,877,118
1,704,489
Zekelman Industries Inc
1/25/2027
968,074
Zep Inc.
8/12/2024
2,431,250
2,423,478
2,229,651
Zest Acquisition Corp.
3/14/2025
957,262
953,932
836,006
Seadrill Operating PIK R/C
PIK Revolver
R/C
2/22/2021
24,694
22,982
25,929
516,146,848
U.S. Bank Money Market(c)
Total cash and cash equivalents
(a) All or a portion of this investment has an unfunded commitment as of August 31, 2020
(b) As of August 31, 2020, the investment was in default and on non-accrual status.
(c) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of August 31, 2020.
1W USD LIBOR — The 1 week USD LIBOR rate as of August 31, 2020 was 0.11%.
2M USD LIBOR — The 2 month USD LIBOR rate as of August 31, 2020 was 0.19%.
3M USD LIBOR — The 3 month USD LIBOR rate as of August 31, 2020 was 0.34%.
6M USD LIBOR — The 6 month USD LIBOR rate as of August 31, 2020 was 0.31%.
Prime — The Prime Rate as of August 31, 2020 was 3.25%.
49
ReferenceRate/Spread
Education Management II LLC
190
67
3.27
500,000.00
498,790
491,665
24 Hour Fitness Worldwide Inc.
Term Loan (5/18)
5.02
5/30/2025
2,959,950
2,949,872
1,943,710
6.52
2,081,927
2,062,239
1,969,149
4.27
1,962,286
1,924,848
4.77
2,371,131
2,370,010
2,286,173
489,950
485,523
470,352
498,753
486,875
6.96
3,950,000
3,919,494
3,695,225
4.52
486,325
Agrofresh Inc.
6.27
7/30/2021
2,889,487
2,886,790
2,677,601
AI Convoy Bidco Limited
AI Convoy Bidco T/L B (USD)
4.96
1,483,125
486,250
384,138
6.46
2,421,875
2,411,617
2,228,125
7.02
1,925,236
1,945,125
6.02
8/19/2021
3,377,293
3,373,263
3,373,071
Allen Media T/L B (1/20)
2,936,250
5.46
1,446,493
1,353,141
3.52
1,767,163
1,763,366
1,748,943
50
American Dental Partners Inc.
5.71
3/24/2023
982,019
982,575
4,889,524
4,886,331
4,788,702
5.52
3,925,767
3,916,564
3,896,324
AmeriLife Group LLC
AmeriLife T/L
838,710
836,613
832,419
AmeriLife Group LLC(a)
Amex GBT (2/20) T/L
2/26/2027
2,993,363
2,933,496
2,926,012
Amex GBT 2/20 D/T/L(a)
3,462,357
3,425,731
3,224,320
5.27
983,508
759,141
4.21
485,063
483,537
354,789
4.02
995,123
APLP Holdings T/L B (Atlantic Power)
4/13/2023
1,977,500
1,498,209
1,484,070
3,332,339
3,225,306
5.77
1,980,000
1,975,743
1,937,093
488,775
487,107
476,556
4.46
1,235,582
1,228,219
Astoria Energy LLC
12/24/2021
1,391,552
1,385,662
1,384,595
1,876,925
1,872,057
1,853,069
492,773
489,808
485,381
1,985,000
1,950,006
1,970,113
3,138,355
3,010,698
51
3,476,222
3,418,777
3,406,697
249,375
248,169
246,881
5.96
3,944,937
3,928,266
3,432,096
Bausch Health Companies Inc.
Term Loan B (05/18)
25,355
25,274
25,161
4,987,500
4,981,754
4,897,974
3,453,781
3,450,952
3,432,195
955,900
953,639
946,341
985,847
978,214
Boxer Parent Company Inc.
10/2/2025
2,475,000
2,454,363
2,374,070
983,437
2,024,614
2,022,736
2,002,687
497,487
496,370
488,627
995,334
989,170
7.77
2,884,283
964,353
964,031
697,500
684,758
696,196
8.27
2,266,211
2,232,341
2,223,720
CareStream Health Inc.
2/28/2021
2,362,278
2,356,691
2,263,062
1,455,000
1,446,052
1,236,750
497,509
475,000
2,453,876
2,338,875
1,447,458
1,435,195
1,329,447
3.77
2,996,438
2,922,180
991,371
983,816
1,482,216
1,451,991
1,891,221
1,886,758
1,855,761
52
Compuware Corporation
Term Loan (08/18)
8/22/2025
493,979
493,763
1,183,650
1,131,380
1,088,224
1,984,055
1,475,404
1,464,720
1,395,481
1,976,660
Covia Holdings Corporation
711,663
5.90
1,427,762
1,089,957
Crown Subsea Communications Holding Inc
7.52
1,655,837
1,640,398
1,649,627
1,974,620
1,952,260
1,941,308
493,968
486,031
3,945,050
3,928,487
3,874,789
1,955,694
1,946,628
1,867,688
DaVita Inc.
8/12/2026
995,133
985,859
Dealer Tire T/L B-1
6,446,003
6,379,073
6,317,083
3,814,430
3,809,967
3,766,292
1,318,289
1,315,922
1,275,445
278,012
267,413
992,773
907,725
2,944,957
2,790,975
468,750
467,304
461,522
4,950,804
4,962,500
53
2,879,096
2,925,469
4,927,385
4,901,606
4,804,200
5.21
2,199,416
2,186,449
2,160,926
497,428
492,831
491,832
3,937,025
3,914,795
3,766,985
1,957,901
1,811,179
4,939,709
3,966,188
1,621,622
1,619,618
1,583,789
EyeCare Partners Delayed Draw Term Loan
360,538
359,905
356,752
3.96
5,450,000
5,426,720
5,338,275
1,322,900
1,312,103
4,443,748
4,414,007
4,421,530
Froneri International Ltd
1,995,162
1,962,500
Fusion ConnectInc.
Exit Term Loan (1/20)
11.50
1/14/2025
1,470,716
1,495,005
8.00
10.00
757,724
737,560
527,883
4,443,750
4,442,729
4,410,422
GC EOS Buyer Inc.
2,940,820
2,888,438
General Nutrition Centers Inc.
10.21
930,446
929,986
856,010
8.52
584,748
583,505
3.46
1,492,771
1,489,380
1,911,214
1,846,260
2,468,750
2,458,492
2,450,234
GI Revelation Acquisition LLC
1,231,867
1,226,730
1,155,652
54
2,960,000
2,937,550
2,952,600
3,039,750
2,886,668
8.02
3,202,597
3,161,265
3,005,093
3,624,459
3,644,769
898,530
894,831
3,964,937
3,941,954
3,895,550
6.21
1,723,072
1,715,720
1,356,919
HD Supply Waterworks Ltd.
8/1/2024
488,750
487,883
481,419
2,925,219
2,754,188
264,030
263,694
253,799
3,935,111
3,883,364
2,454,070
2,301,750
5,975,621
5,955,000
1,709,781
1,701,824
1,691,623
7.21
4,803,288
2,939,742
2,919,274
2,917,694
Informatica LLC
2/25/2027
489,375
3,457,043
3,377,774
3,320,939
Innophos Holdings Inc
497,521
992,818
982,538
2,796,876
2,750,718
1,118,750
Jefferies Finance LLC/JFIN Co-Issuer Corp
3,229,359
3,211,489
3,172,846
55
1,800,290
1,796,697
1,458,235
4,640,380
2,499,984
9/19/2026
248,789
247,505
Kindred Healthcare T/L (6/18)
2,457,482
2,450,618
2,248,596
Lannett Company Inc.
5.38
6.89
11/25/2022
2,379,293
2,356,101
2,343,175
485,000
483,577
439,531
2,992,386
2,955,090
2,857,728
4,129,092
4,115,428
4,123,930
1,320,692
1,164,651
74,493
65,688
394,000
393,227
390,060
98,500
98,307
97,515
2,131,268
2,126,212
2,093,970
1,245,213
1,242,233
1,243,133
3/12/2026
1,432,500
3.21
249,377
248,438
3,159,418
3,131,317
3,136,165
McDermott International (Americas) Inc.(b)
5/12/2025
1,965,000
1,933,938
1,126,928
956,813
954,867
897,807
577,724
572,227
2,970,753
2,917,950
2,599,163
2,590,493
2,393,387
970,910
967,282
951,492
56
3,899,905
3,848,164
3,696,798
887,425
879,526
875,001
988,165
932,144
489,047
477,750
NAI Entertainment Holdings LLC
5/8/2025
870,833
869,104
855,594
4.90
492,907
491,288
1,881,215
1,864,059
1,871,809
104,662
103,730
104,139
2,962,121
2,918,947
2,688,125
975,477
959,311
248,222
247,298
NMI Holdings Inc.
5/23/2023
3,454,906
3,457,271
3,420,357
8.46
4,812,500
4,371,041
4,162,813
1,919,870
1,911,097
1,878,478
10.02
994,137
973,750
237,544
4,937,500
Office Depot Inc.
6.77
11/8/2022
2,456,367
2,445,611
2,464,547
484,678
413,700
874,086
871,682
2,447,449
2,437,345
2,386,263
9/29/2020
3,564,650
3,555,767
1,782,325
1,473,750
1,467,204
1,449,802
1,960,340
1,953,120
Plastipak Packaging Inc
Plastipak Packaging T/L B (04/18)
2,921,203
2,885,691
57
3,922,736
3,988,760
2,930,303
2,921,569
Presidio Inc.
498,787
2,975,658
2,905,717
2,472,719
2,462,039
2,404,720
1,957,491
1,940,438
489,418
473,478
Pug T/L B (02/20)
1,395,000
1,476,064
1,467,715
1,403,486
Radio Systems Corporation
5/2/2024
1,462,500
1,449,703
1,426,403
1,413,386
3,927,406
3,816,352
3,868,494
4.71
2,680,466
2,681,757
2,673,765
858,431
Reynolds Consumer Products Inc.
Reynolds Consumer Products T/L
1,498,128
1,483,875
RGIS Services LLC
8.96
3/31/2023
482,554
477,839
421,994
980,484
884,250
3,970,000
3,953,381
3,817,393
5,554,276
5,553,396
7.71
1,955,250
1,938,956
1,877,040
996,778
765,606
753,041
3,284,831
3,247,280
3,270,049
1,985,537
1,976,329
7.46
905,168
891,491
288,359
58
829,352
827,968
1,947,873
1,946,123
1,913,785
Snacking Investment BidCo Pty Limited
12/18/2026
990,193
3,324,994
3,258,223
3,315,285
1,911,678
1,801,388
3.72
1,769,661
1,762,426
1,756,388
199,839
199,466
196,841
493,682
492,653
486,000
280,056
279,525
275,855
1,960,188
1,928,334
6.65
1,953,068
1,920,000
824,991
823,352
662,740
STG-Fairway Holdings LLC
STG Fairway T/L (First Advantage) (Fastball Merger
496,040
3.71
263,565
262,651
261,918
2,401,489
2,381,531
Tenneco Inc
1,485,000
1,472,625
1,386,619
1,958,142
1,927,327
988,635
991,567
2,766,667
2,639,073
2,711,333
1,232,467
1,211,203
The Knot Worldwide Inc
3,960,000
3,952,856
3,890,700
2,031,203
2,018,102
2,000,735
2,334,338
2,281,664
2,209,288
59
1,600,000
1,586,231
1,504,000
4,106,293
4,111,126
4,013,901
2,458,773
2,410,172
3,376,818
3,366,553
3,250,188
982,926
980,044
Trico Group LLC
Incremental Term Loan
4,758,359
4,645,140
4,675,088
2,927,444
2,910,795
2,874,984
981,396
972,628
990,418
971,060
3,465,000
3,270,106
2,875,950
Univar Solutions Inc.
1,621,989
1,603,307
2,746,369
2,735,251
2,634,565
7.27
984,169
973,856
821,778
US Ecology Inc.
498,859
5,431,250
5,403,194
5,214,000
Verra Mobility Corp.
489,331
483,881
3,801,266
3,787,581
3,793,663
422,273
418,485
415,939
3,218,500
3,217,979
3,213,479
12/31/2025
927,500
926,595
919,094
5/6/2026
495,208
491,600
VS Buyer T/L (Veeam Software)
2/28/2027
986,250
Weight Watchers International Inc.
1,670,130
1,645,266
1,665,955
West Corporation
2,961,172
2,889,546
2,319,573
1,237,374
1,164,156
981,002
Western Dental Services Inc.
2,438,722
2,424,403
2,444,819
903,135
885,248
892,975
1,984,953
1,966,855
1,951,864
2,955,118
2,931,790
2,766,730
3,467,362
3,476,375
1W USD LIBOR+
7.57
1,937,500
1,921,365
1,908,438
1/19/2027
2,443,750
2,434,999
1,840,461
978,750
934,603
526,004,959
(a) All or a portion of this investment has an unfunded commitment as of February 29, 2020 (see Note 6 in Notes to financial statements).(b) As of February 29, 2020, the investment was in default and on non-accrual status.(c) Included within cash and cash equivalents in Saratoga CLO’s Statements of Assets and Liabilities as of February 29, 2020.
1W USD LIBOR — The 1 week USD LIBOR rate as of February 29, 2020 was 1.57%.
2M USD LIBOR — The 2 month USD LIBOR rate as of February 29, 2020 was 1.50%.
6M USD LIBOR — The 6 month USD LIBOR rate as of February 29, 2020 was 1.40%.
Prime — The Prime Rate as of February 29, 2020 was 4.75%.
