Saratoga Investment Corp: Earnings Call Highlights and Challenges

Saratoga Investment ((SAR)) has held its Q3 earnings call. Read on for the main highlights of the call.

In the recent earnings call, Saratoga Investment Corp. revealed a mixed sentiment reflecting both strengths and challenges. The company showcased robust portfolio quality and a solid cash position, yet faced hurdles with decreasing adjusted net investment income (NII), markdowns, and elevated leverage levels. Despite over-earning dividends and achieving successful investment exits, the company’s total returns were below the industry average, painting a complex picture of its current standing.

Increase in Total NAV and Steady NAV Per Share

Saratoga Investment reported an increase in total net asset value (NAV) this quarter, rising to $374.9 million from $372.1 million last quarter. Despite this growth, the NAV per share remained steady at $26.95, indicating stability in shareholder value amidst fluctuating market conditions.

Strong Portfolio Quality and High First Lien Debt

The company highlighted its strong portfolio quality, with 86.8% of the portfolio in first lien debt. This strategic positioning ensures a lower risk profile and has resulted in the core non-CLO portfolio performing 3% above cost.

Over-Earning of Dividends

Saratoga continues to over-earn its dividends, providing support for the current dividend level and contributing to the increase in NAV. This financial strategy underscores the company’s commitment to delivering consistent value to its shareholders.

Successful Investment Exits

A significant highlight from the call was the recognition of a $4.8 million realized gain from the Invita investment. This successful exit underscores Saratoga’s ability to generate strong returns from its investment portfolio.

Strong Cash Position

Saratoga’s cash position grew to $250 million by the end of the quarter, reflecting effective financial management. This increase in cash improved the company’s effective leverage from 160.1% to 183.2% net leverage, bolstering financial resilience.

Decrease in Adjusted NII

The company experienced a decrease in adjusted NII, down 5.3% from last year and 31.7% from the last quarter. This decline was attributed to reductions in interest rates and outsized repayments, posing challenges to income generation.

Significant Credit Markdowns

There were slight markdowns in the core non-CLO portfolio by $1.4 million and the CLO and JV by $4 million. These markdowns reflect ongoing market challenges and have impacted the overall valuation of the portfolio.

High Leverage Levels

Saratoga’s high leverage levels continue to raise concerns, particularly in comparison to other BDCs. This financial posture could pose refinancing risks if market conditions shift unfavorably.

Poor Recent Total Returns

The company’s total returns over the last 12 months were reported at 4%, significantly underperforming against the BDC index of 13%. This performance highlights challenges in aligning with industry benchmarks.

Forward-Looking Guidance

In the earnings call, Saratoga provided forward-looking guidance, noting that the adjusted NII for Q3 2025 was $12.4 million, a decrease from previous periods. Despite the decline, the adjusted NII yield remained at a healthy 13.3%. The return on equity improved to 9.2%, surpassing the industry average. The company also emphasized a robust total portfolio fair value of $960 million and a strong dividend yield of 12.2%. Additionally, Saratoga plans to continue deploying capital prudently, with $85 million in new and follow-on investments, supported by a solid cash reserve.

In summary, Saratoga Investment Corp.’s earnings call depicted a nuanced financial landscape, with both strong portfolio management and challenges in income and returns. The overall sentiment conveyed a cautious optimism, backed by strategic financial management and an eye on navigating future market dynamics.