On October 19, I wrote a piece on Saratoga Investment Corporation (SAR); it had closed at $20.28 on October 18. This past Friday, it closed at $19.63 but it is actually up more than 20% in the past three months. SAR had a stock dividend in late December; if you bought 100 shares on October 18 for $2028.00 and elected to receive the dividend in stock rather than cash, you would now have 125 shares worth $2453.75. I think this is due to a generally good market for BDCs as well as to SAR's improved situation.
SAR filed its quarterly financials this week and its SEC filing contained a detailed and well presented description of its portfolio and investment performance. Earnings for the quarter were 70 cents a share. SAR seems to have had a strategy of paying down debt (in its conference it indicated that as of January 10, net debt was at or near zero). This has put it in a position to pursue new investments. Management seems to believe that there are attractive opportunities for lower middle market debt investments and intends to deploy some of the unused capacity in its credit facility to make such investments.
Net asset value per share was $24.95 at the end of the quarter. If there had not been a stock dividend, net asset value (NAV) per share would have been $30.94 as compared to $29.71 per share at the end of the previous quarter. The company is essentially hanging on to the cash generated by interest payments and debt repayments in order to position itself to make additional loans.
The weighted average interest rates on the company's existing portfolio are: 1. 11.5% for the fixed interest rate loans and 2. libor + 7.2% for the floating rate loans. The company believes that, even though liquidity is improving, there are still opportunities for double digit returns in the lower middle market space.
Reviewing the balance sheet, it appears that, with respect to exits from loans during the quarter, those situations involving losses from original cost conformed reasonably well to the book value of the loans prior to the exit. This suggests that the company has done a reasonable job in writing down those loans on which losses are likely. The book value of the company's assets is substantially below original cost, and, thus, there is some room for an increase in the company's book value if the prospects for collection or recovery on some of its loans improve.
The company seems to be committed to increasing its portfolio both in order to diversify the portfolio and to increase its scale of operations to a more optimal size. It appears that this objective will take a priority over the payment of cash dividends for a period of time so that cash can be deployed to increase the company's portfolio.
The company is well-positioned to increase its portfolio and its NAV over the next several quarters. It has solid management, is disclosing its financials in a great deal of helpful detail, and has "dry powder" to put to work. On the other hand, a dividend oriented investor may be frustrated for a while before cash dividends resume. I do not think it is reasonable to expect that stock in this company will continue to produce a return of the more than 20% as it has in the last quarter. I think there will continue to be appreciation in NAV and that the price per share will continue to close up on NAV but that the rate of "close up" may decelerate.
As I mentioned in the earlier piece, this stock is very lightly traded and somewhat illiquid. In addition, in comparing it with other BDCs it should be understood that a complete comparison must include the value of the cash dividends that most other BDCs pay. On the other hand, for a patient investor, this continues to be an attractive stock.