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Note 5. Income Taxes
SIA-Avionte, Inc., SIA-GH, Inc., SIA-MAC, Inc., SIA-TG, Inc., SIA-TT, Inc., SIA-Vector, Inc. and SIA-VR, Inc., each 100% owned by the Company, are each filing standalone C Corporation tax returns for federal and state purposes. As separately regarded entities for tax purposes, these entities are taxed at normal corporate rates. For tax purposes, any distributions by the entities to the parent company would generally need to be distributed to the Company’s shareholders. Generally, such distributions of the entities’ income to the Company’s shareholders will be considered as qualified dividends for tax purposes. The entities taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences adjustments arising from net operating losses and unrealized appreciation and depreciation of securities held. Deferred tax assets and liabilities are measured using enacted corporate federal and state tax rates expected to apply to taxable income in the years in which those net operating losses are utilized and the unrealized gains and losses are realized. Deferred tax assets and deferred tax liabilities are netted off by entity, as allowed. The recoverability of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized on the basis of a history of operating losses combined with insufficient projected taxable income or other taxable events in the taxable blockers.
Deferred tax assets and liabilities, and related valuation allowance as of August 31, 2020 and February 29, 2020 were as follows:
Total deferred tax assets
1,790,734
1,744,879
Total deferred tax liabilities
(1,261,267
(1,412,486
Valuation allowance on net deferred tax assets
(1,724,167
(1,679,756
Net deferred tax liability
(1,194,700
(1,347,363
As of August 31, 2020, the valuation allowance on deferred tax assets was $1.7 million, which represents the federal and state tax effect of net operating losses and unrealized losses that we do not believe we will realize through future taxable income. Any adjustments to the Company’s valuation allowance will depend on estimates of future taxable income and will be made in the period such determination is made.
Net deferred tax (benefit) expense for the three months ended August 31, 2020 includes $0.1 million net change in unrealized appreciation (depreciation) on investments and $0.0 million net change in total operating expense, in the consolidated statement of operations, respectively. Net deferred tax (benefit) expense for the three months ended August 31, 2019 includes $0.7 million net change in unrealized appreciation (depreciation) on investments and $(0.5) million net change in total operating expense, in the consolidated statement of operations, respectively.
Net deferred tax (benefit) expense for the six months ended August 31, 2020 includes $(0.2) million net change in unrealized appreciation (depreciation) on investments and $(0.00) million net change in total operating expense, in the consolidated statement of operations, respectively. Net deferred tax (benefit) expense for the six months ended August 31, 2019 includes $0.7 million net change in unrealized appreciation (depreciation) on investments and $(0.5) million net change in total operating expense, in the consolidated statement of operations, respectively.
Deferred tax temporary differences may include differences for state taxes and joint venture interests.
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Note 5. Income Taxes (cont.)
Federal and state income tax provisions (benefits) on investments for three and six months ended August 31, 2020 and August 31, 2019:
Current
Federal
State
Net current expense
Deferred
74,636
200,527
(170,838
213,817
49,386
37,812
18,175
47,588
Net deferred expense
124,022
238,339
(152,663
261,405
Net tax provision
Note 6. Agreements and Related Party Transactions
Investment Advisory and Management Agreement
On July 30, 2010, the Company entered into the Management Agreement with our Manager. The initial term of the Management Agreement was two years, with automatic, one-year renewals at the end of each year, subject to certain approvals by our board of directors and/or the Company’s stockholders. On July 7, 2020, our board of directors approved the renewal of the Management Agreement for an additional one-year term. Pursuant to the Management Agreement, our Manager implements our business strategy on a day-to-day basis and performs certain services for us, subject to oversight by our board of directors. Our Manager is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investments transactions, asset sales, financings and performing asset management duties. Under the Management Agreement, we have agreed to pay our Manager a management fee for investment advisory and management services consisting of a base management fee and an incentive management fee.
Base Management Fee and Incentive Management Fee
The base management fee of 1.75% per year is calculated based on the average value of our gross 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. The base management fee is paid quarterly following the filing of the most recent 10-Q.
The incentive management fee consists of the following two parts:
The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, that exceeds a 1.875% quarterly hurdle rate measured as of the end of each fiscal quarter, subject to a “catch-up” provision. Under this provision, in any fiscal quarter, our Manager receives no incentive fee unless our pre-incentive fee net investment income exceeds the hurdle rate of 1.875%. Our Manager will receive 100.0% of pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than or equal to 2.344% in any fiscal quarter; and 20.0% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.344% in any fiscal quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no claw back of amounts previously paid if subsequent quarters are below the quarterly hurdle rate, and there is no delay of payment if prior quarters are below the quarterly hurdle rate.
The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Management Agreement) and equals 20.0% of our “incentive fee capital gains,” which equals our realized capital gains on a cumulative basis from May 31, 2010 through the end of the fiscal year, if any, computed net of
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Note 6. Agreements and Related Party Transactions (cont.)
all realized capital losses and unrealized capital depreciation on a cumulative basis on each investment in the Company’s portfolio, less the aggregate amount of any previously paid capital gain incentive fee. Importantly, the capital gains portion of the incentive fee is based on realized gains and realized and unrealized losses from May 31, 2010. Therefore, realized and unrealized losses incurred prior to such time will not be taken into account when calculating the capital gains portion of the incentive fee, and our Manager will be entitled to 20.0% of incentive fee capital gains that arise after May 31, 2010. In addition, for the purpose of the “incentive fee capital gains” calculations, the cost basis for computing realized gains and losses on investments held by us as of May 31, 2010 will equal the fair value of such investments as of such date.
For the three months ended August 31, 2020 and August 31, 2019, the Company incurred $2.2 million and $2.0 million in base management fees, respectively. For the three months ended August 31, 2020 and August 31, 2019, the Company incurred $1.4 million and $1.4 million in incentive fees related to pre-incentive fee net investment income, respectively. For the three months ended August 31, 2020 and August 31, 2019, the Company accrued an expense of $0.1 million and an expense of $0.7 million in incentive fees related to capital gains.
For the six months ended August 31, 2020 and August 31, 2019, the Company incurred $4.4 million and $3.8 million in base management fees, respectively. For the six months ended August 31, 2020 and August 31, 2019, the Company incurred $2.8 million and $2.6 million in incentive fees related to pre-incentive fee net investment income, respectively. For the six months ended August 31, 2020 and August 31, 2019, the Company accrued a (benefit) of $(3.1) million and an expense of $1.6 million in incentive fees related to capital gains, respectively.
The accrual is calculated using both realized and unrealized capital gains for the period. The actual incentive fee related to capital gains will be determined and payable in arrears at the end of the fiscal year and will include only realized capital gains for the period. As of August 31, 2020, the base management fees accrual was $2.2 million and the incentive fees accrual was $1.5 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities. As of February 29, 2020, the base management fees accrual was $2.1 million and the incentive fees accrual was $13.7 million and is included in base management and incentive fees payable in the accompanying consolidated statements of assets and liabilities.
Administration Agreement
On July 30, 2010, the Company entered into a separate administration agreement (the “Administration Agreement”) with our Manager, pursuant to which our Manager, as our administrator, has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide managerial assistance on our behalf to those portfolio companies to which we are required to provide such assistance. The initial term of the Administration Agreement was two years, with automatic, one-year renewals at the end of each year subject to certain approvals by our board of directors and/or our stockholders. The amount of expenses payable or reimbursable thereunder by the Company was capped at $1.0 million for the initial two-year term of the Administration Agreement and subsequent renewals. On July 8, 2015, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company thereunder, which had not been increased since the inception of the agreement, to $1.3 million. On July 7, 2016, our board of directors approved the renewal of the Administration Agreement for an additional one-year term. On October 5, 2016, our board of directors determined to increase the cap on the payment or reimbursement of expenses by the Company under the Administration Agreement, from $1.3 million to $1.5 million, effective November 1, 2016. On July 11, 2017, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.5 million to $1.75 million, effective August 1, 2017. On July 9, 2018, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $1.75 million to $2.0 million, effective August 1, 2018. On July 9, 2019, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.0 million to $2.225 million effective August 1, 2019.
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On July 7, 2020, our board of directors approved the renewal of the Administration Agreement for an additional one-year term and determined to increase the cap on the payment or reimbursement of expenses by the Company from $2.225 million to $2.775 million effective August 1, 2020.
For the three months ended August 31, 2020 and August 31, 2019, we recognized $0.6 million and $0.5 million in administrator expenses, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. For the six months ended August 31, 2020 and August 31, 2019, we recognized $1.2 million and $1.0 million in administrator expenses, respectively, pertaining to bookkeeping, record keeping and other administrative services provided to us in addition to our allocable portion of rent and other overhead related expenses. As of August 31, 2020, $0.3 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities. As of February 29, 2020, $0.5 million of administrator expenses were accrued and included in due to manager in the accompanying consolidated statements of assets and liabilities.
Saratoga CLO
On August 7, 2018, the Company entered into an unsecured loan agreement with CLO 2013-1 Warehouse, a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse Loan, which expired on February 7, 2020, bears interest at an annual rate of 3M USD LIBOR + 7.5%.
On December 14, 2018, the Company completed the third refinancing and issuance of 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 ending January 2020 was also added. In addition, and as part of the refinancing, the Saratoga CLO has also been 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 and $20.0 million CLO 2013-1 Warehouse Loan were repaid. The Company also paid $2.0 million of transaction costs related to the refinancing and upsizing on behalf of the Saratoga CLO and was reimbursed by the Saratoga CLO for these costs during the year ended February 29, 2020.
For the three months ended August 31, 2020 and August 31, 2019, we recognized management fee income of $0.6 million and $0.6 million, respectively, related to the Saratoga CLO.
For the six months ended August 31, 2020 and August 31, 2019, we recognized management fee income of $1.3 million and $1.3 million, respectively, related to the Saratoga CLO.
In conjunction with the third refinancing and issuance of the 2013-1 Reset CLO Notes on December 14, 2018, the Company is no longer entitled to receive an incentive management fee from Saratoga CLO. See Note 4 for additional information.
On February 11, 2020, the Company entered into an unsecured loan agreement CLO 2013-1 Warehouse 2 Loan with CLO 2013-1 Warehouse 2, a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse 2 Loan, which expires on August 20, 2021, bears interest at an annual rate of 3M USD LIBOR + 7.5%. As of August 31, 2020, the aggregate principal amount of the Company’s investment in the CLO 2013-1 Warehouse 2 Loan was $5.0 million, which had a fair value of $4.6 million.
For the six months ended August 31, 2020 and August 31, 2019, the Company neither bought nor sold any investments from the Saratoga CLO.
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Note 7. Borrowings
Credit Facility
As a BDC, we are only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200.0% after giving effect to such leverage, or, if we obtain the required approvals from our independent directors and/or stockholders, 150.0%. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. Our asset coverage ratio, as defined in the 1940 Act, was 375.8% as of August 31, 2020 and 607.1% as of February 29, 2020. On April 16, 2018, as permitted by the Small Business Credit Availability Act, which was signed into law on March 23, 2018, our non-interested board of directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150.0% asset coverage ratio became effective on April 16, 2019.
On April 11, 2007, we entered into a $100.0 million revolving securitized credit facility (the “Revolving Facility”). On May 1, 2007, we entered into a $25.7 million term securitized credit facility (the “Term Facility” and, together with the Revolving Facility, the “Facilities”), which was fully drawn at closing. In December 2007, we consolidated the Facilities by using a draw under the Revolving Facility to repay the Term Facility. In response to the market wide decline in financial asset prices, which negatively affected the value of our portfolio, we terminated the revolving period of the Revolving Facility effective January 14, 2009 and commenced a two-year amortization period during which all principal proceeds from the collateral were used to repay outstanding borrowings. A significant percentage of our total assets had been pledged under the Revolving Facility to secure our obligations thereunder. Under the Revolving Facility, funds were borrowed from or through certain lenders and interest was payable monthly at the greater of the commercial paper rate and our lender’s prime rate plus 4.00% plus a default rate of 2.00% or, if the commercial paper market was unavailable, the greater of the prevailing LIBOR rates and our lender’s prime rate plus 6.00% plus a default rate of 3.00%.
On July 30, 2010, we used the net proceeds from (i) the stock purchase transaction and (ii) a portion of the funds available to us under the $45.0 million senior secured revolving credit facility (the “Credit Facility”) with Madison Capital Funding LLC, in each case, to pay the full amount of principal and accrued interest, including default interest, outstanding under the Revolving Facility. As a result, the Revolving Facility was terminated in connection therewith. Substantially all of our total assets, other than those held by SBIC LP, have been pledged under the Credit Facility to secure our obligations thereunder.
On February 24, 2012, we amended the Credit Facility to, among other things:
• expand the borrowing capacity under the Credit Facility from $40.0 million to $45.0 million;
• extend the period during which we may make and repay borrowings under the Credit Facility from July 30, 2013 to February 24, 2015 (the “Revolving Period”). The Revolving Period may, upon the occurrence of an event of default, by action of the lenders or automatically, be terminated. All borrowings and other amounts payable under the Credit Facility are due and payable five years after the end of the Revolving Period; and
• remove the condition that we may not acquire additional loan assets without the prior written consent of Madison Capital Funding LLC.
On September 17, 2014, we entered into a second amendment to the Credit Facility to, among other things:
• extend the commitment termination date from February 24, 2015 to September 17, 2017;
• extend the maturity date of the Credit Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);
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Note 7. Borrowings (cont.)
• reduce the applicable margin rate on base rate borrowings from 4.50% to 3.75%, and on LIBOR borrowings from 5.50% to 4.75%; and
• reduce the floor on base rate borrowings from 3.00% to 2.25%, and on LIBOR borrowings from 2.00% to 1.25%.
