Saratoga Investment Corp.: High Yield With An Erratic History

| About: Saratoga Investment (SAR)

Saratoga Investment Corp. is listed on the NYSE under the symbol SAR. It is a business development company specializing in buyout, acquisition, growth, re-capitalization and note financing transactions of private middle market companies.

From a high of over $100 in 2007, it now sells for slightly less than $17. Its trading range for 2011 has been $22.50 - $14.87. It trades less than 3,000 shares daily and has a beta of 1.74.

SAR has finished its recapitalization and is now in good financial shape. In 2010 it paid a dividend of $3.60 (equivalent to a 20% yield) and had earnings of $6.96 (making its price/earnings ratio approximately 3.1) As of February 28, 2011, it had a net asset value of $ 26.26 per share. SAR has 3,277,077 shares outstanding. As of February 28, 2011, it had gross assets slightly less than $ 99,000,000 with total liabilities of approximately $12,600,000. This is after a major recapitalization which greatly reduced debt and doubled the number of common shares outstanding.

The portfolio consists of the following:

First lien term loans - 23.1%
Second lien term loans - 25.3%
Senior secure notes - 12.4%
Unsecured notes - 2.4%
GSCIC subordinated notes - 28.4%
Equity interests - 8.4%

SAR commenced operations on March 23, 2007 as GSC Investment Corp., with a public offering on March 28, 2007. With the recapitalization on July 30, 2010, Saratoga Investment Advisors replaced GSCP and the name was changed.

In connection with the recapitalization, 986,842 shares were privately placed for $ 15,000,000 and a secured revolving credit facility was obtained from Madison Capital Funding for $ 40,000,000. SAR had been in default to Deutsche Bank under its prior credit facility.

Senior management believes in SAR and owns 31.8 % of the outstanding stock. Greenwich Street Capital, an affiliate of the former manager, retains a 7.1% interest and Raging Capital owns 5.1%.

SAR seems to have put its house in order and is sitting on a diversified portfolio of debt instruments which appear to be current in their payments. SAR has had a difficult past but now seems to be functioning. It is trading substantially below its book value and offers an extremely high return.

SAR may not be the most seasoned or steady investment but it does offer substantial return. It does carry much risk but I think it is worth the investment.

Disclosure: I am long SAR.

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