On May 18, 2017, we entered into a third amendment to the Credit Facility to, among other things:
• extend the commitment termination date from September 17, 2017 to September 17, 2020;
• extend the final maturity date of the Credit Facility from September 17, 2022 to September 17, 2025 (unless terminated sooner upon certain events);
• reduce the floor on base rate borrowings from 2.25% to 2.00%;
• reduce the floor on LIBOR borrowings from 1.25% to 1.00%; and
• reduce the commitment fee rate from 0.75% to 0.50% for any period during which the ratio of advances outstanding to aggregate commitments, expressed as a percentage, is greater than or equal to 50%.
On April 24, 2020, we entered into a fourth amendment to the Credit Facility to, among other things:
• permit certain amendments related to the Paycheck Protection Program (“Permitted PPP Amendment”) to Loan Asset Documents;
• exclude certain debt and interest amounts allowed by the Permitted PPP Amendments from certain calculations related to Net Leverage Ratio, Interest Coverage Ratio and EBITDA; and
• exclude such Permitted PPP Amendments from constituting a Material Modification.
In addition to any fees or other amounts payable under the terms of the Credit Facility agreement with Madison Capital Funding LLC, an administrative agent fee per annum equal to $0.1 million is payable in equal monthly installments in arrears.
As of August 31, 2020 and February 29, 2020, there were no outstanding borrowings under the Credit Facility. During the applicable periods, the Company was in compliance with all of the limitations and requirements of the Credit Facility. Financing costs of $3.1 million related to the Credit Facility have been capitalized and are being amortized over the term of the facility.
For the three months ended August 31, 2020 and August 31, 2019, we recorded $0.1 million and $0.1 million of interest expense related to the Credit Facility, respectively, which includes commitment and administrative agent fees. For the three months ended August 31, 2020 and August 31, 2019, we recorded $0.02 million and $0.02 million of amortization of deferred financing costs related to the Credit Facility, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. During the three months ended August 31, 2019, the weighted average interest rate on the outstanding borrowings under the Credit Facility was 6.06%, and the average dollar amount of outstanding borrowings under the Credit Facility was $0.3 million.
For the six months ended August 31, 2020 and August 31, 2019, we recorded $0.2 million and $0.2 million of interest expense related to the Credit Facility, respectively, which includes commitment and administrative agent fees. For the six months ended August 31, 2020 and August 31, 2019, we recorded $0.05 million and $0.05 million of amortization of deferred financing costs related to the Credit Facility, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated
statements of operations. During the six months ended August 31, 2019, the weighted average interest rate on the outstanding borrowings under the Credit Facility was 6.06%, and the average dollar amount of outstanding borrowings under the Credit Facility was $0.2 million.
The Credit Facility contains limitations as to how borrowed funds may be used, such as restrictions on industry concentrations, asset size, weighted average life, currency denomination and collateral interests. The Credit Facility also includes certain requirements relating to portfolio performance, the violation of which could result in the limit of further advances and, in some cases, result in an event of default, allowing the lenders to accelerate repayment of amounts owed thereunder. The Credit Facility has an eight-year term, consisting of a three-year period (the “Revolving Period”), under which the Company may make and repay borrowings, and a final maturity five years from the end of the Revolving Period. Availability on the Credit Facility will be subject to a borrowing base calculation, based on, among other things, applicable advance rates (which vary from 50.0% to 75.0% of par or fair value depending on the type of loan asset) and the value of certain “eligible” loan assets included as part of the Borrowing Base. Funds may be borrowed at the greater of the prevailing one-month LIBOR rate and 1.00%, plus an applicable margin of 4.75%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 2.00%, and the applicable margin over such alternative base rate is 3.75%. In addition, the Company will pay 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 Credit Facility for the duration of the Revolving Period.
Our borrowing base under the Credit Facility was $28.8 million subject to the Credit Facility cap of $45.0 million at August 31, 2020. For purposes of determining the borrowing base, most assets are assigned the values set forth in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q filed with the U.S. Securities and Exchange Commission (“SEC”). Accordingly, the August 31, 2020 borrowing base relies upon the valuations set forth in the Quarterly Report on Form 10-Q for the period ended May 31, 2020. The valuations presented in this Quarterly Report on Form 10-Q will not be incorporated into the borrowing base until after this Quarterly Report on Form 10-Q is filed with the SEC.
SBA Debentures
Our wholly-owned SBIC subsidiaries are able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA.
On August 14, 2019, the Company’s wholly-owned subsidiary, SBIC II LP, received an SBIC license from the SBA. The new license provides up to $175.0 million in additional long-term capital in the form of SBA debentures. 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. With this license approval, Saratoga will grow its SBA relationship from $150.0 million to $325.0 million of committed capital.
As of August 31, 2020, we have funded SBIC LP and SBIC II LP with an aggregate total of equity capital of $75.0 million and $65.0 million, respectively, and have $170.0 million in SBA-guaranteed debentures outstanding, of which $150.0 million is held in SBIC LP and $20.0 million held in SBIC II LP. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. SBA current regulations limit the amount that SBIC LP and SBIC II LP may borrow to a maximum of $150.0 million and $175.0 million, respectively, which is up to twice its potential regulatory capital.
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SBICs are designed 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. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $19.5 million and have average annual fully taxed net income not exceeding $6.5 million for the two most recent fiscal years. In addition, an SBIC must devote 25.0% of its investment activity to ‘‘smaller’’ concerns as defined by the SBA. A smaller concern is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services.
SBIC LP and SBIC II LP are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that SBIC II LP will receive SBA-guaranteed debenture funding, which is dependent upon SBIC II LP continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to SBIC LP and SBIC II LP assets over our stockholders and debtholders in the event we liquidate SBIC LP and SBIC II LP or the SBA exercises its remedies under the SBA-guaranteed debentures issued by SBIC LP and SBIC II LP upon an event of default.
The Company received exemptive relief from the SEC to permit it to exclude the debt of SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. This allows the Company increased flexibility under the asset coverage test by permitting it to borrow up to $325.0 million more than it 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, the non-interested board of directors of the Company approved of the Company becoming subject to a minimum asset coverage ratio of 150.0% from 200% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150.0% asset coverage ratio became effective on April 16, 2019.
As noted above, as of August 31, 2020, there was $170.0 million of SBA debentures outstanding and as of February 29, 2020, there was $150.0 million of SBA debentures outstanding. The carrying amount of the amount outstanding of SBA debentures approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage and would be classified as a Level 3 liability within the fair value hierarchy. Financing costs of $5.0 million and $1.2 million related to the SBA debentures issued by SBIC LP and SBIC II LP, respectively, have been capitalized and are being amortized over the term of the commitment and drawdown.
For the three months ended August 31, 2020 and August 31, 2019, we recorded $1.3 million and $1.2 million of interest expense related to the SBA debentures, respectively. For the three months ended August 31, 2020 and August 31, 2019, we recorded $0.2 million and $0.1 million of amortization of deferred financing costs related to the SBA debentures, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. The weighted average interest rate during the three months ended August 31, 2020 and August 31, 2019 on the outstanding borrowings of the SBA debentures was 3.02% and 3.25%, respectively. During the three months ended August 31, 2020 and August 31, 2019, the average dollar amount of SBA debentures outstanding was $170.0 million and $150.0 million, respectively.
For the six months ended August 31, 2020 and August 31, 2019, we recorded $2.5 million and $2.4 million of interest expense related to the SBA debentures, respectively. For the six months ended August 31, 2020 and August 31, 2019, we recorded $0.3 million and $0.2 million of amortization of deferred financing costs related to the SBA debentures, respectively. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. The weighted average interest
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rate during the six months ended August 31, 2020 and August 31, 2019 on the outstanding borrowings of the SBA debentures was 3.09% and 3.25%, respectively. During the six months ended August 31, 2020 and August 31, 2019, the average dollar amount of SBA debentures outstanding was $163.7 million and $150.0 million, respectively.
In December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million, subject to SBA approval. SBA regulations previously limited the amount of SBA-guaranteed debentures that an SBIC may issue to $150.0 million when it has at least $75.0 million in regulatory capital but this has increased to $175.0 million for new licenses when it has at least $87.5 million in regulatory capital. Affiliated SBICs are permitted to issue up to a combined maximum amount of $350.0 million in SBA-guaranteed debentures when they have at least $175.0 million in combined regulatory capital.
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, the Company entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which the Company 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 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, the Company 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 net proceeds from the offering were used to repay all of the outstanding indebtedness under the 2020 Notes, which amounted to $61.8 million, 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 issued and outstanding 2023 Notes. The 2023 Notes were listed on the NYSE under the trading symbol “SAB” with a par value of $25.00 per share, and have been delisted following the redemption.
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 aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest on the 6.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 6.25% 2025 Notes mature on August 31, 2025 and commencing August 28, 2021, 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 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes.
On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 6.25% 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. 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 aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest rate,
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interest payment dates and maturity remain unchanged from the existing 6.25% 2025 Notes issued in August 2018. 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 are being amortized over the term of the 6.25% 2025 Notes.
As of August 31, 2020, the total 6.25% 2025 Notes outstanding was $60.0 million. The 6.25% 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.
As of August 31, 2020, the carrying amount and fair value of the 6.25% 2025 Notes was $60.0 million and $59.9 million, respectively. The fair value of the 6.25% 2025 Notes, which is publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a Level 1 liability within the fair value hierarchy. As of February 29, 2020, the carrying amount and fair value of the 6.25% 2025 Notes was $60.0 million and $60.6 million, respectively.
For the three months ended August 31, 2020 and August 31, 2019, we recorded $0.9 million and $0.9 million, respectively, of interest expense and $0.1 million and $0.09 million, respectively, of amortization of deferred financing costs related to the 6.25% 2025 Notes. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. During the three months ended August 31, 2020 and August 31, 2019, the average dollar amount of 6.25% 2025 Notes outstanding was $60.0 million and $60.0 million, respectively.
For the six months ended August 31, 2020 and August 31, 2019, we recorded $1.9 million and $1.9 million, respectively, of interest expense and $0.2 million and $0.2 million, respectively, of amortization of deferred financing costs related to the 6.25% 2025 Notes. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. During six months ended August 31, 2020 and August 31, 2019, the average dollar amount of 6.25% 2025 Notes outstanding was $60.0 million and $60.0 million, respectively.
As discussed above, during the fourth quarter of 2020 fiscal year, the Company redeemed $74.45 million in aggregate principal amount of issued outstanding 2023 Notes.
For the three and six months ended August 31, 2019, we recorded $1.3 million and $2.5 million, respectively, of interest expense and $0.1 million and $0.2 million, respectively, of amortization of deferred financing costs related to the 2023 Notes. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of options. During the three and six months ended August 31, 2019 the average dollar amount of 2023 Notes outstanding was $74.5 million and $74.5 million respectively.
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.
As of August 31, 2020, the total 7.25% Notes 2025 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.
As of August 31, 2020, the carrying amount and fair value of the 7.25% 2025 Notes was $43.1 million and $44.1 million, respectively. The fair value of the 7.25% 2025 Notes, which is publicly traded, is based upon closing market quotes as of the measurement date and would be classified as a Level 1 liability within the fair value hierarchy. As of February 29, 2020, the carrying amount and fair value of the 7.25% 2025 Notes was $0.0 million and $0.0 million, respectively.
For the three and six months ended August 31, 2020, we recorded $0.6 million and $0.6 million, respectively, of interest expense and $0.06 million and $0.06 million, respectively, of amortization of deferred financing costs related to the 7.25% 2025 Notes. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations options. During the three and six months ended August 31, 2020 the average dollar amount of 7.25% 2025 Notes outstanding was $43.1 million and $43.1 million respectively.
On July 9, 2020, the Company issued $5.0 million 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. 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 August 31, 2020, the total 7.75% Notes 2025 outstanding was $5.0 million The 7.75% 2025 Notes are not listed and have a par value of $25.00 per share. As of August 31, 2020, there was $5.0 million of 7.75% 2025 Notes outstanding and as of February 29, 2020, there was $0.0 million outstanding. The carrying amount of the amount outstanding of 7.75% 2025 Notes approximates its fair value, which is based on a waterfall analysis showing adequate collateral coverage and would be classified as a Level 3 liability within the fair value hierarchy.
For the three and six months ended August 31, 2020, we recorded $0.06 million and $0.06 million, respectively, of interest expense and $0.06 million and $0.06 million, respectively, of amortization of deferred financing costs related to the 7.75% 2025 Notes. Interest expense and amortization of deferred financing costs are reported as interest and debt financing expense on the consolidated statements of operations. During the three and six months ended August 31, 2020 the average dollar amount of 7.75% 2025 Notes outstanding was $5.0 million and $5.0 million respectively.
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Senior Securities
Information about our senior securities is shown in the following table as of August 31, 2020 for the fiscal year periods indicated in the table, unless otherwise noted.
SENIOR SECURITIES(dollar amounts in thousands, except per share data)
Class and Year(1)(2)
Total Amount Outstanding Exclusive of Treasury Securities(3)
Asset Coverage per Unit(4)
Involuntary Liquidating Preference per Share(5)
Average Market Value per Share(6)
(in thousands)
Credit Facility with Madison Capital Funding
Fiscal year 2021 (as of August 31, 2020)
3,758
N/A
Fiscal year 2020 (as of February 29, 2020)
6,071
Fiscal year 2019 (as of February 28, 2019)
2,345
Fiscal year 2018 (as of February 28, 2018)
2,930
Fiscal year 2017 (as of February 28, 2017)
2,710
Fiscal year 2016 (as of February 29, 2016)
3,025
Fiscal year 2015 (as of February 28, 2015)
9,600
3,117
Fiscal year 2014 (as of February 28, 2014)
3,348
Fiscal year 2013 (as of February 28, 2013)
24,300
5,421
Fiscal year 2012 (as of February 29, 2012)
20,000
5,834
Fiscal year 2011 (as of February 28, 2011)
4,500
20,077
Fiscal year 2010 (as of February 28, 2010)
Fiscal year 2009 (as of February 28, 2009)
Fiscal year 2008 (as of February 29, 2008)
Fiscal year 2007 (as of February 28, 2007)
7.50% Notes due 2020(7)
61,793
25.24
(8)
48,300
25.46
25.18
73
6.75% Notes due 2023(9)
74,451
25.74
(10)
26.05
25.89
23.23
(11)
25.75
24.97
43,125
25.29
7.75% Notes due 2025
25.00
(12)
(1) We have excluded our SBA-guaranteed debentures from this table because the SEC has granted us exemptive relief that permits us to exclude such debentures from the definition of senior securities in the 200% asset coverage ratio we are required to maintain under the 1940 Act.
(2) This table does not include the senior securities of our predecessor entity, GSC Investment Corp., relating to a revolving securitized credit facility with Deutsche Bank, in light of the fact that the Company was under different management during the time that such credit facility was outstanding.
(3) Total amount of senior securities outstanding at the end of the period presented.
(4) Asset coverage per unit is the ratio of our total assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness, calculated on a total basis.
(5) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “—” indicates information which the Securities and Exchange Commission expressly does not require to be disclosed for certain types of senior securities.
(6) Not applicable for credit facility because not registered for public trading.
(7) On January 13, 2017, the Company redeemed in full its 2020 Notes. The Company used a portion of the net proceeds from the 2023 Notes offering, which was completed in December 2016, to redeem the 2020 Notes in full.
(8) Based on the average daily trading price of the 2020 Notes on the NYSE.
(9) On December 21, 2019 and February 7, 2020, the Company redeemed $50.0 million and $24.45 million, respectively, in aggregate principal amount of the $74.45 million in aggregate principal amount of issued and outstanding 2023 Notes.
(10) Based on the average daily trading price of the 2023 Notes on the NYSE.
(11) Based on the average daily trading price of the 2025 Notes on the NYSE.
(12) The carrying value of this unlisted security approximates its fair value, based on a waterfall analysis showing adequate collateral coverage.
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Note 8. Commitments and Contingencies
Contractual Obligations
The following table shows our payment obligations for repayment of debt and other contractual obligations at August 31, 2020:
Payment Due by Period
Long-Term Debt Obligations
Less Than 1 Year
1 – 3 Years
3 – 5 Years
More Than 5 Years
($ in thousands)
SBA debentures
170,000
40,000
39,000
91,000
6.25% 2025 Notes
7.25% 2025 Notes
7.75% 2025 Notes
Total Long-Term Debt Obligations
278,125
147,125
Off-Balance Sheet Arrangements
As of August 31, 2020 and February 29, 2020, the Company’s off-balance sheet arrangements consisted of $45.0 million and $64.1 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 August 31, 2020 and February 29, 2020 is shown in the table below (dollars in thousands):
At Company’s discretion
630
3,000
1,000
Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.
15,000
17,500
3,175
10,000
33,805
46,500
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Note 8. Commitments and Contingencies (cont.)
At portfolio company’s discretion – satisfaction of certain financial and nonfinancial covenants required
Axiom Purchaser, Inc.
3,500
1,022
2,000
4,000
1,124
11,146
17,624
44,951
64,124
Note 9. Directors Fees
The independent directors receive an annual fee of $60,000. They also receive $2,500 plus reimbursement of reasonable out-of- pocket expenses incurred in connection with attending each board meeting and receive $1,000 plus reimbursement of reasonable out-of- pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the Audit Committee receives an annual fee of $10,000 and the chairman of each other committee receives an annual fee of $5,000 for their additional services in these capacities. In addition, we have purchased directors’ and officers’ liability insurance on behalf of our directors and officers. Independent directors have the option to receive their directors’ fees in the form of our common stock issued at a price per share equal to the greater of net asset value or the market price at the time of payment. No compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the 1940 Act). For the three months ended August 31, 2020 and August 31, 2019, we incurred $0.1 million and $0.1 million for directors’ fees and expenses, respectively. For the six months ended August 31, 2020 and August 31, 2019, we incurred $0.1 million and $0.2 million for directors’ fees and expenses, respectively. As of August 31, 2020 and February 29, 2020, $0.06 million and $0.06 million in directors’ fees and expenses were accrued and unpaid, respectively. As of August 31, 2020, we had not issued any common stock to our directors as compensation for their services.
Note 10. Stockholders’ Equity
On May 16, 2006, GSC Group, Inc. capitalized the LLC, by contributing $1,000 in exchange for 67 shares, constituting all of the issued and outstanding shares of the LLC.
On March 20, 2007, the Company issued 95,995.5 and 8,136.2 shares of common stock, priced at $150.00 per share, to GSC Group and certain individual employees of GSC Group, respectively, in exchange for the general partnership interest and a limited partnership interest in GSC Partners CDO III GP, LP, collectively valued at $15.6 million. At this time, the 6.7 shares owned by GSC Group in the LLC were exchanged for 6.7 shares of the Company.
On March 28, 2007, the Company completed its IPO of 725,000 shares of common stock, priced at $150.00 per share, before underwriting discounts and commissions. Total proceeds received from the IPO, net of $7.1 million in underwriter’s discount and commissions, and $1.0 million in offering costs, were $100.7 million.
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Note 10. Stockholders’ Equity (cont.)
On July 30, 2010, our Manager and its affiliates purchased 986,842 shares of common stock at $15.20 per share. Total proceeds received from this sale were $15.0 million.
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.
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. On October 7, 2015, the Company’s board of directors extended the open market 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, the Company’s board of directors extended the open market 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, the Company’s board of directors extended the open market 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, the Board of Directors increased the share repurchase plan to 1.3 million shares of common stock. As of August 31, 2020, the Company purchased 308,812 shares of common stock, at the average price of $16.96 for approximately $5.2 million pursuant to this repurchase plan. During the three and six months ended August 31, 2020, the Company purchased 90,321 shares of common stock, at the average price of $17.17 for approximately $1.6 million pursuant to this repurchase plan.
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 also added to the agreement. 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. As of August 31, 2020, the Company sold 3,992,018 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). During the six months ended August 31, 2020, there was no activity related to the ATM offering.
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.
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The Company adopted Rule 3-04/Rule 8-03(a)(5) under Regulation S-X (Note 2). Pursuant to the regulation, the Company has presented a reconciliation of the changes in each significant caption of stockholders’ equity as shown in the tables below:
Capital in Excess of Par Value
Total Distributable Earnings (Loss)
Net Assets
Shares
Amount
Balance at February 28, 2019
7,657,156
7,657
203,552,800
(22,685,270
Increase (Decrease) from Operations:
3,680,788
3,989,130
(20,930
Decrease from Shareholder Distributions:
Distributions of investment income – net
(4,176,132
Capital Share Transactions:
76,448
1,772,557
1,772,634
31,240
667,358
667,389
(4,365
Balance at May 31, 2019
7,764,844
7,765
205,988,350
(19,212,414
186,783,701
(4,336,226
1,371,667
1,371
34,101,012
34,102,383
31,545
714,497
714,529
(507,592
Balance at August 31, 2019
9,168,056
9,168
240,296,267
(15,968,868
78
4,575,303
10,739,678
(536,151
(1,061,608
(5,323,383
1,952,367
1,951
49,351,357
49,353,308
34,575
806,857
806,893
(710,257
Balance at November 30, 2019
11,154,998
11,155
289,744,224
(7,575,029
282,180,350
66,106
30,267,388
(5,681,765
2,141,150
(6,261,839
26,865
676,089
676,116
35,682
907,645
907,681
(8,334
Tax reclassification of stockholders’ equity in accordance with generally accepted accounting principles
(1,842,633
1,842,633
Balance at February 29, 2020
11,217,545
9,018,314
8,480
(31,950,369
267,740
79
Balance at May 31, 2020
(7,857,191
281,631,018
47,098
774,944
(90,321
(90
(1,550,327
Balance at August 31, 2020
11,174,322
Note 11. Earnings Per Share
In accordance with the provisions of FASB ASC Topic 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following information sets forth the computation of the weighted average basic and diluted net increase in net assets resulting from operations per share for the three and six months ended August 31, 2020 and August 31, 2019 (dollars in thousands except share and per share amounts):
Basic and Diluted
21,811
7,580
(845
15,229
Weighted average common shares outstanding
Weighted average earnings (loss) per common share
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Note 12. Dividend
On July 7, 2020, our board of directors declared a dividend of $0.40 per share, which was paid on August 12, 2020, to common stockholders of record as of July 27, 2020. Shareholders had the option to receive payment of the dividend in cash, or receive shares of common stock, pursuant to our DRIP. Based on shareholder elections, the dividend consisted of approximately $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% 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.
During the three months ended May 31, 2020, there were no dividends declared.
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 our 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.
The following table summarizes dividends declared for the six months ended August 31, 2020 (dollars in thousands except per share amounts):
Date Declared
Record Date
Payment Date
Amount Per Share
Total Amount*
July 7, 2020
July 27, 2020
August 12, 2020
0.40
4,487
Total dividends declared
* Total amount is calculated based on the number of shares outstanding at the date of record.
The following table summarizes dividends declared for the six months ended August 31, 2019 (dollars in thousands except per share amounts):
May 28, 2019
June 13, 2019
July 27, 2019
0.55
4,336
February 26, 2019
March 14, 2019
March 28, 2019
0.54
4,176
1.09
8,512
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Note 13. Financial Highlights
The following is a schedule of financial highlights as of and for the six months ended August 31, 2020 and August 31, 2019:
Per share data
Net asset value at beginning of period
23.62
Net investment income(1)
1.28
1.07
Net realized and unrealized gain and losses on investments(1)
(1.36
0.82
Net increase in net assets resulting from operations
Distributions declared from net investment income
(0.40
(1.09
Total distributions to stockholders
Issuance of common stock above net asset value(2)
0.05
Repurchases of common stock(3)
0.06
Dilution(4)
(0.03
Net asset value at end of period
24.47
Shares outstanding at end of period
Per share market value at end of period
17.14
25.16
Total return based on market value(5)(6)
(23.37
)%
14.68
Total return based on net asset value(5)(7)
0.73
8.80
Ratio/Supplemental data:
Ratio of net investment income to average net assets(8)
9.55
10.81
Expenses:
Ratio of operating expenses to average net assets(9)
4.87
6.12
Ratio of incentive management fees to average net assets(5)
(0.11
2.13
Ratio of interest and debt financing expenses to average net assets(9)
3.97
7.79
Ratio of total expenses to average net assets(8)
8.73
16.04
Portfolio turnover rate(5)(10)
6.63
10.97
Asset coverage ratio per unit(11)
2,669
Average market value per unit
Revolving Credit Facility(12)
SBA Debentures Payable(12)
6.75% Notes Payable 2023(13)
25.80
7.25% Notes Payable 2025(14)
7.75% Notes Payable 2025(12)
(1) Per share amounts are calculated using the weighted average shares outstanding during the period.
(2) The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date multiplied by (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding during the period.
(3) Represents the anti-dilutive impact on the net asset value per share (“NAV”) of the Company due to the repurchase of common shares. See Note 10, Stockholders’ Equity.
(4) Represents the dilutive effect of issuing common stock below net asset value per share during the period in connection with the satisfaction of the Company’s annual RIC distribution requirement and may include the impact of the different
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Note 13. Financial Highlights (cont.)
share amounts used for different items (weighted average basic common shares outstanding for the corresponding year and actual common shares outstanding at the end of the year) in the per common share data calculation and rounding impacts. See Note 12, Dividend.
(5) Ratios are not annualized.
(6) Total investment return is calculated assuming a purchase of common shares at the current market value on the first day and a sale at the current market value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
(7) Total investment return is calculated assuming a purchase of common shares at the current net asset value on the first day and a sale at the current net asset value on the last day of the periods reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total investment return does not reflect brokerage commissions.
(8) Ratios are annualized. Incentive management fees included within the ratio are not annualized.
(9) Ratios are annualized.
(10) Portfolio turnover rate is calculated using the lesser of year-to-date sales or year-to-date purchases over the average of the invested assets at fair value.
(11) Asset coverage ratio per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage ratio per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. Asset coverage ratio per unit does not include unfunded commitments. The inclusion of unfunded commitments in the calculation of the asset coverage ratio per unit would not cause us to be below the required amount of regulatory coverage.
(12) The Revolving Credit Facility, SBA Debentures and 7.75% Notes Payable 2025 are not registered for public trading.
(13) 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 issued and outstanding 2023 Notes and are no longer listed on the NYSE.
(14) Period from close of business on June 30, 2020 through August 31, 2020.
Note 14. Subsequent Events
The Company has evaluated subsequent events through the filing of this Form 10-Q and determined that there have been no events that have occurred that would require adjustments to the Company’s consolidated financial statements and disclosures in the consolidated financial statements except for the following:
On October 6, 2020, the Company declared a dividend of $0.41 per share payable on November 10, 2020, to common stockholders of record on October 26, 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.
Subsequent to August 31, 2020, the global outbreak of the coronavirus (“COVID-19”) pandemic, and the related effect on the U.S. and global economies, has continued to have adverse consequences for the business operations of some of the Company’s portfolio companies and, as a result, has had some adverse effects on the Company’s operations. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, remain uncertain. The operational and financial performance of the issuers of securities in which the Company invests depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Company’s investments and negatively impact the Company’s performance.
On September 14, 2020, we entered into a fifth amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:
• extend the commitment termination date of the Credit Facility from September 17, 2020 to September 17, 2021, with no change to the maturity date of September 17, 2025.
• provide for the transition away from the LIBOR Rate in the market, and
• expand the definition of Eligible Loan Asset to allow investments with certain recurring revenue features to qualify as Collateral and be included in the borrowing base.
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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 29, 2020.
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 impact of 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;
• pandemics or other serious public health events, such as the recent global outbreak of COVID-19;
• 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 prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;
• 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 status, 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 on our results, particularly because we use leverage as part of our investment strategy;
• 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 or industry conditions, and changes in the interest rate environment, including with respect to the anticipated discontinuation of LIBOR, 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 and other isolation and quarantine measures 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 the current economic downturn as a result of the 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.
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OVERVIEW
We are a Maryland corporation that has elected to be treated as a BDC under 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 qualified to be treated as a RIC under Subchapter M of the Code.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel coronavirus, or COVID-19, as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has, and continues, to severely impact global economic activity and cause significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company’s portfolio companies, the Company’s business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, company decisions to delay, defer and/or modify the character of dividends in order to preserve liquidity, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy.
We have evaluated subsequent events from September 1, 2020 through October 7, 2020. However, as the discussion in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Company’s financial statements for the quarter-ended August 31, 2020, the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as of August 31, 2020, the Company valued its portfolio investments in conformity with U.S. GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused, any valuations conducted now or in the future in conformity with U.S. GAAP could result in a lower fair value of our portfolio. The potential impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID- 19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time.
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.
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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 Credit Facility, and the Company began doing business as Saratoga Investment Corp.
We used the net proceeds from the private sale transaction and a portion of the funds available to us under the Credit Facility to pay the full amount of principal and accrued interest, including default interest, outstanding under our revolving securitized credit facility with Deutsche Bank. The revolving securitized credit facility with Deutsche Bank was terminated in connection with our payment of all amounts outstanding thereunder on July 30, 2010.
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 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. 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 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 6.75% fixed-rate unsecured notes due 2023 (the “2023Notes”) for net proceeds of $71.7 million after deducting underwriting commissions of approximately $2.3 million and offering costs of approximately $0.5 million. The issuance included the exercise of substantially all of the underwriters’ option to purchase an additional $9.8 million aggregate principal amount of 2023 Notes within 30 days. 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 issued and outstanding 2023 Notes.
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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 also added to the agreement. On July 11, 2019, the amount of the common stock to be offered through this offering 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. As of August 31, 2020, the Company 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). During the six months ended August 31, 2020, there was no activity related to the ATM offering.
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 has also been 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 February 5, 2019, the Company completed a re-opening and up-sizing of its existing 6.25% 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. 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 aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 6.25% 2025 Notes issued in August 2018. 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 are being amortized over the term of the 6.25% 2025 Notes. As of August 31, 2020, the total 6.25% 2025 Notes outstanding was $60.0 million. The 6.25% 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.
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. The new license will provide up to $175.0 million in additional long-term capital in the form of SBA debentures.
On February 11, 2020, the Company entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd (“CLO 2013-1 Warehouse 2”), a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse 2 Loan, which expires on August 20, 2021, bears interest at an annual rate of 3M USD LIBOR +7.5%.
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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. As of August 31, 2020, 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 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. As of August 31, 2020, the total 7.25% 2025 Notes outstanding was $5.0 million. The 7.75% 2025 Notes are unlisted and has a par value of $25.00 per share.
Critical Accounting Policies
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 follows.
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 Measurement 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 balance sheet date in the principal market to independent market participants, or in the absence of a principal market, in the most advantageous market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact.
Investments for which market quotations are readily available are fair valued at such market quotations obtained from independent third-party pricing services and market makers subject to any decision by our board of directors to approve a fair value determination to reflect significant events affecting the value of these investments. We value investments for which market quotations are not readily available at fair value as approved, in good faith, by our board of directors based on input from Saratoga Investment Advisors, the audit committee
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of our board of directors and a third party independent valuation firm. Determinations of fair value may involve subjective judgments and estimates. The types of factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments, market yield trend analysis, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors.
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
• 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-R-2 Notes and Class G-R-2 Notes tranches of the Saratoga CLOs every quarter.
• 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 flow model that utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for equity interests in collateralized loan obligation funds similar to Saratoga CLO, when available, as determined by Saratoga Investment Advisors and recommended to our board of directors. Specifically, we use Intex cash flow models, or an appropriate substitute, to form the basis for the valuation of our investment in Saratoga CLO. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated valuations. The assumptions are based on available market data and projections provided by third parties as well as management estimates. We use the output from the Intex models (i.e., the estimated cash flows) to perform a discounted cash flow analysis on expected future cash flows to determine a valuation for our investment in Saratoga CLO.
Revenue Recognition
Income Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. Discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortization of premiums on investments.
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as a reduction in principal depending upon 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.
90
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 LIBOR plus 8.75% and LIBOR plus 10.00%, respectively. As part of this refinancing, we also redeemed our existing $4.5 million aggregate amount of the Class F notes tranche at par.
On February 11, 2020, the Company entered into an unsecured loan agreement (“CLO 2013-1 Warehouse 2 Loan”) with Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd (“CLO 2013-1 Warehouse 2”), a wholly-owned subsidiary of Saratoga CLO, pursuant to which CLO 2013-1 Warehouse 2 may borrow from time to time up to $20.0 million from the Company in order to provide capital necessary to support warehouse activities. The CLO 2013-1 Warehouse 2 Loan, which expires on August 20, 2021, bears interest at an annual rate of 3M USD LIBOR + 7.5%. For the six months ended August 31, 2020, the maximum amount invested by us in CLO 2013-1 Warehouse 2 amounted to $5.0 million. As of August 31, 2020, the fair value of our investment in CLO 2013-1 Warehouse 2 was $4.6 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%.
91
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 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:
• organization;
• 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)).
92
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 former 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 our former 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.
93
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.
Portfolio and Investment Activity
Investment Portfolio Overview
($ in millions)
Number of investments(1)
Number of portfolio companies(2)
Average investment per portfolio company(2)
12.9
Average investment size(1)
Weighted average maturity(3)
2.8 yrs
3.1 yrs
Number of industries
Non-performing or delinquent investments (fair value)
2.1
Fixed rate debt (% of interest earning portfolio)(3)
30.4
(6.7%)
29.7
(6.8%)
Fixed rate debt (weighted average current coupon)(3)
8.8
9.3
Floating rate debt (% of interest earning portfolio)(3)
425.8
(93.3%)
404.4
(93.2%)
Floating rate debt (weighted average current spread over LIBOR)(3)(4)
7.9
8.0
(1) Excludes our investment in the subordinated notes of Saratoga CLO.
(2) Excludes our investment in the subordinated notes of Saratoga CLO, Class F-R-2 Notes and Class G-R-2 Notes tranches of Saratoga CLO and loan to Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.
(3) Excludes our investment in the subordinated notes of Saratoga CLO and equity interests.
(4) Calculation uses either 1-month or 3-month LIBOR, depending on the contractual terms, and after factoring in any existing LIBOR floors.
94
During the three months ended August 31, 2020, we invested $31.7 million in new or existing portfolio companies and had $23.3 million in aggregate amount of exits and repayments resulting in net investments of $8.4 million for the period. During the three months ended August 31, 2019, we invested $92.5 million in new or existing portfolio companies and had $19.0 million in aggregate amount of exits and repayments resulting in net investments of $73.5 million for the period.
During the six months ended August 31, 2020, we invested $70.7 million in new or existing portfolio companies and had $32.6 million in aggregate amount of exits and repayments resulting in net investments of $38.1 million for the period. During the six months ended August 31, 2019, we invested $119.9 million in new or existing portfolio companies and had $45.9 million in aggregate amount of exits and repayments resulting in net investments of $74.0 million for the period.
Portfolio Composition
Our portfolio composition at August 31, 2020 and February 29, 2020 at fair value was as follows:
Percentage of Total Portfolio
Weighted Average Current Yield
9.7
9.6
10.7
16.4
At August 31, 2020, our investment in the subordinated notes of Saratoga CLO, a collateralized loan obligation fund, had a fair value of $21.6 million and constituted 4.3% of our portfolio. This investment constitutes a first loss position in a portfolio that, as of August 31, 2020 and February 29, 2020, was composed of $521.6 million and $528.4 million, respectively, in aggregate principal amount of primarily senior secured first lien term loans. In addition, as of August 31, 2020, we also own $2.5 million in aggregate principal of the F-R-2 Notes and $7.5 million in aggregate principal of the G-R-2 Notes in the Saratoga CLO, that only rank senior to the subordinated notes. At August 31, 2020, our investment in CLO 2013-1 Warehouse 2, a wholly-owned subsidiary of Saratoga CLO, had a fair value of $4.6 million and constituted 0.9% of our portfolio.
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 29, 2020).
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 August 31, 2020, $478.0 million or 98.3% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and six Saratoga CLO portfolio investments were in default with a fair value of $2.5 million. At February 29, 2020, $494.2 million or 98.6% of the Saratoga CLO portfolio investments in terms of market value had a CMR (as defined below) color rating of green or yellow and two Saratoga CLO portfolio investments were in default with a fair value of $1.4 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 29, 2020.
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.
95
Portfolio CMR distribution
The CMR distribution for our investments at August 31, 2020 and February 29, 2020 was as follows:
Color Score
Green
420,092
82.7
429,784
88.5
Yellow
32,667
6.4
2,141
Red
3,488
2,137
N/A(1)
51,870
51,570
(1) Comprised of our investment in the subordinated notes of Saratoga CLO and equity interests.
The change in reserve from $1.2 million as of February 29, 2020 to $1.7 million as of August 31, 2020 was primarily related to the additional interest accruals reserved on My Alarm Center, LLC, Roscoe Medical, Inc. and TMAC Acquisition Co., LLC.
The CMR distribution of Saratoga CLO investments at August 31, 2020 and February 29, 2020 was as follows:
406,644
83.7
456,767
91.1
71,671
14.7
37,446
7.5
7,708
6,787
0
486,023
501,000
(1) Comprised of Saratoga CLO’s equity interests.
96
Portfolio composition by industry grouping at fair value
The following table shows our portfolio composition by industry grouping at fair value at August 31, 2020 and February 29, 2020:
Investments At Fair Value
97,431
19.2
96,055
19.8
80,678
15.9
62,541
43,045
8.5
30,764
Structured Finance Securities(1)
35,738
34,675
7.1
31,789
36,365
30,233
28,455
24,943
25,740
18,757
3.7
19,055
16,882
14,200
16,325
14,894
3.1
14,859
11,179
11,503
10,225
9,982
9,668
10,779
9,020
9,090
8,873
9,000
8,072
7,717
7,601
1.5
4,284
6,934
5,375
6,800
2,970
5,475
5,555
3,609
3,799
1,880
2,140
1,572
3,130
1,527
1,997
672
922
424
32,090
6.6
418
(1) Comprised of our investment in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of Saratoga CLO and Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd.
97
The following table shows Saratoga CLO’s portfolio composition by industry grouping at fair value at August 31, 2020 and February 29, 2020:
86,035
17.7
87,957
17.6
41,665
45,735
9.1
37,315
7.7
39,978
33,774
32,897
31,001
28,317
25,155
5.2
28,327
24,550
25,093
20,665
4.3
19,808
18,919
21,637
16,973
15,700
16,779
14,689
16,710
13,820
2.8
16,264
16,883
12,729
15,753
10,680
7,959
10,071
11,674
9,989
9,551
9,490
14,538
7,019
7,306
6,946
7,054
5,329
5,385
5,169
7,617
4,039
1,914
3,871
4,112
3,230
4,752
3,113
2,711
2,213
3,559
1,920
3,357
1,787
1,651
1,928
972
989
98
Portfolio composition by geographic location at fair value
The following table shows our portfolio composition by geographic location at fair value at August 31, 2020 and February 29, 2020. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
Southeast
169,254
33.3
165,353
34.0
West
130,292
25.7
99,390
20.5
Midwest
90,577
17.8
75,528
Southwest
33,976
61,456
12.7
Northeast
17,658
18,047
Northwest
9,981
Other(1)
56,135
11.0
55,877
11.5
(1) Comprised of our investment in the subordinated notes, Class F-R-2 Notes and Class G-R-2 Notes of Saratoga CLO, Saratoga Investment Corp. CLO 2013-1 Warehouse 2, Ltd and foreign investments.
Results of operations
Operating results for the three and six months ended August 31, 2020 and August 31, 2019 was as follows:
13,856
13,888
27,153
26,639
8,521
8,932
12,800
18,002
5,335
4,956
14,353
8,637
16,580
1,458
(116
(704
152
(725
Investment income
The composition of our investment income for three and six months ended August 31, 2020 and August 31, 2019 was as follows:
12,260
11,742
24,411
23,345
146
197
626
1,260
1,259
940
1,047
1,254
1,364
323
215
474
99
For the three months ended August 31, 2020, total investment income decreased $0.03 million, or 0.2% to $13.9 million from $13.9 million for the three months ended August 31, 2019. Interest income from investments increased $0.5 million, or 4.4%, to $12.3 million for the three months ended August 31, 2020 from $11.7 million for the three months ended August 31, 2019. This reflects the impact of the increase of $21.2 million, or 4.4% in total investments at August 31, 2020 from $486.9 million at August 31, 2019, offset by the reduction in LIBOR during this same period. At August 31, 2020, the weighted average current yield on investments was 9.6% compared to 10.1% at August 31, 2019, which offset some of the increase in investments.
For the six months ended August 31, 2020, total investment income increased $0.5 million, or 1.9% to $27.2 million from $26.6 million for the six months ended August 31, 2019. Interest income from investments increased $1.1 million, or 4.4%, to $24.4 million for the six months ended August 31, 2020 from $23.3 million for the six months ended August 31, 2019. This reflects the partial period impact of the increase of $21.2 million, or 4.4% in total investments at August 31, 2020 from $486.9 million at August 31, 2019.
For the three months ended August 31, 2020 and August 31, 2019, total PIK income was $0.4 million and $1.2 million, respectively. For the six months ended August 31, 2020 and August 31, 2019, total PIK income was $1.1 million and $2.4 million, respectively. This decrease was primarily due to the sale of our investment in Easy Ice, LLC during the fourth quarter of the fiscal year ended February 29, 2020, which primarily generated PIK income.
Management fee income reflects the fee income received for managing the Saratoga CLO. For the three months ended August 31, 2020 and August 31, 2019, total management fee income was $0.6 million and $0.6 million, respectively. For the six months ended August 31, 2020 and August 31, 2019, total management fee income was $1.3 million and $1.3 million, respectively.
Operating expenses
The composition of our operating expenses for the three and six months ended August 31, 2020 and August 31, 2019 was as follows:
3,327
3,867
5,893
7,731
2,209
4,370
3,809
1,530
2,086
(329
4,199
368
385
754
780
602
519
1,158
1,019
135
129
158
General & administrative and other expenses
334
382
685
641
(466
(1
(464
For the three months ended August 31, 2020, total operating expenses decreased $0.4 million, or 4.6% compared to the three months ended August 31, 2019. For the six months ended August 31, 2020, total operating expenses decreased $5.2 million, or 28.9% compared to the three months ended August 31, 2019.
For the three months ended August 31, 2020, interest and debt financing expenses decreased $0.5 million, or 13.9% compared to the three months ended August 31, 2019. The decrease is primarily attributable to a decrease in average outstanding debt from $288.7 million for the three months ended August 31, 2019 to $265.3 million for the three months ended August 31, 2020, primarily reflecting the redemption of our 2023 Notes during the fiscal quarter ended February 29, 2020.
100
For the six months ended August 31, 2020, interest and debt financing expenses decreased $1.8 million, or 23.8% compared to the six months ended August 31, 2019. The decrease is primarily attributable to a decrease in average outstanding debt from $284.6 million for the six months ended August 31, 2019 to $241.3 million for the six months ended August 31, 2020, primarily reflecting the redemption of our 2023 Notes during the fiscal quarter ended February 29, 2020.
For the three months ended August 31, 2020, the weighted average interest rate on our outstanding indebtedness was 4.32% compared to 4.73% for the three months ended August 31, 2019. The decrease in weighted average interest rate was primarily driven by the redemption of the 2023 Notes during the fiscal quarter ended February 29, 2020 which carried a fixed rate of 6.75%.
For the six months ended August 31, 2020, the weighted average interest rate on our outstanding indebtedness was 4.18% compared to 4.80% for the six months ended August 31, 2019. The decrease in weighted average interest rate was primarily driven by the redemption of the 2023 Notes during the fiscal quarter ended February 29, 2020 which carried a fixed rate of 6.75%.
As of August 31, 2020 and February 29, 2020, the SBA debentures represented 61.1% and 71.4% of overall debt, respectively.
For the three months ended August 31, 2020, base management fees increased $0.2 million, or 10.6% compared to the three months ended August 31, 2019. The increase in base management fees results from the 10.3% increase in the average value of our total assets, less cash and cash equivalents, from $454.2 million for the three months ended August 31, 2019 to $500.8 million for the three months ended August 31, 2020. For the six months ended August 31, 2020, base management fees increased $0.5 million, or 14.7% compared to the six months ended August 31, 2019. The increase in base management fees results from the 14.4% increase in the average value of our total assets, less cash and cash equivalents, from $433.1 million for the six months ended August 31, 2019 to $495.3 million for the six months ended August 31, 2020.
For the three months ended August 31, 2020, incentive management fees decreased $0.5 million, or 26.7%, compared to the three months ended August 31, 2019. The first part of the incentive management fees remained relatively unchanged at $1.4 million for the three months ended August 31, 2020 and 2019. The incentive management fees related to capital gains decreased from a $0.7 million expense for the three months ended August 31, 2019 to a $0.1 million expense for the three months ended August 31, 2020, reflecting a reversal of incentive fee accrual due to an increase in unrealized depreciation on investments as of August 31, 2020.
For the six months ended August 31, 2020, incentive management fees decreased $4.5 million, or 108.0%, compared to the six months ended August 31, 2019. The first part of the incentive management fees increased from $2.6 million for the six months ended August 31, 2019 to $2.8 million for the six months ended August 31, 2020, as higher average total assets led to increased net investment income above the hurdle rate pursuant to the Management Agreement. The incentive management fees related to capital gains decreased from a $1.6 million expense for the six months ended August 31, 2019 to a $(3.1) million benefit for the six months ended August 31, 2020, reflecting a reversal of incentive fee accrual due to an increase in unrealized depreciation on investments as of August 31, 2020.
For the three and six months ended August 31, 2020, professional fees decreased $0.02 million, or 4.5%, and decreased $0.03 million, or 3.3%, respectively, compared to the three and six months ended August 31, 2019.
For the three and six months ended August 31, 2020, administrator expenses increased $0.08 million, or 16.1%, and increased $0.1 million, or 13.7%, respectively, compared to the three and six months ended August 31, 2019. These increases during the period are primarily attributable to an increase to the cap on the payment or reimbursements of expenses by the Company from $2.0 million to $2.225 million, effective August 1, 2019, and from $2.225 million to $2.775 million, effective August 1, 2020.
As discussed above, the decrease in interest and debt financing expenses for the three months ended August 31, 2020 compared to the three months ended August 31, 2019 is primarily attributable to a decrease in the average dollar amount of outstanding debt. During the three months ended August 31, 2020 and August 31, 2019, the average borrowings outstanding under the Credit Facility was $0.0 million and $0.3 million, respectively. For the three months ended August 31, 2020 and August 31, 2019, the average borrowings outstanding of SBA debentures
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was $170.0 million and $150.0 million, respectively. For the three months ended August 31, 2020 and August 31, 2019, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.02% and 3.25%, respectively. During the three months ended August 31, 2020 and August 31, 2019, the average dollar amount of our 6.25% fixed-rate 2025 Notes outstanding was $60.0 million and $60.0 million, respectively. During the three months ended August 31, 2020 and August 31, 2019, the weighted average dollar amount of our 7.25% fixed-rate 2025 Notes outstanding was $43.1 million and $0.0 million, respectively. During the three months ended August 31, 2020 and August 31, 2019, the weighted average dollar amount of our 7.75% fixed-rate 2025 Notes outstanding was $5.0 million and $0.0 million, respectively. During the three months ended August 31, 2020 and August 31, 2019, the average dollar amount of our 6.75% fixed-rate 2023 Notes outstanding was $0.0 million and $74.5 million, respectively.
As discussed above, the decrease in interest and debt financing expenses for the six months ended August 31, 2020 compared to the six months ended August 31, 2019 is primarily attributable to a decrease in the average dollar amount of outstanding debt. During the six months ended August 31, 2020 and August 31, 2019, the average borrowings outstanding under the Credit Facility was $0.0 million and $0.2 million, respectively. For the six months ended August 31, 2020 and August 31, 2019, the average borrowings outstanding of SBA debentures was $163.7 million and $150.0 million, respectively. For the six months ended August 31, 2020 and August 31, 2019, the weighted average interest rate on the outstanding borrowings of the SBA debentures was 3.09% and 3.25%, respectively. During the six months ended August 31, 2020 and August 31, 2019, the average dollar amount of our 6.25% fixed-rate 2025 Notes outstanding was $60.0 million and $60.0 million, respectively. During the six months ended August 31, 2020 and August 31, 2019, the weighted average dollar amount of our 7.25% fixed-rate 2025 Notes outstanding was $43.1 million and $0.0 million, respectively. During the six months ended August 31, 2020 and August 31, 2019, the weighted average dollar amount of our 7.75% fixed-rate 2025 Notes outstanding was $5.0 million and $0.0 million, respectively. During the six months ended August 31, 2020 and August 31, 2019, the average dollar amount of our 6.75% fixed-rate 2023 Notes outstanding was $0.0 million and $74.5 million, respectively.
For the three months ended August 31, 2020 and August 31, 2019, there were income tax expense (benefits) of $0.01 million and $0.5 million, respectively. For the six months ended August 31, 2020 and August 31, 2019, there were income tax expense (benefits) of $(0.01) million and $0.5 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.
Net realized gains (losses) on sales of investments
For the three months ended August 31, 2020, the Company had $23.3 million of sales, repayments, exits or restructurings resulting in $0.01 million of net realized gains. For the six months ended August 31, 2020, the Company had $70.7 million of sales, repayments, exits or restructurings resulting in $0.02 million of net realized gains.
For the three months ended August 31, 2019, the Company had $19.0 million of sales, repayments, exits or restructurings resulting in $1.9 million of net realized gains. For the six months ended August 31, 2019, the Company had $45.9 million of sales, repayments, exits or restructurings resulting in $1.9 million of net realized gains. The most significant realized gains and losses during the six months ended August 31, 2019 were as follows (dollars in thousands):
Six Months ended August 31, 2019
Issuer
Gross Proceeds
NetRealizedGain
Censis Technologies, Inc.
Equity Interests
1,559
560
Fancy Chap, Inc.
6,000
5,940
2,175
925
1,250
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For the three months ended August 31, 2020, our investments had a net change in unrealized appreciation of $16.6 million versus a net change in unrealized appreciation of $1.5 million for the three months ended August 31, 2019. For the six months ended August 31, 2020, our investments had a net change in unrealized depreciation of $15.4 million versus a net change in unrealized appreciation of $5.4 million for the six months ended August 31, 2019. The most significant cumulative net change in unrealized appreciation (depreciation) for the six months ended August 31, 2020 were the following (dollars in thousands):
Six Months ended August 31, 2020
TotalUnrealizedAppreciation(Depreciation)
YTD Change inUnrealizedAppreciation(Depreciation)
C2 Educational Systems
15,989
13,030
(2,959
(2,977
Second Lien Term Loans
15,768
13,355
(2,412
(2,306
26,782
(1,840
(1,815
Second Lien Term Loan & Equity Interests
10,969
(9,397
(1,652
Vector Controls Holding Co., LLC
First Lien Term Loan & Equity Interests
7,849
1,819
(1,110
37,708
36,856
(852
(1,054
Texas Teachers of Tomorrow, LLC
19,394
18,759
(635
(767
Kev Software Inc.
20,999
20,398
(601
(717
My Alarm Center, LLC
4,867
(3,340
(470
The net changes in unrealized depreciation for the six months ended August 31, 2020 noted above primarily relate to the impact of COVID-19, resulting in changes to market spreads, EBITDA multiples and/or revised portfolio company performance, following the events since March 2020.
The most significant cumulative net change in unrealized appreciation for the six months ended August 31, 2019 were the following (dollars in thousands):
TotalUnrealizedAppreciation
YTD Change inUnrealizedAppreciation
4,262
2,874
10,177
15,421
5,244
1,571
3,150
6,641
3,491
1,462
The $2.9 million net change in unrealized appreciation in our investment in Censis Technologies, Inc. was driven by continued outperformance of the business as well as the completion of a strategic acquisition.
The $1.6 million net change in unrealized appreciation in our investment in Easy Ice, LLC was driven by a continued increase in the scale and earnings of the business.
The $1.5 million net change in unrealized appreciation in our investment in Netreo Holdings, LLC was driven by a continued increase in the scale and earnings of the business.
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Changes in net assets resulting from operations
For the three months ended August 31, 2020, we recorded a net increase in net assets resulting from operations of $21.8 million. Based on 11,207,142 weighted average common shares outstanding as of August 31, 2020, our per share net increase in net assets resulting from operations was $1.95 for the three months ended August 31, 2020. For the three months ended August 31, 2019, we recorded a net increase in net assets resulting from operations of $7.6 million, or $0.91 per share based on 8,333,570 weighted average common shares outstanding as of August 31, 2019.
For the six months ended August 31, 2020, we recorded a net decrease in net assets resulting from operations of $0.8 million. Based on 11,212,315 weighted average common shares outstanding as of August 31, 2020, our per share net decrease in net assets resulting from operations was $0.08 for the six months ended August 31, 2020. For the six months ended August 31, 2019, we recorded a net increase in net assets resulting from operations of $15.2 million, or $1.89 per share based on 8,041,365 weighted average common shares outstanding as of August 31, 2019.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We intend to continue to generate cash primarily from cash flows from operations, including interest earned from our investments in debt in middle market companies, interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less, future borrowings and future offerings of securities.
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 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 non-interested board of 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 375.8% as of August 31, 2020 and 607.1% as of February 29, 2020. 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.
Madison revolving credit facility
Below is a summary of the terms of the senior secured revolving credit facility we entered into with Madison Capital Funding LLC (the “Credit Facility”) on June 30, 2010, which was most recently amended on September 14, 2020. (See Recent Developments).
Availability. The Company can draw up to the lesser of (i) $40.0 million (the “Facility Amount”) and (ii) the product of the applicable advance rate (which varies from 50.0% to 75.0% depending on the type of loan asset) and the value, determined in accordance with the Credit Facility (the “Adjusted Borrowing Value”), of certain “eligible” loan assets pledged as security for the loan (the “Borrowing Base”), in each case less (a) the amount of any undrawn funding commitments the Company has under any loan asset and which are not covered by amounts in the Unfunded Exposure Account referred to below (the “Unfunded Exposure Amount”) and outstanding borrowings. Each loan asset held by the Company as of the date on which the Credit Facility was closed was valued as of that date and each loan asset that the Company acquires after such date will be valued at the lowest of its fair value, its face value (excluding accrued interest) and the purchase price paid for such loan asset. Adjustments to the value of a loan asset will be made to reflect, among other things, changes in its fair value, a default by the obligor on the loan asset, insolvency of the obligor, acceleration of the loan asset, and certain modifications to the terms of the loan asset.
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The Credit Facility contains limitations on the type of loan assets that are “eligible” to be included in the Borrowing Base and as to the concentration level of certain categories of loan assets in the Borrowing Base such as restrictions on geographic and industry concentrations, asset size and quality, payment frequency, status and terms, average life, and collateral interests. In addition, if an asset is to remain an “eligible” loan asset, the Company may not make changes to the payment, amortization, collateral and certain other terms of the loan assets without the consent of the administrative agent that will either result in subordination of the loan asset or be materially adverse to the lenders.
Collateral. The Credit Facility is secured by substantially all of the assets of the Company (other than assets held by our SBIC subsidiary) and includes the subordinated notes (“CLO Notes”) issued by Saratoga CLO and the Company’s rights under the CLO Management Agreement (as defined below).
Interest Rate and Fees. Under the Credit Facility, funds are borrowed from or through certain lenders at the greater of the prevailing LIBOR rate and 1.00%, plus an applicable margin of 4.75%. At the Company’s option, funds may be borrowed based on an alternative base rate, which in no event will be less than 2.00%, and the applicable margin over such alternative base rate is 3.75%. In addition, the Company pays the lenders a commitment fee of 0.75% per year on the unused amount of the Credit Facility for the duration of the Revolving Period (defined below). Accrued interest and commitment fees are payable monthly. The Company was also obligated to pay certain other fees to the lenders in connection with the closing of the Credit Facility.
Revolving Period and Maturity Date. The Company may make and repay borrowings under the Credit Facility for a period of three years following the closing of the Credit Facility (the “Revolving Period”). The Revolving Period may be terminated at an earlier time by the Company or, upon the occurrence of an event of default, by action of the lenders or automatically. All borrowings and other amounts payable under the Credit Facility are due and payable in full five years after the end of the Revolving Period.
Collateral Tests. It is a condition precedent to any borrowing under the Credit Facility that the principal amount outstanding under the Credit Facility, after giving effect to the proposed borrowings, not exceed the lesser of the Borrowing Base or the Facility Amount (the “Borrowing Base Test”). In addition to satisfying the Borrowing Base Test, the following tests must also be satisfied (together with Borrowing Base Test, the “Collateral Tests”):
• Interest Coverage Ratio. The ratio (expressed as a percentage) of interest collections with respect to pledged loan assets, less certain fees and expenses relating to the Credit Facility, to accrued interest and commitment fees and any breakage costs payable to the lenders under the Credit Facility for the last 6 payment periods must equal at least 175.0%.
• Overcollateralization Ratio. The ratio (expressed as a percentage) of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets plus the fair value of certain ineligible pledged loan assets and the CLO Notes (in each case, subject to certain adjustments) to outstanding borrowings under the Credit Facility plus the Unfunded Exposure Amount must equal at least 200.0%.
• Weighted Average FMV Test. The aggregate adjusted or weighted value of “eligible” pledged loan assets as a percentage of the aggregate outstanding principal balance of “eligible” pledged loan assets must be equal to or greater than 72.0% and 80.0% during the one-year periods prior to the first and second anniversary of the closing date, respectively, and 85.0% at all times thereafter.
The Credit Facility also requires payment of outstanding borrowings or replacement of pledged loan assets upon the Company’s breach of its representation and warranty that pledged loan assets included in the Borrowing Base are “eligible” loan assets. Such payments or replacements must equal the lower of the amount by which the Borrowing Base is overstated as a result of such breach or any deficiency under the Collateral Tests at the time of repayment or replacement. Compliance with the Collateral Tests is also a condition to the discretionary sale of pledged loan assets by the Company.
Priority of Payments. During the Revolving Period, the priority of payments provisions of the Credit Facility require, after payment of specified fees and expenses and any necessary funding of the Unfunded Exposure Account, that collections of principal from the loan assets and, to the extent that these are insufficient, collections of interest from the loan assets, be applied on each payment date to payment of outstanding borrowings if the Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage Ratio would not otherwise be met. Similarly,
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following termination of the Revolving Period, collections of interest are required to be applied, after payment of certain fees and expenses, to cure any deficiencies in the Borrowing Base Test, the Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant payment date.
Reserve Account. The Credit Facility requires the Company to set aside an amount equal to the sum of accrued interest, commitment fees and administrative agent fees due and payable on the next succeeding three payment dates (or corresponding to three payment periods). If for any monthly period during which fees and other payments accrue, the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets which do not pay cash interest at least quarterly exceeds 15.0% of the aggregate Adjusted Borrowing Value of “eligible” pledged loan assets, the Company is required to set aside such interest and fees due and payable on the next succeeding six payment dates. Amounts in the reserve account can be applied solely to the payment of administrative agent fees, commitment fees, accrued and unpaid interest and any breakage costs payable to the lenders.
Unfunded Exposure Account. With respect to revolver or delayed draw loan assets, the Company is required to set aside in a designated account (the “Unfunded Exposure Account”) 100.0% of its outstanding and undrawn funding commitments with respect to such loan assets. The Unfunded Exposure Account is funded at the time the Company acquires a revolver or delayed draw loan asset and requests a related borrowing under the Credit Facility. The Unfunded Exposure Account is funded through a combination of proceeds of the requested borrowing and other Company funds, and if for any reason such amounts are insufficient, through application of the priority of payment provisions described above.
Operating Expenses. The priority of payments provision of the Credit Facility provides for the payment of certain operating expenses of the Company out of collections on principal and interest during the Revolving Period and out of collections on interest following the termination of the Revolving Period in accordance with the priority established in such provision. The operating expenses payable pursuant to the priority of payment provisions is limited to $350,000 for each monthly payment date or $2.5 million for the immediately preceding period of twelve consecutive monthly payment dates. This ceiling can be increased by the lesser of 5.0% or the percentage increase in the fair market value of all the Company’s assets only on the first monthly payment date to occur after each one-year anniversary following the closing of the Credit Facility. Upon the occurrence of a Manager Event (described below), the consent of the administrative agent is required in order to pay operating expenses through the priority of payments provision.
Events of Default. The Credit Facility contains certain negative covenants, customary representations and warranties and affirmative covenants and events of default. The Credit Facility does not contain grace periods for breach by the Company of certain covenants, including, without limitation, preservation of existence, negative pledge, change of name or jurisdiction and separate legal entity status of the Company covenants and certain other customary covenants. Other events of default under the Credit Facility include, among other things, the following:
• an Interest Coverage Ratio of less than 150.0%;
• an Overcollateralization Ratio of less than 175.0%;
• the filing of certain ERISA or tax liens;
• the occurrence of certain “Manager Events” such as:
• failure by Saratoga Investment Advisors and its affiliates to maintain collectively, directly or indirectly, a cash equity investment in the Company in an amount equal to at least $5.0 million at any time prior to the third anniversary of the closing date;
• failure of the Management Agreement between Saratoga Investment Advisors and the Company to be in full force and effect;
• indictment or conviction of Saratoga Investment Advisors or any “key person” for a felony offense, or any fraud, embezzlement or misappropriation of funds by Saratoga Investment Advisors or any “key person” and, in the case of “key persons,” without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed to replace such key person within 30 days;
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• resignation, termination, disability or death of a “key person” or failure of any “key person” to provide active participation in Saratoga Investment Advisors’ daily activities, all without a reputable, experienced individual reasonably satisfactory to Madison Capital Funding appointed within 30 days; or
• occurrence of any event constituting “cause” under the Collateral Management Agreement between the Company and Saratoga CLO (the “CLO Management Agreement”), delivery of a notice under Section 12(c) of the CLO Management Agreement with respect to the removal of the Company as collateral manager or the Company ceases to act as collateral manager under the CLO Management Agreement.
Conditions to Acquisitions and Pledges of Loan Assets. The Credit Facility imposes certain additional conditions to the acquisition and pledge of additional loan assets. Among other things, the Company may not acquire additional loan assets without the prior written consent of the administrative agent until such time that the administrative agent indicates in writing its satisfaction with Saratoga Investment Advisors’ policies, personnel and processes relating to the loan assets.
Fees and Expenses. The Company paid certain fees and reimbursed Madison Capital Funding LLC for the aggregate amount of all documented, out-of-pocket costs and expenses, including the reasonable fees and expenses of lawyers, incurred by Madison Capital Funding LLC in connection with the Credit Facility and the carrying out of any and all acts contemplated thereunder up to and as of the date of closing of the stock purchase transaction with Saratoga Investment Advisors and certain of its affiliates. These amounts totaled $2.0 million.
On February 24, 2012, we amended our senior secured revolving credit facility with Madison Capital Funding LLC to, among other things:
• remove the condition that we may not acquire additional loan assets without the prior written consent of the administrative agent.
On September 17, 2014, we entered into a second amendment to the Revolving Facility with Madison Capital Funding LLC to, among other things:
• extend the maturity date of the Revolving Facility from February 24, 2020 to September 17, 2022 (unless terminated sooner upon certain events);
• reduce the floor on base rate borrowings from 3.00% to 2.25%; and on LIBOR borrowings from 2.00% to 1.25%.
On May 18, 2017, we entered into a third amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:
• extend the final maturity date of the Credit Facility from September 17, 2022 to September 17, 2025;
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On April 24, 2020, we entered into a fourth amendment to the Credit Facility with Madison Capital Funding LLC to, among other things:
As of August 31, 2020, we had no outstanding borrowings under the Credit Facility and $170.0 million of SBA-guaranteed debentures outstanding (which are discussed below). As of February 29, 2020, we had no outstanding borrowings under the Credit Facility and $150.0 million of SBA-guaranteed debentures outstanding. Our borrowing base under the Credit Facility at August 31, 2020 and February 29, 2020 was $28.8 million and $35.6 million, respectively.
Our asset coverage ratio, as defined in the 1940 Act, was 375.8% as of August 31, 2020 and 607.1% as of February 29, 2020.
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. The new license will provide 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. Our wholly-owned SBIC subsidiaries are able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid in and is subject to customary regulatory requirements including but not limited to an examination by the SBA. With this license approval, Saratoga will 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 debt of our SBIC subsidiaries guaranteed by the SBA from the definition of senior securities in the asset coverage test under the 1940 Act. This allows us increased flexibility under the asset coverage test 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 non-interested
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board of directors approved of our becoming subject to a minimum asset coverage ratio of 150.0% from 200% under Sections 18(a)(1) and 18(a)(2) of the Investment Company Act, as amended. The 150.0% asset coverage ratio became effective on April 16, 2019.
As of August 31, 2020, our SBIC LP subsidiary had $75.0 million in regulatory capital and $150.0 million in SBA-guaranteed debentures outstanding and our SBIC II LP subsidiary had $65.0 million in regulatory capital and $20.0 million in SBA-guaranteed debentures outstanding.
Unsecured notes
On May 29, 2015, we entered into a Debt Distribution Agreement with Ladenburg Thalmann & Co. through which we may offer for sale, from time to time, up to $20.0 million in aggregate principal amount of the 2020 Notes through an ATM offering. 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 on January 13, 2017, which amounted to $61.8 million, 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 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 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 aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest on the 6.25% 2025 Notes is paid quarterly in arrears on February 28, May 31, August 31 and November 30, at a rate of 6.25% per year, beginning November 30, 2018. The 6.25% 2025 Notes mature on August 31, 2025 and commencing August 28, 2021, 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 6.25% 2025 Notes have been capitalized and are being amortized over the term of the 6.25% 2025 Notes. The 6.25% 2025 Notes are listed on the NYSE under the trading symbol “SAF” with a par value of $25.00 per share.
On February 5, 2019, the Company completed a re-opening and up-sizing of its existing 6.25% 2025 Notes by issuing an additional $20.0 million in aggregate principal amount for net proceeds of $19.2 million after deducting underwriting commissions of approximately $0.6 million and discount of $0.2 million. 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 aggregate principal amount of 6.25% 2025 Notes within 30 days. Interest rate, interest payment dates and maturity remain unchanged from the existing 6.25% 2025 Notes issued in August 2018. 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 are being amortized over the term of the 6.25% 2025 Notes.
At August 31, 2020, the total 6.25% 2025 Notes outstanding was $60.0 million.
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In connection with the issuance of the 6.25% 2025 Notes, we agreed to the following covenants for the period of time during which the notes are outstanding:
• we will not violate (whether or not we are subject to) Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, but giving effect to any exemptive relief granted to us by the SEC. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings, or, if we obtain the required approvals from our independent directors and/or stockholders, 150% (after deducting the amount of such dividend, distribution or purchase price, as the case may be).
• we will not declare any dividend (except a dividend payable in our stock), or declare any other distribution, upon a class of our capital stock, or purchase any such capital stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, we have an asset coverage (as defined in the 1940 Act) of at least 150.0%, as such obligation may be amended or superseded, after deducting the amount of such dividend, distribution or purchase price, as the case may be, and in each case giving effect to (i) any exemptive relief granted to us by the SEC, and (ii) any SEC no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time, as such obligation may be amended or superseded, in order to maintain such BDC’s status as a regulated investment company under Subchapter M of the Code.
• if, at any time, we are not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, to file any periodic reports with the SEC, we agree to furnish to holders of the 6.25% 2025 Notes and the Trustee, for the period of time during which the 6.25% 2025 Notes are outstanding, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.
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. As of August 31, 2020, 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. At August 31, 2020, the total 7.25% 2025 Notes outstanding was $43.1 million.
On July 9, 2020, the Company issued $5.0 million 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.
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At August 31, 2020, the total 7.75% 2025 Notes outstanding was $5.0 million.
At August 31, 2020 and February 29, 2020, the fair value of investments, cash and cash equivalents and cash and cash equivalents, reserve accounts were as follows:
Percentage ofTotal
39,052
24,599
26,343
14,851
67.9
66.0
14.0
5.5
573,512
525,082
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. On October 7, 2015, the Company’s board of directors extended the open market 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, the Company’s board of directors extended the open market 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, the Company’s board of directors extended the open market 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, the Board of Directors increased the share repurchase plan to 1.3 million shares of common stock. As of August 31, 2020, the Company purchased 308,812 shares of common stock, at the average price of $16.96 for approximately $5.3 million pursuant to this repurchase plan. During the six months ended August 31, 2020, the Company purchased 90,321 shares of common stock, at the average price of $17.17 for approximately $5.2 million pursuant to this repurchase plan.
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
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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 7, 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 our 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 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 our 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 our 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%
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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 our 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 our 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.2 million in cash and 33,551 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.19 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.3 million in cash and 26,222 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $20.04 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $2.0 million in cash and 29,096 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $21.38 per share, which equaled 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 our 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,548 newly issued shares
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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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.7 million in cash and 24,786 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $17.06 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 58,167 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.32 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.5 million in cash and 56,728 newly issued shares of common stock, or 1.0% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.43 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.4 million in cash and 66,765 newly issued shares of common stock, or 1.2% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $13.11 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 61,029 newly issued shares of common stock, or 1.1% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.53 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $1.1 million in cash and 47,861 newly issued shares of common stock, or 0.9% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $15.28 per share, which equaled 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.
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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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $3.4 million in cash and 126,230 newly issued shares of common stock, or 2.3% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.47 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.9 million in cash and 33,766 newly issued shares of common stock, or 0.6% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $16.78 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.8 million in cash and 26,858 newly issued shares of common stock, or 0.5% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.97 per share, which equaled 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 our DRIP. Based on shareholder elections, the dividend consisted of approximately $0.6 million in cash and 22,283 newly issued shares of common stock, or 0.4% of our outstanding common stock prior to the dividend payment. The number of shares of common stock comprising the stock portion was calculated based on a price of $14.37 per share, which equaled 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
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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.
Contractual obligations
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Off-balance sheet arrangements
Recent Developments
Subsequent to August 31, 2020, the global outbreak of the coronavirus, or COVID-19, pandemic, and the related effect on the U.S. and global economies, has continued to have adverse consequences for the business operations of some of the Company’s portfolio companies and, as a result, has had some adverse effects on the Company’s operations. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, is uncertain. The operational and financial performance of the issuers of securities in which the Company invests depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Company’s investments and negatively impact the Company’s performance.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business activities contain elements of market risk. We consider our principal market risk to be the fluctuation in interest rates. Managing this risk is essential to our business. Accordingly, we have systems and procedures designed to identify and analyze our risks, to establish appropriate policies and thresholds and to continually monitor this risk and thresholds by means of administrative and information technology systems and other policies and processes. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities held by us.
Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, including relative changes in different interest rates, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire leveraged loans, high yield bonds and other debt investments and the value of our investment portfolio.
Our investment income is affected by fluctuations in various interest rates, including LIBOR and the prime rate. A large portion of our portfolio is, and we expect will continue to be, comprised of floating rate investments that utilize LIBOR. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. Our interest expense is affected by fluctuations in LIBOR only on our revolving credit facility. At August 31, 2020, we had $278.0 million of borrowings outstanding. There were no borrowings outstanding on the revolving credit facility as of August 31, 2020.
We have analyzed the potential impact of changes in interest rates on interest income from investments. Assuming that our investments as of August 31, 2020 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 a 1.0% increase in interest rates would cause a corresponding increase of approximately $0.5 million to our interest income. Conversely, a hypothetical change of a 1.0% decrease in interest rates would cause a corresponding decrease of approximately $0.04 million to our interest income.
Changes in interest rates would have no impact to our current interest and debt financing expense, as all our borrowings except for our credit facility are fixed rate, and our credit facility is currently undrawn.
Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the statements of assets and liabilities and other business developments that could magnify or diminish our sensitivity to interest rate changes, nor does it account for divergences in LIBOR and the commercial paper rate, which have historically moved in tandem but, in times of unusual credit dislocations, have experienced periods of divergence. Accordingly, no assurances can be given that actual results would not materially differ from the potential outcome simulated by this estimate.
For further information, the following table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of August 31, 2020.
Basis Point Change
Increase(Decrease)in InterestIncome
(Increase)Decreasein InterestExpense
Increase(Decrease) in NetInvestmentIncome
Increase(Decrease) in NetInvestmentIncome per Share
-100
(36
(0.00
-50
-25
0.01
468
0.04
200
2,871
0.26
300
7,013
0.63
400
11,420
1.02
ITEM 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, our chief executive officer and our chief financial officer have concluded that our current disclosure controls and procedures are effective in facilitating timely decisions regarding required disclosure of any material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(b) There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of Exchange Act) that occurred during the quarter ended August 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither we nor our wholly-owned subsidiaries, Saratoga Investment Funding LLC and Saratoga Investment Corp. SBIC LP and Saratoga Investment Corp. SBIC II LP, are currently subject to any material legal proceedings.
Item 1A. Risk Factors
In addition to information set forth in this report, you should carefully consider the “Risk Factors” discussed in our most recent Annual Report on Form 10-K filed with the SEC, which could materially affect our business, financial condition and/or operating results. Other than as set forth below, there have been no material changes during the six months ended August 31, 2020 to the risk factors discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.
Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR. Further, the borrowings of the senior secured revolving credit facility entered into with Madison Capital Funding LLC (the “Credit Facility”) typically use LIBOR as a reference rate.
In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.
Actions by the ICE Benchmark Administration, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible. It is unclear if after 2021 LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements,
backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain, including whether the COVID-19 pandemic will have further effect on LIBOR transition plans.
The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. In the event that the LIBOR Rate is no longer available or published on a current basis or no longer made available or used for determining the interest rate of loans, our administrative agent that manages our loans will generally select a comparable successor rate; provided that (i) to the extent a comparable or successor rate is approved by the administrative agent, the approved rate shall be applied in a manner consistent with market practice; and (ii) to the extent such market practice is not administratively feasible for the administrative agent, such approved rate shall be applied as otherwise reasonably determined by the administrative agent.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
ITEM 6. EXHIBITS
Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
EXHIBIT INDEX
ExhibitNumber
Description
3.1(a)
Articles of Incorporation of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Form 10-Q for the quarterly period ended May 31, 2007).
3.1(b)
Articles of Amendment of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed August 3, 2010).
3.1(c)
Articles of Amendment of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed August 13, 2010).
Second Amended and Restated Bylaws of Saratoga Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on June 14, 2011).
Specimen certificate of Saratoga Investment Corp.’s common stock, par value $0.001 per share. (incorporated by reference to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-169135, filed on September 1, 2010).
4.2
Registration Rights Agreement dated July 30, 2010 between GSC Investment Corp., GSC CDO III L.L.C., and the investors party thereto (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
Dividend Reinvestment Plan (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 24, 2014).
Form of Indenture by and between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Saratoga Investment Corp.’s Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-186323 filed April 30, 2013).
4.5
Form of Second Supplemental Indenture between the Company and U.S. Bank National Association (incorporated by reference to Amendment No. 2 to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-214182, filed on December 12, 2016).
Form of Global Note (incorporated by reference to Exhibit 4.5 hereto, and Exhibit A therein).
Form of Third Supplemental Indenture between the Company and U.S. Bank National Association (incorporated by reference to Post- Effective Amendment No. 9 to the Registrant’s Registration Statement on Form N-2, File No. 333-216344, filed on August 28, 2018).
Form of Global Note (incorporated by reference to Exhibit 4.7 hereto, and Exhibit A therein).
Form of Articles Supplementary Establishing and Fixing the Rights and Preferences of Preferred Stock (incorporated by reference to Saratoga Investment Corp.’s registration statement on Form N-2 Pre-Effective Amendment No. 1, File No. 333-196526, filed on December 5, 2014).
4.10
Description of Securities. (incorporated by reference to Saratoga Investment Corp.’s Annual Report on Form 10-K filed on May 6, 2020).
4.11
Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as trustee, relating to the 7.25% Note due 2025 (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 814-00732) filed on June 24, 2020).
4.12
Form of 7.25% Notes due 2025 (incorporated by reference to Exhibit 4.11 hereto).
Investment Advisory and Management Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors, LLC (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
Custodian Agreement dated March 21, 2007 between GSC Investment LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Form 10-Q for the quarterly period ended May 31, 2007).
10.3
Administration Agreement dated July 30, 2010 between GSC Investment Corp. and Saratoga Investment Advisors, LLC (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
10.4
Trademark License Agreement dated July 30, 2010 between Saratoga Investment Advisors, LLC and GSC Investment Corp. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
Credit, Security and Management Agreement dated July 30, 2010 by and among GSC Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on August 3, 2010).
Form of Indemnification Agreement between Saratoga Investment Corp. and each officer and director of Saratoga Investment Corp. (incorporated by reference to Amendment No. 2 to Saratoga Investment Corp.’s Registration Statement on Form N-2 filed on January 12, 2007).
Amendment No. 1 to Credit, Security and Management Agreement dated February 24, 2012 by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on February 29, 2012).
10.8
Amended and Restated Indenture, dated as of November 15, 2016, among Saratoga Investment Corp. CLO 2013-1, Ltd., Saratoga Investment Corp. CLO 2013-1, Inc. and U.S. Bank National Association. (incorporated by reference to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-216344, filed on February 28, 2017).
10.9
Amended and Restated Collateral Management Agreement, dated October 17, 2013, by and between Saratoga Investment Corp. and Saratoga Investment Corp. CLO 2013-1, Ltd. (incorporated by reference to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-196526, filed on December 5, 2014).
10.10
Amendment No. 2 to Credit, Security and Management Agreement dated September 17, 2014 by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 18, 2014).
10.11
Amendment No. 3 to Credit, Security and Management Agreement, dated May 18, 2017, by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on May 18, 2017).
10.12
Equity Distribution Agreement dated March 16, 2017, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc. and BB&T Capital Markets, a division of BB&T Securities, LLC (incorporated by reference to Saratoga Investment Corp.’s Post-Effective Amendment No. 1 to the Registration Statement on Form N-2, File No. 333-216344, filed on March 16, 2017).
10.13
Amendment No. 1 to the Equity Distribution Agreement dated October 12, 2017, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and FBR Capital Markets & Co. (incorporated by reference to Saratoga Investment Corp.’s Post-Effective Amendment No. 2 to the Registration Statement on Form N-2, File No. 333-216344, filed on October 12, 2017).
10.14
Amendment No. 2 to the Equity Distribution Agreement dated January 11, 2018, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and FBR Capital Markets & Co. (incorporated by reference to Saratoga Investment Corp.’s Post-Effective Amendment No. 3 to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-216344, filed on January 11, 2018).
10.15
Amendment No. 3 to the Equity Distribution Agreement dated October 16, 2018, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and B. Riley FBR, Inc. (incorporated by reference to Post-Effective Amendment No. 1 to the registrant’s Registration Statement on Form N-2, File No. 333-227116, filed on October 16, 2018).
10.16
Amendment No. 4 to the Equity Distribution Agreement dated July 11, 2019, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division of BB&T Securities, LLC, and B. Riley FBR, Inc. (incorporated by reference to Post-Effective Amendment No. 5 to the registrant’s Registration Statement on Form N-2, File No. 333-227116, filed on July 12, 2019).
10.17
Amendment No. 5 to the Equity Distribution Agreement dated October 10, 2019, by and among Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Ladenburg Thalmann and Co. Inc., BB&T Capital Markets, a division BB&T Securities, LLC, and B. Riley FBR, Inc. (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on October 10, 2019).
124
10.18
Amendment No. 4 to Credit, Security and Management Agreement, dated April 24, 2020, by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on April 29, 2020).
10.19
Amendment No. 5 to Credit, Security and Management Agreement, dated September 14, 2020, by and among Saratoga Investment Funding LLC, Saratoga Investment Corp., Saratoga Investment Advisors, LLC, Madison Capital Funding LLC and U.S. Bank National Association (incorporated by reference to Saratoga Investment Corp.’s Current Report on Form 8-K filed on September 17, 2020).
Computation of Per Share Earnings (included in Note 11 to the consolidated financial statements contained in this report).
Code of Ethics of the Company adopted under Rule 17j-1 (incorporated by reference to Amendment No. 7 to Saratoga Investment Corp.’s Registration Statement on Form N-2, File No. 333-138051, filed on March 22, 2007).
21.1
List of Subsidiaries (incorporated by reference to Saratoga Investment Corp.’s Annual Report on Form 10-K filed on May 6, 2020).
31.1*
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
31.2*
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
32.2*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
* Filed herewith
125
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 7, 2020
By:
/s/ CHRISTIAN L. OBERBECK
Christian L. Oberbeck
Chief Executive Officer
/s/ HENRI J. STEENKAMP
Henri J. Steenkamp
Chief Financial Officer and Chief Compliance Officer